Cars assembled outside NA may qualify for EV tax credit, per new IRS note

The U.S. Treasury has released new guidelines for electric vehicle tax credits under the Inflation Reduction Act. lease vehicle Assembled outside of North America may still qualify for the EV tax credit, reports Reuters.

The Reducing Inflation Act significantly changed how the EV tax credit works. Among these changes was the requirement that vehicles be final assembled in North America in order to qualify. The purpose of this section is to bring EV manufacturing to the United States and the United States to step into the future of the automotive industry.

The provision received strong backlash from foreign automakers, notably Hyundai and Kia. It currently sells more electric vehicles in the United States than any other automaker.

Both companies have established battery and car factories in the United States, but those factories have not opened for several years and are now trying to gain credibility.

But today, the IRS released a fact sheet of frequently asked questions about tax credits. This suggests that foreign-made EVs may qualify for tax credits through the commercial vehicle section of the law.

The law contains two main sections detailing tax credits. Standard credits are covered under section 30D and commercial vehicle credits are covered under section 45W. In explaining Section 30D, the IRS states that a qualifying vehicle cannot be acquired for resale, must be manufactured by a qualifying manufacturer, must be a 4-wheel electric vehicle powered by a battery greater than 7 kWh, GVWR Must be less than 14k lbs and assembled in North America.

But section 45W says:

Q2. What is a “certified commercial clean vehicle”? (Added on December 29, 2022)

A2. A “qualifying commercial clean vehicle” is defined as a vehicle that is subject to depreciation charges that:

• Made by a qualified manufacturer,
• is acquired for use or lease by the taxpayer and not for resale;
• Treated as a motor vehicle for the purposes of Title II of the Clean Air Act and manufactured or transported primarily for use on public roads, roads, or highways (excluding vehicles operated on only one or more rails) Machine.as defined in § 4053(8) of the Code, and
• Propelled to a large extent by an electric motor drawing power from a battery with a capacity of 15 kWh or more (or 7 kWh for vehicles with a gross vehicle weight rating of less than 14,000 lbs) and recharging from an external power source or meet the requirements to be a new eligible fuel cell vehicle under § 30B(b)(3)(A) and (B) of the Code.

Note, 45W is No References to final assembly in North America.

Another question comes up later in the same fact sheet.

Q5. Are taxpayers who lease clean vehicles to customers as a business eligible to claim eligible commercial clean vehicle credits? (Added 12/29/2022)
A5. Whether a taxpayer can claim eligible commercial clean vehicle credits for their business depends on who owns the vehicle for federal income tax purposes. Vehicle ownership is determined based on 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 whether a transaction is a “lease” for tax purposes? (Added 29 December 2022)
A6. Under longstanding tax doctrine, determining whether a transaction constitutes a sale or lease of a vehicle for tax purposes is a matter of fact. Features of a vehicle lease agreement that are more likely to be reclassified as a vehicle sale for tax purposes include, but are not limited to:

• A lease term that covers 80% to 90% or more of the vehicle’s economic life
• A bargain purchase option at the end of the lease term (i.e., the ability to purchase the vehicle at a price less than its fair market value at the end of the term) or any other term/provision of the lease that economically compels the lessee to acquire at the end of the lease term the vehicle of
• A condition that results in the lessor transferring the risk of ownership to the lessee. For example, a final rent adjustment clause (TRAC) clause that requires the lessee to pay the difference between the actual and expected value of the vehicle at the end of the lease.

in short, for leased vehicles, the commercial tax credit is available to the lessor regardless of whether the vehicle was assembled in the United States. That means the dealer can get a tax credit of $7,500 for each EV he leases.

This credit could be passed on to consumers in the form of reduced lease payments. This is because the dealer effectively recognizes his additional $7,500 in revenue from leasing that vehicle.

The “old” tax credit worked similarly for leased vehicles. This was one way that low-income taxpayers could bypass the non-refundable deduction limit. That means people with less than $7,500 in federal tax liability didn’t get the benefit. full credit.

This is also why there have been many EV lease deals in the past with vehicles like the Nissan Leaf and Fiat 500e. Because dealers can recognize tax credits to effectively lower the price of these vehicles. Such deals no longer exist in a production-constrained, high-demand EV sales environment, but similar deals could return if the market levels off.

U.S. Senator Joe Manchin responded to the announcement by calling it a “dangerous interpretation” and calling on the Treasury Department to suspend implementation of the EV tax credit, arguing that domestic manufacturing is the primary purpose of the law. claimed.