New Tax Credit Ups the Appeal of Used Electric Vehicle Purchases

The price of used cars is falling across-the-board. According to some estimates, used car prices are about 8% lower today when compared to prices at the same time one year ago. Still, prices remain much higher than when compared with used car prices before the COVID-19 pandemic. That means clients who are considering a used car purchase may be particularly interested in learning more about the available tax credits that can serve to reduce the price of used cars that qualify as “clean” vehicles. Electric vehicles, plug-in hybrid electric vehicles and fuel cell vehicles that meet certain standards may all qualify the buyer for a tax credit under IRC Section 25E. However, both the vehicle and the vehicle’s buyer must satisfy certain requirements to qualify for the credit in the first place.

Section 25E: The Basics

The Inflation Reduction Act of 2022 created a new tax credit for buyers of qualified pre-owned “clean” vehicles. The credits are available forgreen energy vehicles placed into service after December 31, 2022, for ten years, through 2032.

Under IRC Section 25E, the maximum amount of the credit equals $4,000 or 30% of the used electric vehicle’s cost, whichever is less. Used electric vehicles only qualify if they are purchased for personal use, rather than for resale.

To claim the credit, the buyer must file Form 8936, “Qualified Plug-In Electric Drive Motor Vehicle Credit” in the tax year the vehicle was purchased and include the vehicle’s VIN number.

Beginning in 2024, the Section 25E credit can also be “transferred” in the same manner as the Section 30D credit for new green energy vehicles. In other words, the buyer can receive the value of the credit at the time of purchase, either in the form of a cash payment or down payment to reduce the vehicle’s purchase price.

Taxpayers will be permitted to transfer up to two clean vehicle tax credits per year, either in the form of two clean vehicle credits or one clean vehicle credit and one previously owned clean vehicle credit (taxpayers cannot transfer two previously owned clean vehicle credits in the same tax year).

Which Vehicles Qualify for the Credit?

As an initial matter, the vehicle must cost less than $25,000 and weigh less than 14,000 pounds to qualify for the credit. The vehicle’s model year must also be at least two years earlier than the year of purchase (for example, only vehicles made in 2021 or earlier qualify if the vehicle is purchased in 2023). The vehicle must be purchased from a licensed dealer whose business involves the sale of vehicles.

The $25,000 sales price includes all dealer-imposed fees and expenses that aren’t required by law. Certain fees that are required by law are not included when determining whether the vehicle’s price exceeds $25,000.

Vehicles that have been transferred in another transaction since Section 25E was enacted do not qualify (i.e., the sale must be the vehicle’s first transfer since August 16, 2022).

Despite the restrictions, many more used vehicles qualify for the Section 25E credit when compared with the Section 30D credit for new clean energy vehicles. That’s because Section 25E doesn’t contain requirements about the extraction, processing or manufacturing location of battery components or critical minerals.

The dealer is required to report information about the vehicle and the purchase both to the IRS and to the taxpayer at the time of sale.

Qualification Requirements for Clean Vehicle Buyers

Taxpayers can only claim the credit if their modified adjusted gross income (MAGI) does not exceed the Section 25E income thresholds for the year of purchase or the prior tax year. The thresholds are $150,000 for married taxpayers filing jointly, $75,000 for single filers and $112,500 for heads of households.

Taxpayers can use their MAGI from the year of purchase or the prior year, whichever is less.

Only buyers who are not the vehicle’s original owner qualify for the Section 25E credit (though the vehicle itself may initially qualify for the Section 30D credit and later be resold to a separate buyer who qualifies for the 25E credit). Further, the buyer cannot be purchasing the vehicle for resale. The buyer cannot have claimed the credit in the three years prior to the purchase.

The buyer will also be disqualified if they can be claimed as a dependent on someone else’s tax return.

Conclusion

For taxpayers who qualify, the Section 25E electric vehicle credit can make the purchase of a used electric vehicle even more affordable amid falling car prices. Advisors should pay close attention to the qualification rules to determine whether their clients can benefit.

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