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Cars Assembled Outside of NA May Be Eligible for EV Tax Credit, Per New IRS Note

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The US Treasury has issued new guidance on this. electric vehicle tax credit in the Inflation Reduction Actwhich seems to suggest that leased vehicles may be eligible for the EV tax credit even if they were assembled outside of North America, Reuters reports.

The Inflation Reduction Act significantly changed the way EV tax credit And among those changes was a requirement that cars had to undergo final assembly in North America to qualify. The intent of this section is to bring electric vehicle manufacturing to the United States to give the country a head start in the future of the automotive industry.

The provision was strongly pushed back by foreign countries, Especially South Korea, whose automakers, Hyundai and Kia, currently sell more electric cars in the United States than any other foreign automaker. Both companies are establishing battery and car factories in the United States, but these will not open for a few years, leaving them waiting for credit for the time being.

European and Asian countries have even considered filing a complaint with the World Trade Organization, alleging a violation of trade rules.

But today the IRS released a fact sheet of frequently asked questions about tax credits, suggesting that foreign-made electric vehicles may qualify for tax credits through the commercial vehicle section of the law. This interpretation had been Driven by South Korean automakers (Although the famous anti-EV Toyota objected to the interpretationeven if the company would benefit from it).

The law includes two main sections detailing the tax credits. Standard credit is covered by section 30D, while commercial vehicle credit is covered by section 45W. When describing Section 30D, the IRS mentions that qualifying vehicles cannot be acquired for resale, must be done by a qualified manufacturermust be 4-wheel electric vehicles driven by a battery > 7 kWh, must have a GVWR of less than 14,000 pounds, and must be assembled in North America.

But the 45W section reads as follows:

Q2. What is a “qualified clean commercial vehicle”? (added December 29, 2022)

A2. A “qualified own utility vehicle” is defined as any vehicle of a type subject to the allowance for depreciation which:

  • It is made by a qualified manufacturer.
  • It is acquired to be used or rented by the taxpayer and not to be sold.
  • Is it treated as a motor vehicle for purposes of Title II of the Clean Air Act and is it manufactured primarily for use on public roads, highways and highways (excluding a vehicle operated exclusively on a rail or rails), or is mobile machinery, as defined in § 4053(8) of the Code, and
  • is powered largely by an electric motor that draws its electricity from a battery with a capacity of at least 15 kilowatt hours (or, in the case of a vehicle with a gross vehicle weight rating of less than 14,000 pounds, 7 kilowatt hours) and capable of being recharged from an external source of electricity, or meets the requirements of Section 30B(b)(3)(A) and (B) of the Code to be a new motor vehicle with qualified fuel cell.

the list of qualified manufacturers is available on the IRS website and manufacturers can be added to the list by follow the instructions on this page.

Notably, 45W makes do not mention North American final assembly. Which means commercial vehicles don’t need to be assembled in North America.

Later in the same fact sheet, another question arises:

Q5. Is a taxpayer who leases clean vehicles to customers as a business eligible to claim clean qualified commercial vehicle credit? (added December 29, 2022)
AT 5. Whether a taxpayer can claim the eligible own commercial vehicle credit in their business depends on who owns the vehicle for federal income tax purposes. Ownership of the vehicle is determined by whether the lease is honored as a lease or recharacterized as a sale for federal income tax purposes.

Q6. What factors are used to determine if a transaction is a “lease” for tax purposes? (added December 29, 2022)
A6. Based on longstanding tax principles, the determination of whether a transaction constitutes a sale or lease of a vehicle for tax purposes is a question of fact. Features of a vehicle lease that would make it more likely to qualify as a sale of the vehicle for tax purposes include, but are not limited to:

  • A rental period that covers more than 80% to 90% of the economic life of the vehicle
  • A bargain purchase option at the end of the lease term (i.e. the ability to purchase the vehicle for less than its fair market value at the end of the term) or other conditions/provisions of the lease that economically oblige the lessee to acquire the vehicle at the end of the lease
  • Conditions that cause the lessor to transfer the risk of ownership to the lessee, for example, a terminal lease adjustment clause (TRAC) that obligates the lessee to pay the difference between the actual value and the expected value of the vehicle at the end of the lease.

In short, for a leased vehicle, the business tax credit can be taken by the lessor whether or not the vehicle was assembled in the United States. This means dealers can get $7,500 in tax credits for each electric vehicle leased.

This credit could then be passed on to the consumer in the form of reduced lease payments, as the dealer will effectively recognize an additional tax credit income of $7,500 from leasing this vehicle.

The “old” tax credit worked the same way on leased vehicles, which was a way for low-income taxpayers to get around the limitation that the credit was non-refundable, meaning anyone having less than $7,500 in federal taxes to pay could not qualify. full credit.

This is also why there have been many Electric vehicle rental offers in the past, with vehicles like the Nissan Leaf and Fiat 500e, each with an MSRP of around $30,000, leasing for $99/month or less (as opposed to the expected around $300 per month for a car from $30,000), because dealers could recognize tax credits to effectively reduce the price of these vehicles. Those deals no longer exist in this limited-production, high-demand electric vehicle sales environment, though similar deals may return if the market ever flattens.

U.S. Senator Joe Manchin responded to the announcement, calling it a “dangerous interpretation” and asking the Treasury to suspend implementation of the electric vehicle tax credit, saying domestic manufacturing is the primary intent. of the law :

Manchin was the crucial 50th vote to pass the Cut Inflation Act in the Senate. He has declared his intention to introduce legislation clarifying the intent of the law, presumably in an effort to prevent foreign-assembled cars from qualifying through the leasing provisions announced by the IRS today. .

In other recent changes, the IRS announced that it delay implementation of battery supply guidelines until March, which means, among other things, that for the next two months, Chevy Bolt going to be a shouting agreement (Other vehicles will have similar credit availability for the next two months, but the Bolt is the biggest deal of the bunch).

Electrok’s Grasp

Well, it seems to be a generous interpretation. From my reading of the law, I’m not sure I would interpret it that way myself.

However, the implementation of the law was really unfair to foreign car manufacturers, who had not had enough time to prepare for it. The fact that these credits were removed with only a few days’ notice, which resulted in a scramble to figure out how to get credits For manufacturers and consumers, this not only created confusion, but also resulted in some of the best vehicles on the road today (like the Excellent Hyundai Ioniq 5) being excluded from the availability of the tax credit.

It was also unfair to EV buyers, as many were excluded from credits due to the murky nature of these changes. It took us a long time to figure them out, and even communicating these changes to our readers can get tricky, as you can see above.

I even received an email from a reader this week pointing to the IRS qualified clean vehicle page, which until today had not been updated with information from the Inflation Reduction Act. He still said the Hyundai Ioniq 5 was eligible for tax credits, which was true before August 16 but not true after. The buyer wondered if he was entitled to tax credits, and I had to announce that he was not. Now we find out that if they had just leased the vehicle, they could have gotten the credit, which is a pretty unfortunate circumstance.

The implementation of this law has therefore been quite difficult. But as it passed, I stated that I hoped and believed that the IRS would eventually announce lenient guidance on its implementation to compensate for the unfairness of the way it was implemented.

Today the IRS did. If I think the interpretation is very generous based on the text of the law, I also think it is fair based on the predicament regarding its implementation. Unfortunately, there has been a lot of confusion and some people have been left out in the meantime, but going forward, allowing more vehicles to claim the credit can only be good for EV adoption.

We will update our EV tax credit guide with all the new changes as they come, so check back for the latest.

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