As we move into 2022, climate change is a common topic. The most prominent discussion point revolves around electrifying vehicles and removing fossil fuels from vehicle operations. This has resulted in many new and old automakers releasing new or upcoming electric vehicles. While in the past, that has been limited to sedans or awkward SUVs that work on a consumer basis but are not useful for contractors, this year will result in the release and proliferation of practical vehicles for contractors with both service vans, trucks, and larger SUVs being released.
Outside of the apparent savings these vehicles can lead to with less maintenance and lower fuel costs, the best advantage that currently exists with these vehicles is the tax credits that exist with certain automakers. Currently, up to a $7500 tax credit can exist to purchase an electric vehicle meeting specific requirements, which goes directly against your tax liability. This credit works for all types of businesses, not just corporations. A tax credit is a one-for-one reduction in any taxes owed to the federal government. So while you won't get paid back if you owe more than $7500 in taxes, it reduces your tax bill by the credit. For example, let's say you have $100,000 in net profit at the end of the year. Your tax bill is likely to be more than $25,000. That tax credit would reduce your tax bill down to $17,500 and result in either a refund if you paid in over that amount or a reduction in the amount owed to the federal government.
Certain states will also have tax benefits in place that will vary from state to state, which also allows you to have a chance to reduce your state tax bill, not just your federal taxes, once again adding up to savings for you in the long run.
Requirements to Earn
So what are the requirements to earn this tax credit? First, you need to buy a brand new car. The credit does not work on used cars, as you must be the vehicle's first owner. Second, make sure you select a manufacturer who still has credits remaining. Tesla and GM, which includes GMC and Chevrolet, do not have any credits left as the current program limits a manufacturer to 200,000 total credits that can be used. However, Ford, Rivian, Dodge, and many other mainstream brands still have credits available to them to use.
Next, you will need to ensure that the battery pack is large enough because this credit isn't just for fully electric cars. This can also be used for PHEV or plug-in hybrid electric vehicles like the Ford Escape or Volvo XC90 and XC60. To qualify for the tax credit, you have to have a battery pack of at least 5 kWh, which all fully electric vehicles have, and most PHEVs; however that pack would only qualify you for a $2500 credit. An increase to the credit of $417 per additional kWh exists, meaning you would need to have a battery pack of at least 16.99 kWh to qualify for the full $7500 tax credit. So, in short, as long as you are buying a new vehicle with at least a 17 kWh battery from a manufacturer that still has credits, you can claim this credit.
Claiming the Credit
So how would you go about claiming this credit? Once you have purchased the vehicle, you can either inform your accountant or note that you purchased an energy-efficient vehicle when filing your own taxes. Both will want to know information like make, model, year, and purchase date to help quantify the purchase of the vehicle. Some programs will calculate out your tax credit for you just like your accountant should. Others may require you to figure out the credit for yourself, and even if you don't calculate it yourself, using fueleconomy.gov will help you know if the vehicle you are looking to purchase qualifies and how much the vehicle qualifies for. You can also get a tax credit for installing an electric charging station of up to $1000 based on a 30% credit on the purchase price and installation costs, further increasing the credit that you can claim.
Changes on the Table
As with everything else, many changes have happened in recent months, and changes are on the table to the vehicle tax credit, which has both pros and cons. In Biden's infrastructure bill, it is currently proposed to increase the credit to $12,500 or a $5000 increase from where it is now. However, the credit will not apply to vans, trucks, or SUVs that exceed $80,000 MSRP and sedans exceeding $55,000. Furthermore, the max credit requires you to purchase a vehicle made in the US utilizing labor unions for $4500 of the credit and the battery pack to have 50% of its components made in the US for another $500. Ultimately leading to no increase in the credit if those two boxes are not satisfied and limiting the selection of automakers to GM Ford and Stelantis.
Service trucks regularly must be replaced. With the advancement of technology and electric vehicle options at a marginally higher price, savvy contractors will consider this with their tax plan to help reduce their tax bill when considering replacing and adding vehicles to their fleet over the next few years. As there is no maximum you can claim on a tax return, businesses can spread the credit out over several years to provide even better benefits rather than limiting your current tax liability. In addition to the credit that you claim, you can still write off depreciation and take special depreciation on those vehicle purchases, if eligible, to further help reduce tax liability.James Griner is owner and manager at Waterford Business Solutions, Greenville, SC. Find them atwww.waterfordbusinesssolutions.com.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction