On Jan. 1, new rules targeting the origin of electric vehicle battery materials from countries considered hostile to the U.S. went into effect and limited the number of EVs eligible to receive U.S. tax credits.

As part of the Inflation Reduction Act, the guidelines issued by the Treasury in December detail new battery sourcing that bars EVs from qualifying for the full tax break if critical minerals or other battery components were made by a “Foreign Entity of Concern.”

The law defines an FEOC as any company owned by, controlled by, or subject to the jurisdiction of North Korea, China, Russia, or Iran. However, the ultimate goal is to wean the U.S. EV supply chain from China.

According to Reuters, the number of EV models qualifying for U.S. EV tax credits fell from 43 to 19 and included different versions of the same vehicle type.

According to multiple media reports, some automakers plan to either apply or reapply for vehicle eligibility later this year, once they feel a vehicle meets the new requirements.

Since the start of the year, to be eligible for the credit, an EV may not contain any battery components manufactured by an FEOC. Beginning in 2025, EVs cannot contain any critical minerals extracted, processed, or recycled by an FEOC in order to qualify for a tax credit.

The new rule will allow $7,500 in tax credits to be applied at the time of sale. This means a taxpayer who purchases an eligible EV will not have to wait until they file their tax returns to receive the credit.

As of Jan. 1, EV tax credit eligibility and amount will be determined at the time of sale using the IRS Energy Credits Online website.

EV Tax Credit eligibility

The EV credit is available to individuals and businesses who:

• Buy it for their own use, not for resale.
• Use it primarily in the U.S.

For specific eligibility for business, please see the IRS website.

The modified adjusted gross income (AGI) may not exceed:

• $300,000 for married couples filing jointly.
• $225,000 for heads of households.
• $150,000 for all other filers.

Customers can use their modified AGI from the year they take delivery of the vehicle or the year before, whichever is less. If the modified AGI is below the threshold in one of the two years, the customer can claim the credit.

Please note, the modified AGI is the amount from line 11 of Form 1040 plus:

• Any amount on line 45 or line 50 of Form 2555, Foreign Earned Income.
• Any amount excluded from gross income because it was received from sources in Puerto Rico or American Samoa.

The credit is nonrefundable, so a taxpayer cannot get back more on the credit than they owe in taxes. Also, excess credit cannot be applied to future tax years.

EV Tax Credit eligible vehicles

To qualify, a vehicle must:

• Have a battery capacity of at least 7 kilowatt hours.
• Have a gross vehicle weight rating of less than 14,000 pounds.
• Be made by a qualified manufacturer.

Please note, fuel cell vehicles do not need to be made by a qualified manufacturer to be eligible. See Rev. Proc. 2022-42 for more detailed guidance.

The process

Once the taxpayer agrees to purchase an EV, the dealer will complete and submit the time-of-sale report online, and it will be accepted or rejected in real time.

The dealer is required to provide the customer with a copy of the time-of-sale report, and the customer will need it in order to claim the credit.

If the vehicle qualifies for a credit, the taxpayer has two options:

To claim the credit on their tax return for the year in which it was placed in service using Form 8936.

• Transfer the credit to the dealer so the dealer can apply the credit amount to the customer’s final purchase cost. This essentially allows the customer to receive the benefit of the credit at the time of sale and allows the dealer to be reimbursed by the IRS. Taxpayers must fill out Form 8936  in order to report their eligibility for the credit and their decision to transfer the credit to the dealership.

Please note, if the vehicle qualifies but the customer does not qualify for the credit for any reason (e.g., modified adjusted gross income exceeds certain thresholds), the taxpayer must reimburse the IRS for any difference in the credit for which they are eligible and the benefit they received from the dealer.

Dealers are not required to verify the eligibility of the buyer at the time of sale. It is the buyer’s responsibility to ensure they meet all buyer requirements. The dealer is, however, required to provide the modified adjusted gross income requirements for your information.

For more information, see IRS updates frequently asked questions related to new, previously-owned and qualified commercial clean vehicle credits.

If you are considering purchasing an EV in 2024 or 2025 and have questions regarding your eligibility or the eligibility of the vehicle, please contact the Zinner & Co. tax team.