Electric buses in a charging station.
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Additionally, the tax credit for larger trucks is worth more money, up to $ 40,000 as opposed to the $ 7,500 maximum for passenger cars and small commercial electrical systems.
“I think it will be much simpler and easier to leverage than the light vehicle tax credit,” said Ingrid Malmgren, Plug In America’s director of policy of the commercial electric vehicle tax credit. “It really is a great opportunity for entrepreneurs to cost-effectively reduce emissions.”
Entrepreneurs can get the tax credit for new vehicles purchased starting January 1, 2023. It is available for 10 years, until the end of 2032.
How and why of the commercial vehicle tax credit
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Here are the basics of commercial vehicle credit.
The tax break is available to entrepreneurs who purchase an electric vehicle or electric “mobile machinery”, including for construction, manufacturing, processing, agriculture, mining, drilling or lumbering.
The vehicle must be subject to a depreciation allowance, which means it is for business use, according to the Congressional Research Service.
“If you had a flower shop, for example, and you want to buy flower delivery vehicles, you buy a bunch of vans, you’d be the one taking the tax credit,” Malmgren said.
There are two thresholds for the commercial tax credit: vehicles weighing less than £ 14,000 qualify for a maximum of $ 7,500; those who weigh more than that qualify for up to $ 40,000.
The 14,000-pound dividing line includes Class 4 and higher commercial vehicles, or mostly trucks and buses for medium and heavy loads.
According to a 2019 US Department of Energy report, medium and heavy trucks “are the fastest growing fuel consumers and greenhouse gas producers in the United States.”
According to the report, Class 3 to Class 8 trucks account for less than 5% of the total number of US vehicles on the road, but account for 27% of annual road fuel consumption. Gasoline and diesel account for well over 90% of fuel consumption for medium and heavy vehicles, he added.
While the electrified commercial vehicle market is “far behind” light vehicles, battery performance has improved and battery costs have dropped significantly over the past decade, making the electrification of medium and heavy range trucks and buses “more attractive, “according to the Energy Department report.
Technically, the commercial vehicle tax credit is worth the lower of: (1) 30% of the vehicle purchase price; or (2) the “incremental cost” of a similar gasoline-powered vehicle. (The incremental cost is the net difference in price between the clean commercial vehicle and a similar internal combustion engine vehicle.)
Whatever the amount of this calculation, its final value is capped at $ 7,500 or $ 40,000, as noted earlier.
Some aspects of the tax break won’t be clear until the U.S. Treasury Department and IRS publish guidance on the new rules, experts said. For example, how will entrepreneurs determine the price of a comparable gas vehicle to perform an “incremental cost” analysis?
Since the financial advantage is structured like a tax credit, entrepreneurs must have a tax liability to benefit. One caveat: Tax-exempt entities can still get a financial advantage in the form of a direct check from the government, said Steven Schmoll, director of KPMG.
Furthermore, entrepreneurs cannot double the advantage by obtaining tax breaks on the consumer side (section 30D tax code) and on the commercial side (section 45W code).
How breakdowns of commercial and consumer electric vehicles differ
A key difference between commercial and consumer tax credits for new clean vehicles is the absence of production and other requirements for commercial credit.
In order to qualify for a “new clean vehicle” credit (ie one that is not for entrepreneurs), the final assembly of the car must now take place in North America. The Department of Energy has a list of vehicles that meet this standard.
Some additional rules will come into effect in 2023.
First, there are income limits. A tax credit is not available to individuals with modified adjusted gross income of $ 150,000 and above. The limit is higher for others: $ 225,000 for heads of households and $ 300,000 for married couples filing a joint tax return. (The test applies to current or previous year’s income, whichever is lower.)
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And some cars may not qualify based on price. Sedans with a retail price above $ 55,000 are not eligible, nor are vans, SUVs, or trucks above $ 80,000.
Two other rules apply to production: one contains requirements for sourcing the car battery’s critical minerals; the second requires that part of the battery components 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 all $ 7,500 for not meeting them both.
The five requirements were added by the Inflation Reduction Act, and none of them apply to clean commercial vehicle credit, Schmoll said.