TL;DR

Starting in 2024, consumers will have the option to transfer their $7,500 EV Tax Credit to the dealer at the time of purchase.  While that may sound enticing to consumers, for the foreseeable future, so many asterisks are attached to that transfer that it might as well be an academic exercise.

The Nitty Gritty Details of the EV Tax Credit Changes Coming in 2024

On August 22, 2023, there was a working group Zoom-type call between the IRS and twenty other participants about the upcoming rule changes to Section 39D of the IRS code (hereafter referred to as “the EV Tax Credit”). Of the twenty participants, nineteen were from the National Auto Dealers Association, representatives from Tesla Finance, and sales managers from auto dealership groups from around the country.

I was the only participant who introduced themselves as a journalist. This working group was eye-opening.

The purpose of the working group was for the IRS to solicit ideas and opinions about implementing the change taking effect on January 1, 2024. This change primarily allows consumers to transfer their EV tax credit to the dealer. My Spidey-sense started tingling right away, since this new rule takes effect in little more than 90 days from the time of the call. It was clear that the IRS didn’t really know how to work with auto dealers in a retail sense, not to mention that the dealers struggled with not-too-distant flashbacks of the 2008 Cash for Clunkers debacle.  More on that in a bit.

On the other side of the purchasing transaction, consumers are rightfully giddy at the prospect of using their $7,500 tax credit as “cash on the hood” toward the purchase of a new car.  For starters, it reduces (or eliminates) the need for a down payment when financing. Equally compelling is that it eliminates the wait to realize the credit from what could be more than a year from the point of sale. Both of those incentives are compelling for any consumer.

Anyone who has tried envisioning this new arrangement has come away with more questions than answers.  Essentially, the tax code enables the consumer to transfer their EV Tax Credit to the dealer at the time of sale.  From a dealer’s perspective, this opens them up to being between the consumer and the IRS.

During the August 22 call between dealers and the IRS, several aspects of how this new rule would work were discussed, all of which are subject to change. In broad strokes, here is what you need to know about changes to the EV Tax Credit under IRS Section 30D:

1. Starting January 1, 2024 a consumer wishing to buy an EV can elect to transfer their potential $7,500 EV Tax Credit to a participating dealer to reduce the purchase price of the vehicle. 
2. Initially, the ability to transfer the $7,500 EV Tax Credit from the consumer to the dealer will be limited. Dealers must register with the IRS to participate… and they are reluctant. Simply put, dealers are concerned the new rule essentially makes them liable for the $7,500 until the government is satisfied that the consumer qualifies for the credit. Dealers are unwilling to accept that liability. During the working group call, I heard dealers mention several times that they experienced huge losses during the circa 2009 Cash for Clunkers program, with one small dealer stating that they failed to recoup around $250k because the government put the burden of eligibility on to the dealers without clear guidelines. No dealer that remembers Cash for Clunkers will rush to register to participate in this new program.
3. The $7,500 EV Tax Credit is still limited to eligibility requirements per IRS Code 30D (see below for details). The consumer still has the responsibility to verify, via year-end tax filing, that they were eligible for the credit.  Dealers are understandably loath to get between their prospective customers and the IRS.
4. It is unclear when the dealers would receive the EV Tax Credit that a consumer transferred at the time of sale. Dealers want to be reimbursed as soon as possible. Any delay beyond “immediately” effectively extends credit to the US Treasury, and dealers are loath to do that, too. This is an additional disincentive for dealers to participate.
5. During the working group, there was a discussion on having a consumer be “pre-approved” for the tax credit.  While this is not necessarily how the new rule will eventually be implemented, any pre-approval process would be tentative. This is because pre-approval would be based on the previous year’s IRS filing, and the tax credit requirements are for the current tax year.

It doesn’t take much imagination to envision the risks that dealers will accept if they participate in transferring the EV Tax Credit from a consumer. What happens if a consumer transfers the $7,500 EV Tax Credit when they purchase their new car, only to find out when they file their taxes months later that they are over the IRS’s income limit? In this case, what recourse does the dealer have? Earning too much money to qualify for the tax credit might be a good problem to have for any consumer, but the dealers I spoke with are unwilling to finance the risk that they would be delayed payment until the consumer files, or worse, be required to return the funds to the IRS.

That these details are still being worked out with little more than 90 days until the new rule takes effect should be alarming to anyone wishing to benefit from the changes.

A point-of-sale incentive has long been a goal of EV advocates. The passing of the Inflation Reduction Act provided a mechanism to finally realize that goal.  At least initially, the implementation may make the point-of-sale incentive unworkable for most consumers because dealers are reluctant to participate without assurance from the IRS that they will get paid in a timely manner and guarantees that they are not liable if a consumer does not qualify for the incentive. In the long term, the IRS and dealers may agree on how these new rules will be implemented to reduce a dealer’s exposure. Once those protections are in place, the point-of-sale reduction in price will provide a competitive advantage over dealers who don’t participate and may eventually become widely available.

But until (or if) that happy day arrives, consumers in the market for an EV will most likely have to rely on retaining the tax credit and applying it the old-fashioned way, using Form 8936 when you file your 1040 on April 15th.

According to the IRS, the Inflation Reduction Act is a 10-year work in progress, and they (the IRS) have not completed that work. Nevertheless, there are some things we can be 100% certain of. That is, unless Congress rewrites or overturns the Inflation Reduction Act. Photo credit: iStockPhoto.

IRS Section 30D — Here’s What You Need to Know

Income Tests

There is a maximum Adjusted Gross Income test, generally defined as $300k for couples filing jointly and $150k for single filers.  But there are other disqualifying details, so it is best to check. If you make more than this amount, no soup for you.

Qualifying Vehicles

There are a number of stipulations that can disqualify a vehicle’s eligibility:

• Must be new (used vehicles can qualify for a used vehicle credit, however)
• Must be less than $80,000 for SUVs, vans, and trucks
• Must be less than $50,000 for other vehicles
• Must be less than 14,000 pounds
• Must be made by a qualifying manufacturer
• Must have a battery larger than 7 kWh
• Must undergo final assembly in North America
• Meet critical mineral and battery component requirements, which will change every year for the next few years

Fortunately, there is a quick and easy way to determine if a specific car is eligible and if it gets full or partial credit by checking if it is on the list at fueleconomy.gov.  Remember that the MSRP limit applies to factory-installed options. The list at fueleconomy.gov is the definitive list of qualifying vehicles.  It doesn’t matter if your friend told you that vehicle x qualifies, or even if the dealer said that it qualifies, or even if the car does actually qualify but isn’t on this list. The manufacturer is responsible for certifying the car’s qualification with the IRS.  That’s what earns a particular EV the right to be on the list.

Remember – if your car qualifies for the credit at the base price, but factory-installed options put you over the bar, you’re frankly out of luck.  

What Is a Tax Credit, Anyway?

My experience in EV-related social media groups leads me to conclude there is a lot of misunderstanding about tax credits, and even about taxes in general.  A tax credit isn’t a deduction, nor does the credit have anything to do with the withholdings from your paycheck that an employer pre-deducts on your behalf.

The simplest way to think of a tax credit is to imagine it as a coupon to get a certain amount of money off your tax bill – in the case of the EV Tax Credit, brought to you by Section 30D of the IRS code, that is typically $7,500.

If, at the end of the year, your tax bill is $10,000, you’ll get $7,500 off for buying a qualified EV and will only owe the IRS $2,500.

But what if your tax bill was only $5,000?  How do you get your $7,500 refund?  You don’t, because it isn’t a refund.  You get $5,000 off your tax bill, so in this example, your tax bill is reduced to zero and the difference ($2,500) is forfeited because you didn’t qualify for the full credit.  This rule will still apply in 2024, so if your tax liability is less than $7,500, you will reduce your annual tax bill to zero but forfeit any difference.