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1 1 (March 1, 2024)

handle is hein.crs/goveomd0001 and id is 1 raw text is: Congres &onaI Research Se informing Ih legislative debat s in e 1914 0 March 1, 2024 The Tax Credit Exception for Leased Electric Vehicles The Inflation Reduction Act (P.L. 117-169) created or modified three tax credits for purchases of electric vehicles (EVs): the clean vehicle credit (CVC), the used clean vehicle credit (UCVC), and the credit for qualified commercial clean vehicles (CQCCV). These credits may contribute to both the reduction of greenhouse gases and the promotion of domestic industry, policy initiatives that at times can conflict with each other. This In Focus describes one such conflict: the exception for leased electric vehicles. Since businesses have the ability to receive tax credits for a broader group of electric vehicles leased to customers, car dealers may pass tax savings to individuals who lease vehicles that are ineligible for the CVC. Because the CVC has certain made in America requirements and other restrictions not present in the CQCCV, the leased vehicles exception may promote larger emissions reductions at the expense of domestic industry. Clean Vehicle Credit Reqirements The CVC allows taxpayers to receive up to $7,500 for purchasing new EVs. Eligible EVs must be made by a qualified manufacturer, weigh less than 14,000 pounds, have four or more wheels, and be intended for use on public streets, roads, and highways. Electric boats, motorcycles, and bicycles do not qualify. The CVC does not apply to all EVs. Rather, it applies to EVs meeting certain domestic content and manufacturing requirements. The $7,500 total credit is the sum of two smaller credits: a $3,750 credit for vehicles meeting the critical minerals requirement and a $3,750 credit for vehicles meeting the battery components requirement. To meet the critical minerals requirement, a certain percentage of the critical minerals in an eligible EV's battery must have been extracted or processed in the United States, extracted or processed in a country with which the United States has a free trade agreement, or recycled in North America. To meet the battery components requirement, a certain share of an EV battery's component parts must be manufactured or assembled in North America. The applicable percentages for both requirements are shown in Table 1. If a car meets just one requirement, it is eligible for a $3,750 credit. EVs must meet additional domestic requirements to qualify for the CVC. First, eligible EVs must undergo final assembly in North America. Second, starting in 2024, none of the battery components in credit-eligible vehicles may have been manufactured or assembled by a foreign entity of concern (FEOC) (a company significantly influenced by the governments of China, Russia, Iran, or North Korea). Third, starting in 2025, none of the critical minerals in an eligible EV's batteries may have been extracted, processed, or recycled by an FEOC. If any of these conditions is violated, vehicles become ineligible for even partial credits. Table 1 summarizes the five domestic content and manufacturing requirements in the CVC. Table I. Domestic Content and Manufacturing Requirements in the Clean Vehicle Credit, by Year North Battery Critical Minerals American Components Final As l Domestic FEOC Domestic FEOC Assembly Content Ban Content Ban 2023 Yes 50% N.A. 40% N.A. 2024 Yes 60% Yes 50% N.A. 2025 Yes 60% Yes 60% Yes 2026 Yes 70% Yes 70% Yes 2027 Yes 80% Yes 80% Yes 2028 Yes 90% Yes 80% Yes 2029 Yes 100% Yes 80% Yes 2030 Yes 100% Yes 80% Yes 2031 Yes 100% Yes 80% Yes 2032 Yes 100% Yes 80% Yes Source: Internal Revenue Code §30D. Notes: Vehicles acquired after August 16, 2022, must undergo final assembly in North America. The domestic content requirements and FEOC bans apply based on the year a vehicle is placed in service. The domestic content requirements denote (a) the share of an EV's battery components that must be manufactured or assembled in North America; and (b) the share of critical minerals in the EV's battery that must be extracted or processed in the United States, extracted or processed in a country with which the United States has a free trade agreement, or recycled in North America. The clean vehicle credit does not apply to vehicles placed in service after 2032. In addition, taxpayers must have modified adjusted gross incomes at or below certain thresholds in either the year they claim the credit or the year before. The thresholds are $150,000 for single individuals without dependents, $225,000 for single individuals with dependents (known as heads of household), and $300,000 for married couples. Finally, vans, SUVs, and pickup trucks with manufacturer suggested retail prices (MSRPs) above $80,000 do not qualify for the CVC, nor do other vehicles with MSRPs above $55,000. One rationale for such ceilings could be to prevent high-wealth, low-income individuals (such as heirs or wealthy retirees) from claiming the credit when purchasing expensive EVs.

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