As our world becomes increasingly focused on environmental, social and governance (ESG) issues, many businesses are turning to electric vehicles (EVs) to help reduce their carbon footprint and take a step forward into the more electrified world of tomorrow. In turn, the benefits they receive range from lower operational costs to higher reputational favor among stakeholders and clients. On the construction jobsite, electric heavy machinery can yield even greater levels of benefit through lowered noise pollution, emissions, energy usage and project costs.
Under the Inflation Reduction Act (IRA), contractors can now add significant tax savings to this list of benefits. Effective August 16, 2022 through the end of 2032, qualifying new and used commercial vehicles are eligible for the clean vehicle tax credits, IRC 45W. If applicable to your situation, it is also worth noting the availability of IRC 30D for EVs purchased in 2022 or prior and IRC 25E for used EVs.
Qualifying business vehicles weighing 14,000 pounds or more can now achieve up to a $40,000 credit under IRC 45W (up to $7,500 for qualifying vehicles under 14,000 pounds). To be considered a “qualified commercial clean vehicle,” it must be subject to a depreciation allowance, be utilized for business (not resale), and be primarily used in the United States. It must also be made by a qualified manufacturer and not have already been allowed another credit, such as under Section 30D. As with all proper tax planning or tax credit analysis, each taxpayer needs to make the proper analysis with their tax advisor to determine what makes the most tax-efficient sense for them, not only in the current year, but for future tax years to come. Sometimes focusing on the current year, and not looking forward, could end up actually costing you money or, in this case, losing credits you were counting on.
Mobile machinery is among the list of eligible assets under IRC 45W, making this an important tax-savings opportunity for contractors purchasing or leasing electric vehicles. These vehicles must be plug-in with a battery capacity of 15 kilowatt hours (7 kilowatt hours for vehicles less than 14,000 pounds).
The amount of the qualified commercial clean vehicle credit is the lesser of the following (up to the $40,000 or $7,500 cap):
- 15 percent of the taxpayer’s tax basis in the vehicle (30 percent if the vehicle is not powered by a gasoline or diesel internal combustion engine), or
- the incremental cost of the vehicle.
The IRS defines “incremental cost” for this purpose as “the excess of the purchase price of a qualified commercial clean vehicle over the price of a comparable vehicle.” A “comparable vehicle” is defined by the IRS as “a vehicle powered solely by a gasoline or diesel internal combustion engine that is comparable in size and use to the qualified commercial clean vehicle.”
There is no limit on the number of credits your business can claim, but they are nonrefundable. If the credit amount exceeds the amount of tax owed, it cannot be refunded but can be carried forward as a general business credit.
These rules are for business-use vehicles only. For personal-use vehicles, the rules before and after the enactment of the IRA (August 16, 2022) vary by income, cost and manufacturer limitations. With these recent changes, it is important to seek the advice of your tax professional to determine your business and/or personal eligibility, as well as the tax year in which to take the credit if the date of contract and date placed in service fall in different years.
For more information, please contact Ronald Eagar, Partner at Grassi Advisors and Accountants, at email@example.com or 516.336.2460.
This article originally appeared in the July/August 2023 issue of SMACNews.