Declining used car prices warrant a second look at Sec. 25E Incentives

With the significant decline in prices in the used car market over the past year, practitioners should be aware of the tax incentives implemented by the Ministry of Finance. 25E for previously owned clean vehicles, known as the Clean Used Vehicle Credit. As of this writing, wholesale used car prices have seen a smaller decline in July, according to Cox Automotive and Manheim. Used car prices have fallen by 11.6% since July 2022, reaching levels not seen since April 2021. As used cars become more affordable again, practitioners and taxpayers must take a fresh look at the tax incentives associated with clean vehicles.

After enactment of the Inflation Reduction Act of 2022, P.L. 117-169, tax credits available under Sec. 30D is well publicized (see “Guidance on the Clean Vehicle Tax Credit” Jova, August 17, 2022). Supreme Education Council. The 30D credit, applied to new electric vehicles and fuel cell vehicles, allows for a non-refundable credit of up to $7,500 of the purchase price. Additional credit restrictions for vehicles purchased after April 18, 2023, that relate to the location of extraction or processing of critical metals used in the battery and the location of manufacture of other battery components, limit a second panel. 30-day credit on a short list of eligible vehicles, all of which have a manufacturer’s suggested retail price well above the average new vehicle. Therefore, purchasing a new, clean car is unaffordable for many taxpayers.

As used car prices continue to moderate, taxpayers may find more value in securities. 25E tax credit provided by the Inflation Reduction Act. Clean Used Vehicle Credit applies to eligible vehicle purchases made on or after January 1, 2023. Eligible vehicles include electric vehicles, hybrid electric vehicles, and fuel cell vehicles, all of which weigh less than 14,000 pounds (Sec. 25E)(c)(1)(D)). The model year of the vehicle must be at least two years before the calendar year of purchase, which means taxpayers must consider vehicles with a year of manufacture of 2021 or earlier in the calendar year 2023 (Section 25E(c)(1)(A)). Most importantly, there is no requirement regarding the extraction, processing or manufacturing of critical metals or battery components; Thus, more than twice the number of vehicles eligible under Sec. 25E Qualified under Sec. 30 D. Also, many vehicle brands are eligible for a Sec. 25E credit. A complete list of clean used vehicles that qualify for the federal used electric and fuel cell vehicle tax credits is available.

Supreme Education Council. The 25E credit equals 30% of the vehicle’s purchase price, up to a maximum credit of $4,000 (Section 25E(a)). The purchase must be made through a licensed dealer (as defined in Section 30D(g)(8)) engaged in the sale of vehicles, with a purchase price not to exceed $25,000. The purchase may only be the first transfer of the vehicle (other than the original owner) since the Sec. Legislation 25E (16 August 2022) (s 25E(c)(2)). For example, a 2017 Toyota Prius Prime sells for an average dealer retail price of about $20,615, according to Edmunds.com, and will be eligible for the full $4,000 tax credit, reducing the after-credit cost to the buyer by 20%. % almost. To $16,615. The continued decline in used car prices will bring more clean used vehicles into the credit price range, making these vehicles more attractive options for SEC-aware consumers. 25E credit.

Of course again. The 25E credit is not without other limitations. The credit is non-refundable and applies only to individuals who are not the original owner and those who are not purchasing the vehicle for resale (Section 25E(c)(3)(A) and (B)). Additionally, a taxpayer claiming the credit cannot claim as dependent on another return and cannot claim the clean used car credit in the three years prior to purchasing the vehicle (Section 25E(c)(3)(C) and (D)). Taxpayers can claim the credit only if their modified adjusted gross income is less than the minimum amount for the tax year of the purchase or the previous tax year, whichever is lower (Section 25E(b)(1)). The minimum to claim the credit is $150,000 for married taxpayers filing jointly or for surviving spouses; $112,500 for heads of household; and $75,000 for other taxpayers, including single taxpayers and married taxpayers filing separately (Section 25E(b)(2)).

Compliance requirements include that the selling dealer must report the required information to the taxpayer and the IRS at the time of the sale and that the taxpayer must file Form 8936, Eligible electric motor vehicle credit. Taxpayers must list the vehicle identification number on Form 8936 (Section 25E(d)). For vehicles acquired after December 31, 2023, Sec. The 25E credit can be transferred in the same way as Sec. Balance 30D under sec. 30 d (g). In addition, there are special rules similar to those set forth in Section II. Section 30D(f) (Section 25E(e)) applies, including that the basis of the vehicle must be reduced by the amount of the credit (Section 30D(f)(1)) and that there is no additional “double benefit” of any other federal income tax credit allowed for the same Vehicle (Section 30D(F)(2)).

Since prices for clean used cars fall under Sec. At the 25E credit limit of $25,000, more taxpayers will find value in this feature. The tax credit is available for purchases made through December 31, 2032.

■ seconds. 25E, enacted under Section 13402 of the Inflation Reduction Act, PL 117-169.

— Thomas Goodwin, CPA, CGMA, Ph.D., and John McKinley, CPA, CGMA, JD, LL.M, are both professors of accounting and tax at the SC Johnson College of Business at Cornell University. To comment on this column, contact Paul Bonner, JofA’s tax editor.