If your tax and accounting firm’s clients are concerned about increasing gas and energy costs, “go-green” tax credits will reduce their carbon footprint and save them money in the long run. Tell your clients about the qualified plug-in electric drive motor vehicle tax credit (EV tax credit) and the residential energy efficient property credit.
Electric vehicle (EV) tax credits
Over 100 million people watched the Rams beat the Bengals during Super Bowl 56, and some of you may have paid more attention to the commercials than the game. As a tax professional, what caught my attention was that I counted no less than a dozen electric vehicle commercials – which got me thinking about tax credits!
General Motor’s advertised their all-electric Equinox and their new Silverado truck featuring Mike Myers as Dr. EV-il (“EV” for Electric Vehicle). A BMW iX ad featured Arnold Schwarzenegger and Salma Hayek as Greek gods Zeus and Hera celebrating retirement with the “ultimate electric driving machine.” These commercials are fun to watch, but they also send a clear message that electric vehicles are here to stay, and demand for EVs is on the rise.
Electric vehicle technology is advancing rapidly, offering faster EV charge times and batteries that allow vehicles to travel farther on a single charge. And let’s not forget the Infrastructure Investment and Jobs Act (IIJA) allocated $7.5 billion to states that help accelerate EV adoption by increasing public charging station availability.
The EV tax credit starts with a base credit of $2,500, increased to a maximum credit of $7,500 per vehicle based on the strength of the battery charge or kilowatt (kWh) hours of battery capacity (see IRC Sec. 30D, claimed on Form 8936). For example, the 2021 hybrid gas/EV Mitsubishi Outlander comes with a maximum federal tax credit of roughly $6,500 because the battery has a 13.8-kWh charge and a range of 24 miles before the gas engine starts to recharge the battery. In contrast, the full $7,500 credit is available for all-electric vehicles like Ford’s 2022 Mustang Mach-E. The Mach-E’s standard range battery holds a 70-kWh charge and can travel around 270 miles before it needs recharging. The tax credit clearly incentivizes buyers to choose all-electric over hybrid models.
Under current law, the EV tax credit does not expire, but it begins to phase out once a manufacturer has sold 200,000 EVs, described as a per-manufacturer cumulative unit sales limitation. For example, General Motors and Tesla surpassed the 200,000-unit threshold and are completely phased out of the federal tax credit. This doesn’t mean clients shouldn’t get on the (11-month average) waitlist for the widely popular Tesla Model S; it just means that no federal tax credit is currently available to Tesla EV buyers.
The IRS maintains a list of vehicles indexed by manufacturer, showing the available EV tax credit amount and the estimated phase-out periods for vehicles sold by manufacturers approaching the 200,000-unit threshold. The credit is available only to the car’s original registered owner, and it applies only to new vehicle purchases (not used or leased EVs). However, an individual can reap the benefit of the tax credit on multiple EV purchases, so long as the client’s annual tax liability can absorb the credit, which is nonrefundable and cannot be carried forward to another tax year.
Although lawmakers’ discussions of the Build Back Better legislation (BBB) have stalled, there was no dispute about extending the availability of the EV tax credit. Both the House and Senate versions of BBB would have increased the maximum credit to $12,500, doing away with the manufacturer phase-out and making future used EV buyers eligible for the credits.
Clients should also consider the $2,500 maximum credit for qualified 2- or 3-wheeled plug-in electric vehicles (see IRC Sec. 30D(g)(1)(A) for reference). Renewal of green credits for 2- and 3-wheeled vehicles under BBB was similarly uncontroversial among lawmakers.
Residential energy efficiency property credits
With fossil fuel energy costs rising, clients may be thinking of ways to lower their home electric utility bill. There’s a significant federal tax credit that may help persuade them to “go green” by installing solar panels, solar hot water heaters, residential wind property, or geothermal heat pumps in their homes. For 2022, the residential energy efficient property credit is worth 26% of the costs incurred to upgrade a home (see IRC Sec. 25D, claimed on Form 5695). Clients may rely on the manufacturer’s certification that components meet the requirements for the credit.
Like the EV tax credit, the residential energy efficient property credit is only available to original owners, so clients can’t lease solar panels and take advantage of the credit. This credit is also non-refundable, but, unlike the EV tax credit, it can be carried forward indefinitely to offset future federal tax liabilities if a client doesn’t have a high enough tax bill to cover the full amount of the credit in a given year.
Under current law, the residential energy efficient property credit will be reduced to 22% of the cost of green energy upgrades for 2023, which is also the credit’s sunset (expiration) year.
However, if the House and Senate versions of BBB are any indication of how legislators feel about this credit, there is a very good chance that it will be renewed in the future; both versions increased the credit percentage and extended it through 2031.
Nonbusiness energy property credit for energy-efficient improvements
If clients don’t have the cash to buy a new electric vehicle or invest tens of thousands of dollars in solar panels on their roofs, you still have an at-home “do-it-yourself” option when it comes to green tax incentives.
The nonbusiness energy property credit for energy-efficient improvements to a principal residence grants individuals a lifetime credit of up to $500 (beginning in 2009) to prevent excess heat loss and improve the insulation of their home residence (see IRC Sec. 25C, claimed on Form 5695). This credit is available to homeowners who replace their roof, insulation, or doors or who repair cracks with weather sealants and upgrade to energy-efficient windows ($200 maximum lifetime credit for windows).
Under current law, the nonbusiness energy property credit expired at the end of 2021. However, legislators in both the House and Senate appear to favor extending the credit. In both BBB versions, this credit was set to increase to a lifetime maximum of $1,200 and extend through 2031.
Get expert guidance on “go-green” tax incentives
Many states have their own versions of electric vehicle and residential energy efficiency credits, rebates, subsidies, and green tax incentives. Checkpoint Edge State Charts: Green Credits provides expert guidance on these state tax incentives. If you want to recommend federal green tax credits to your clients and want more information, Checkpoint Edge offers expert analysis on existing and pending “go-green” tax laws:
- FTC¶ L-18030: Introduction – Credit for new qualified plug-in electric drive motor
- FTC Client Letter¶ 2164: Tax credit for buying a plug-in electric vehicle
- FTC Client Letter ¶1338: Residential energy efficient property credit for individuals
- FTC ¶ A-4781: Individuals allowed tax credit for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in home
- FTC ¶A-4751: Individuals allowed personal credit for energy-efficient property added to a principal residence before calendar year 2022
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