Electric buses at a charging station.
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Also, the tax credit is worth more money for larger trucks — up to $40,000 as opposed to the $7,500 maximum for passenger cars and smaller commercial electric vehicles.
“I think it’s going to be a lot more straightforward and simpler to use than the light-duty vehicle tax credit,” said Ingrid Malmgren, policy director at Plug In America, of the commercial EV tax credit. “It really is a great opportunity for business owners to reduce emissions in a cost-effective way.”
Business owners can receive the tax credit for new vehicles purchased on or after January 1, 2023. It is available for 10 years until the end of 2032.
How and why the trade tax deduction
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Here are the basics of the loan for commercial vehicles.
The tax credit is available to business owners who purchase an electric vehicle or electric “mobile machinery” including for construction, manufacturing, processing, farming, mining, drilling, or timber construction.
The vehicle must be subject to a depreciation allowance — which means it’s for business use, according to the Congressional Research Service.
“For example, if you had a flower shop and you wanted to buy flower delivery vehicles, buy a bunch of delivery vehicles, then you would be the one claiming the tax credit,” Malmgren said.
There are two thresholds for the business tax credit: Vehicles weighing less than 14,000 pounds are eligible for up to $7,500; Those who weigh more qualify for up to $40,000.
The 14,000 pound demarcation line includes Class 4 and above commercial vehicles or mostly medium and heavy duty trucks and buses.
According to a 2019 US Department of Energy report, medium- and heavy-duty trucks are “the fastest growing fuel consumers and greenhouse gas producers in the United States.”
Class 3 through 8 trucks make up less than 5% of the total number of U.S. vehicles on the road, but they account for 27% of annual on-road fuel consumption, according to the report. Gasoline and diesel account for well over 90% of fuel consumption for medium and heavy vehicles, she added.
While the electrified commercial vehicle market “lags far behind that of light commercial vehicles,” battery performance has improved and battery costs have fallen significantly over the past decade, making electrification of medium- and heavy-duty trucks and buses “more attractive,” it said in the Department of Energy report.
Technically, the Commercial Vehicle Tax Credit is the lesser of: (1) 30% of the vehicle purchase price; or (2) the “extra cost” relative to a similar gasoline-powered vehicle. (The additional cost is the net price difference between the clean utility vehicle and a similar vehicle with an internal combustion engine.)
Whatever the amount from this calculation, its final value is capped at $7,500 or $40,000, as previously mentioned.
Some aspects of the tax break will remain unclear until the US Treasury Department and IRS issue guidance on the new rules, experts said. For example, how will business owners determine the price of a comparable gas-powered vehicle in order to perform an “incremental cost” analysis?
Since the financial advantage is designed as a tax credit, entrepreneurs must be taxable in order to benefit from it. One caveat: Tax-exempt companies can still receive a financial benefit in the form of a direct check from the government, said Steven Schmoll, a director at KPMG.
Additionally, business owners cannot double-dip by receiving a tax benefit on the consumer side (Section 30D of the Tax Code) and on the commercial side (Section 45W of the Tax Code).
How are commercial EVs different for consumers?
A key difference between the business and consumer tax credits for new clean vehicles is the lack of manufacturing and other requirements for the business credits.
To be eligible for a “new clean vehicle” loan (ie, the one not intended for business owners), final car assembly must now occur in North America. The Department of Energy maintains a list of vehicles that meet this standard.
Some additional rules will come into effect in 2023.
First, there are income caps. A tax credit is not available to individuals with a modified adjusted gross income of $150,000 or more. The cap is higher for others — $225,000 for heads of household and $300,000 for married couples filing joint returns. (The test applies to current or previous year’s income, whichever is lower.)
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And certain cars may not qualify based on price. Sedans selling for more than $55,000 are not eligible, and vans, SUVs or trucks over $80,000 are not eligible.
Two other rules apply to crafting: one contains requirements for sourcing the car battery’s critical minerals; The second requires some of the battery components to be manufactured and assembled in North America. Consumers lose half the value of the tax credit – up to $3,750 – if any of these requirements are not met; They would lose the full $7,500 if they failed to meet both.
The five requirements were added by the Inflation Mitigation Act, and none of them apply to the clean vehicle commercial loan, Schmoll said.