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Understanding the Electric Vehicle Credit

By Robert H. Lee, Ph.D., CMA, CPA
January 1, 2020
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While taxpayers who buy electric vehicles may be eligible for a tax credit, a number of criteria must be met to receive the full credit.

 

More than one million electric vehicles (EVs) are now on the road in the United States, according to the Edison Electric Institute. Sales of EVs continue to grow, having increased more than 80% from 2017 to 2018. Purchasing an EV has many benefits, from the environmental impact to fuel savings. For some, there’s also a tax benefit. Under the Internal Revenue Code Plug-In Electric Drive Vehicle Credit (IRS §30D), taxpayers are eligible to receive a tax credit when purchasing an EV. Yet not all EVs are eligible for the full credit.

 

The EV credit was created under the Energy Improvement and Extension Act of 2008. A qualified electric car is a new motor vehicle that has four wheels; a gross weight of less than 14,000 pounds; and a battery with a capacity of at least 4 kilowatt hours and that’s capable of being recharged from an external source of electricity. In addition, to qualify for the EV credit, the Internal Revenue Service (IRS) requires that the taxpayer owns the vehicle and placed it in service during the tax year; the vehicle was created to be used on public roads; the taxpayer is the first owner of the vehicle; he or she purchased the vehicle to use and not to resell; and the vehicle is used within the U.S.

 

To claim the tax credit, taxpayers are required to complete Form 8936 with their tax return. Form 8936 also determines the exact amount to claim on the EV credit. The total federal tax credit amount is up to $7,500 per EV, and a taxpayer may be eligible for some state and local incentives as well. The credit amount is determined by the vehicle’s battery size. For example, the 2017 BMW i3 is eligible for a $7,500 credit, but the 2017 BMW i8, which is a hybrid, is eligible for only a $3,793 credit.

 

The credit applies for the first 200,000 qualifying vehicles a manufacturer sells. A credit phaseout occurs beginning in the second calendar quarter after that number is reached. Specifically, an EV from that manufacturer is eligible for only 50% of the full credit for two quarters and then 25% of the full credit for the following two quarters. Thereafter, no credit is allowed. Consider Tesla EVs, for example. Tesla sold its 200,000th EV in July 2018. So a Tesla purchased before January 1, 2019, was eligible for 100% of the credit. A Tesla purchased after December 31, 2018, and before July 1, 2019 (the second calendar quarter), was eligible for 50% of the credit; 25% if purchased between June 30, 2019, and January 1, 2020 (the following two quarters); and no credit if purchased after December 31, 2019.

 

The Tesla Model 3 and Model S, Chevrolet Bolt, and Toyota Prius Prime were some of the top-selling EVs in 2019. To no surprise, as Tesla and General Motors had the top-selling EVs, they both reached their limits for the credit and were being phased out in 2019. Ford, Nissan, and Toyota also passed the 100,000 mark and are next in line to be phased out.

 

ERRONEOUSLY CLAIMED CREDITS

 

Although EV credit incentives encourage taxpayers to purchase EVs, the IRS has recently found that many taxpayers have incorrectly claimed the tax credit. According to the September 2019 U.S. Treasury Inspector General for Tax Administration (TIGTA; bit.ly/2OSabWX) report, more than 16,000 taxpayers incorrectly claimed the EV tax credit from 2014 to 2018, amounting to more than $70 million. This includes individuals not properly claiming the appropriate amount, claiming the credit twice, or fraudulently claiming the credit. These errors appear elementary, and one would expect the IRS compliance department to detect them.

 

Since the $7,500 credit is a small amount, some might believe that it may not be material enough to be on the IRS audit radar considering that the IRS has limited resources and must allocate these resources accordingly to ensure tax compliance in all areas of the tax law. After the news of more than $70 million being claimed erroneously, however, the EV credit has attracted wider attention.

 

The TIGTA report recommends that, for each credit claimed, the IRS analyze the EV’s vehicle identification number (VIN) and perform data analytics to ensure compliance with the tax code. It suggests that a third party match VINs with taxpayers and analyze the data accordingly. In addition, TIGTA recommends creating a compliance program and taking appropriate enforcement actions against those that erroneously receive the credit. Only two automakers have currently been phased out, so there’s still a significant amount of tax savings available to taxpayers who pursue the EV credit properly.

 

THE FUTURE OF THE CREDIT

 

The state of the EV credit is still under debate by Congress. For example, the Electric CARS Act of 2019, which extends the EV credit to 2029, was introduced to the Senate in April 2019. The proposed bill would remove the 200,000 phaseout limitation, allow a taxpayer to assign the credit to a financing entity, and allow an unused credit to be carried forward for five years.

 

The Driving America Forward Act, which would extend the EV credit but with a maximum credit of $7,000, was also proposed in April 2019. This bill would be applicable to an additional 400,000 vehicles to the current ceiling of 200,000 vehicles. Not surprisingly, automobile manufacturers and electric utility companies have expressed support for these proposals, as both groups would benefit from an extension of the EV credit.

 

At the same time, some within Congress are requesting the EV credit be eliminated, as it will provide a tremendous amount of tax savings for the future. One of the main objectives of the EV credit was to encourage taxpayers to purchase EVs in a time when EVs were novel. Ten years later, all the major automakers have an EV in their car lineup, and some of these vehicles have received awards in terms of performance and safety. The performance and quality gap between EVs and gasoline-powered vehicles has shrunk or been eliminated. Thus, some people believe the need to incentivize taxpayers to purchase EVs is no longer needed.

 

There are reasons to all sides of the argument on whether to keep, extend, or modify the EV credit. It will be interesting to see what comes next. EVs are clearly here to stay, and the demand for them will likely continue to rise. What remains to be seen is how the EV credit will adapt in this growing market.

 

© 2020 A.P. Curatola

Robert H. Lee, Ph.D., CMA, CPA, is an associate professor of accounting in Pepperdine University’s Graziadio Business School and a member of IMA’s Los Angeles Metro Chapter. Robert can be reached at robert.lee2@pepperdine.edu.
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