Federal Tax Incentive for Electric Vehicles|How to Get a Tax Write-Off for Your Business

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Key Takeaways:

  • The federal tax incentive for businesses allows you to deduct up to 100% of the cost of an eligible zero-emission vehicle (ZEV) in the year you buy it, subject to certain limitations and requirements.
  • This option is not available in combination with the Incentives for Zero-Emission Vehicles (iZEV) Program or the Incentives for Medium and Heavy-Duty Zero-Emission Vehicles (iMHZEV) Program, which offer rebates for individuals and businesses who buy or lease new ZEVs.
  • To qualify for the federal tax incentive, you must use the vehicle for business purposes, and the vehicle must meet certain criteria based on its type, battery capacity, critical minerals, and battery components.
  • You can claim the credit by filing Form 8936 with your tax return and providing your vehicle’s VIN. Alternatively, you can transfer the credit to the dealer at the point of sale and get an instant discount on the purchase price.
  • The credit is nonrefundable, which means it can only reduce your tax liability to zero, and you cannot carry over any excess amount to future years.
Electric vehicle in business setting with savings graph and tax incentive paperwork, symbolizing federal tax benefits for businesses.

What is the federal tax incentive for businesses?

If you are a business owner who is looking for ways to reduce your tax bill and support the transition to a cleaner transportation system, you may be interested in the federal tax incentive for electric vehicles. This incentive allows you to write off up to 100% of the cost of an eligible zero-emission vehicle (ZEV) in the year you buy it, subject to certain limitations and requirements. This can significantly lower your taxable income and help you save money on your taxes.

However, this option is not available in combination with the Incentives for Zero-Emission Vehicles (iZEV) Program or the Incentives for Medium and Heavy-Duty Zero-Emission Vehicles (iMHZEV) Program, which offer rebates for individuals and businesses who buy or lease new ZEVs. You have to choose one or the other, depending on which one is more beneficial for you.

IMPORTANT LINKS

Which vehicles qualify for the federal tax incentive?

To qualify for the federal tax incentive, you must use the vehicle for business purposes, and the vehicle must meet certain criteria based on its type, battery capacity, critical minerals, and battery components. These criteria vary depending on when you placed the vehicle in service (took delivery), regardless of when you purchased it.

For vehicles placed in service from January 1 to April 17, 2023, the vehicle must:

  • Be a new plug-in electric vehicle (EV) or fuel cell vehicle (FCV) that meets all of Canada’s Motor Vehicle Safety Standards;
  • Have a battery capacity of at least 7 kilowatt hours (kWh) for EVs or a fuel cell capacity of at least 4 kilowatts (kW) for FCVs;
  • Have a manufacturer’s suggested retail price (MSRP) of less than $80,000 for SUVs or less than $55,000 for sedans, wagons, or hatchbacks.

For vehicles placed in service from April 18, 2023, and after, the vehicle must meet all of the above criteria, plus:

  • Have a portion of its battery components produced or assembled in North America;
  • Have a portion of its critical minerals used in the battery extracted or processed in the U.S. or in a country that is a U.S. free-trade agreement partner, or made from materials recycled in North America.

The percentages of battery components and critical minerals required to qualify for the credit increase every year starting from 2024. Vehicles with components from countries that have been designated as “foreign entities of concern” by the U.S. government will not be eligible for the credit.

You can check the list of eligible vehicles on the IRS website or contact the auto manufacturer or your local dealership for more information.

How much is the federal tax incentive worth?

The amount of the federal tax incentive depends on the vehicle’s qualifications and the date you placed it in service. The maximum credit is $7,500, but it may be lower depending on the vehicle’s battery capacity and critical minerals.

For vehicles placed in service from January 1 to April 17, 2023, the credit equals:

  • $2,500 base amount;
  • Plus $417 for a vehicle with at least 7 kWh of battery capacity or 4 kW of fuel cell capacity;
  • Plus $417 for each kWh of battery capacity or kW of fuel cell capacity beyond 5 kWh or 4 kW;
  • Up to $7,500 total.

For vehicles placed in service from April 18, 2023 and after, the credit equals:

  • $3,750 if the vehicle meets the battery components requirement only;
  • $3,750 if the vehicle meets the critical minerals requirement only;
  • $7,500 if the vehicle meets both.

A vehicle that does not meet either requirement will not be eligible for a credit.

The credit is nonrefundable, which means it can only reduce your tax liability to zero, and you cannot carry over any excess amount to future years. For example, if your tax liability is $5,000 and you buy a vehicle that qualifies for a $7,500 credit, you can only claim $5,000 of the credit and the remaining $2,500 will be lost.

How to claim the federal tax incentive?

To claim the federal tax incentive, you have two options:

  • File Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit (Including Qualified Two-Wheeled Plug-in Electric Vehicles) with your tax return. You will need to provide your vehicle’s VIN and other information to calculate the credit amount. You can use the credit to offset your income tax, alternative minimum tax, or self-employment tax.
  • Transfer the credit to the dealer at the point of sale and get an instant discount on the purchase price. This option is available starting from 2023 and requires the dealer to register online and report the same information to the IRS. If the dealer does not do this, your vehicle will not be eligible for the credit.

You can choose the option that is more convenient and beneficial for you, depending on your cash flow and tax situation. However, you cannot claim the credit twice or combine it with other federal, provincial, or local incentives for ZEVs.

Is the federal tax incentive the right choice for your business?

The federal tax incentive for businesses can be a great way to lower your tax bill and support the transition to a cleaner transportation system. However, it may not be the best option for everyone, depending on your business needs, budget, and preferences.

Before you decide to buy a ZEV and claim the federal tax incentive, you should consider the following factors:

  • The availability and eligibility of ZEVs in your area. Not all ZEVs qualify for the federal tax incentive, and some may have limited supply or high demand. You should check the list of eligible vehicles and contact the auto manufacturer or your local dealership for more information.
  • The cost and benefits of ZEVs compared to conventional vehicles. ZEVs may have higher upfront costs than conventional vehicles, but they may also have lower operating and maintenance costs, as well as environmental and social benefits. You should compare the total cost of ownership and the return on investment of ZEVs and conventional vehicles over their lifetimes.
  • The availability and accessibility of charging or refuelling infrastructure. ZEVs require charging or refuelling stations that may not be widely available or convenient in your area. You should check the location and availability of charging or refuelling stations near your home, workplace, and travel routes, and factor in the time and cost of charging or refuelling your ZEV.
  • The compatibility and suitability of ZEVs for your business purposes. ZEVs may have different performance, range, and capacity than conventional vehicles, which may affect your business operations and customer satisfaction. You should assess the compatibility and suitability of ZEVs for your business needs and preferences, such as driving distance, cargo space, towing capacity, and safety features.

If you decide that buying a ZEV and claiming the federal tax incentive is the right choice for your business, you should act fast, as the credit may not be available for long. The credit is subject to phase-out once a manufacturer sells 200,000 eligible vehicles in the U.S., and some manufacturers may be close to reaching that limit. You should also keep track of your vehicle’s qualifications, purchase date, and service date, as they may affect the amount and availability of the credit.

Conclusion

The federal tax incentive for businesses is a valuable opportunity to save money on your taxes and support the transition to a cleaner transportation system. However, it is not available in combination with other federal, provincial, or local incentives for ZEVs, and it has certain limitations and requirements that you should be aware of. To qualify for the federal tax incentive, you must use the vehicle for business purposes, and the vehicle must meet certain criteria based on its type, battery capacity, critical minerals, and battery components. You can claim the credit by filing Form 8936 with your tax return or transferring the credit to the dealer at the point of sale. You should consider the availability and eligibility of ZEVs in your area, the cost and benefits of ZEVs compared to conventional vehicles, the availability and accessibility of charging or reffueling infrastructure, and the compatibility and suitability of ZEVs for your business purposes before you decide to buy a ZEV and claim the federal tax incentive.

Source: (1) EV Tax Credit 2024: How It Works, What Qualifies – NerdWallet. https://www.nerdwallet.com/article/taxes/ev-tax-credit-electric-vehicle-tax-credit. (2) Clean Vehicle Tax Credits | Internal Revenue Service. https://www.irs.gov/clean-vehicle-tax-credits. (3) Credits for new clean vehicles purchased in 2023 or after. https://www.irs.gov/credits-deductions/credits-for-new-clean-vehicles-purchased-in-2023-or-after. (4) Credits for New Electric Vehicles Purchased in 2022 or Before. https://www.irs.gov/credits-deductions/credits-for-new-electric-vehicles-purchased-in-2022-or-before. (5) Eligible vehicles – Transport Canada. https://tc.canada.ca/en/road-transportation/innovative-technologies/zero-emission-vehicles/incentives-zero-emission-vehicles/eligible-vehicles.

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