• Dr. Mark Lee Levine, Professor

Tax Credit for Electric Vehicles

Everyone (who might owe taxes) Loves a Tax Credit!

Why? Because dollar for dollar, credits reduce the tax burden. Thus, if Taxpayer X owed a tax on the Federal or state level of $10,000, and the Taxpayer had a credit of $4,000, the taxpayer would reduce, dollar for dollar, the $10,000 burden, to a net tax owing of only $6,000 in the example. Credits are much more valuable than tax deductions, since a deduction is of value only to the extent of the tax rate of the taxpayer, as noted below.

Tax Credits vs Tax Deductions:

To contrast the deduction with a credit, assume X owed, while in the 30% tax bracket, 30% of each net, income tax dollar to the government on X’s taxes. Employing the same amount of tax owing as noted above in the example of $10,000, before any adjustments, if X had a deduction of $4,000, the savings to X from a $4,000 deduction is only a net of $1,200. (That is, $4,000 * 30%.) Recall that the same $4,000 in a credit would have saved X $4,000. Thus, the credit is clearly of greater value to X ($4,000) as compared to the deduction ($1,200).

This discussion is important as taxpayers, because of the rules noted above, pursue credits to thus reduce the net tax due by the taxpayer.

Tax Credits for Electric Vehicles:

Tax credits for Electric Vehicles (EV) is the credit awarded by state and federal governments in the US to qualified taxpayers who purchase an Electric Vehicle (EV).

This Tip is focused on how those selling EV, be it inside or outside the US, are anxious to obtain the coveted credits for EV, thus making the net price to the purchasers more favorable. The US and states in the US are not the only governments that have provided for this important credit with EV. (Of course, there are other credits that governments have allowed to qualified taxpayers, allowing the reduction of the taxes owing to governments. However, this Tip is directed toward the examination of EV credits. For more on other credits allowed in the US, see Levine, Mark Lee and Segev, Libbi Levine, Real Estate Transactions, Tax Planning, Chapter 23 (Thompson Reuters West 2022).)

Tax Credits on EV in China:

As mentioned, the US is not the only government encouraging the purchase of EV via incentives from credits. In one recent article by Jill Shen, the author noted that the Chinese government, to help pull Shanghai and all of China out of the depressed car sales setting, caused by the Covid-19 Lockdown by the Chinese government, has developed tax credits to encourage the purchase of EV In China. (Of course, this position also can, hopefully, reduce direct auto pollution generated by using combustible engines in autos.)

The credits, which support car sales in China, allow for vouchers to obtain tax credits against taxes owing to the governments in China, when one buys a qualified EV.

(China is also providing other stimuli to encourage auto sales, such as reducing taxes on the purchase of autos, allowing special permission to obtain needed car plates, etc. However, the EV credit is the focus of this note.)

With the promotion of tax credits for auto sales in China, this position, supporting the auto industry and related industries, such as car parts, is similar to some of the positions taken in the US by the Federal government and many state governments.

Tax Credits on EV in the USA:

As stated, the US has allowed credits for EV purchases for many years. The amount of the credit on the Federal level, recognizing that many states have also provided for tax credits on the state level, depends on the timing of the EV purchase, the amount of the purchase price, and other factors at the time of the purchase, such as the type of auto purchased, the weight of the vehicle, etc. However, it is apparent that the US, via the Biden Administration, currently, continues the support for EV. Recent proposals by the Biden Administration have supported additional and larger credits for the purchase of EV.

The amount of the Federal credit, if the auto is qualified, with the manufacturer, has generally been at the maximum level of $7,500. Some proposals have sought to raise this credit to $12,500. Some vehicles do not qualify at the present time, since the allowable number of vehicles allowed to qualify for the credit has been reached. Tesla is an example of such position. It may be that such companies will be allowed the credit for its customers, again, if new legislation, being proposed, will extend the credit to companies that have already reached the ceiling on qualified vehicles. Thus, Tesla and others may soon be allowed to notify their potential customers of a credit that is allowed for the EV. Look to see additional credits allowed for the installation of charging stations for the EV and other credits and benefits provided when one purchases an EV.

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