Most small business owners use their personal vehicle for business driving. And some small businesses own vehicles used exclusively for company driving. If your current car, truck, or van is aging, is now the right time to buy an electric-powered vehicle (EV) or a plug-in electric-powered vehicle (PHEV)? There are many considerations to factor in—pricing, tax breaks, and concerns about your carbon footprint. The following are some things to think about, and when EV is mentioned, also keep PHEV in mind.
What to consider about buying an EV
Currently, it’s hard to go green on a budget. The average cost of new EVs is now over $66,000. There are, of course, some less costly models, such as one from Mazda at around $30,000. The lowest-priced Tesla is over $40,000. Some EVs are over $100,000. Keep these prices in mind in determining eligibility for a federal tax credit, below
You may be able to find a used EV, with a lower sticker price. But the older models in the used-car market have less range and potential battery problems.
Federal tax credits
If you buy an EV, a plug-in hybrid, or a hydrogen fuel cell vehicle, you may be eligible for a federal tax credit of up to $7,500. The credit is set to run through 2032. The Inflation Reduction Act, which was signed into law on August 16, 2022, expanded the credit (but not the credit amount) for buying an EV, and only for some people. Here are some of the new rules to help you decide if and when to buy an EV.
- The former title of the tax credit buying an EV, the credit for plug-in electric powered vehicles, is now called the clean vehicle credit.
- A final assembly requirement is effective for the purchase of any vehicle from August 16th This requirement means that the final assembly must take place in North America. The IRS says that if you had a contract to purchase an EV before August 16 but didn’t get deliver until later in 2022, the final assembly requirement doesn’t apply. Delivery after December 31, 2022? The requirement applies. The Department of Energy has a list of EVs assembled in North America. You can also check a particular vehicle using the Department of Transportation’s decoder based on the vehicle’s VIN.
- There is a battery requirement, effective starting in 2023. The maximum potential credit is the sum of two amounts: the critical mineral amount and the battery component amount. The amounts scale up in coming years.
- The 200,000-vehicles cap on manufacturers is eliminated after 2022; it still applies for 2022. This means that Teslas and GMs bought in 2022 don’t qualify for any credit, and there’s a reduced credit for Toyotas purchased in Q4 2022.
- There is a maximum manufacturer’s retail suggested price (MSRP) starting in 2023: $80,000 for SUVs, vans, and pickup trucks; $55,000 for other vehicles. If the vehicle costs more, no credit is allowed.
- There is an income limit on a taxpayer’s eligibility to claim the credit, starting in 2023: modified adjusted gross income up to $300,000 for joint filers, $225,000 for heads of households, and $150,000 for singles.
- There’s a credit of up to the lesser of 30% of the price of the vehicle or $4,000 for used EVs starting in 2023. The EV must have been owned for at least two years. Lower purchase price and income limits apply for the credit for a pre-owned vehicle.
- The credit may be “sold” to the dealer starting in 2024. This effectively reduces the purchase price and you don’t have to wait until filing your return to reap the benefit of the tax credit if you’re eligible for it.
- There is a separate credit for the purchase of a charger, called the alternative fuel refueling property credit; it runs through 2032. There are different credit amounts if the charger is installed in a home versus at a business. The tax credit for home recharging station is limited to 30% of the cost of the hardware and installation. The credit for one installed at a business after 2022 is 30% of the cost up to $100,000; before 2023, the credit is limited to $30,000.
Note: There’s a new credit for commercial clean vehicles starting in 2023.
According to the EPA, EVs typically have a smaller carbon footprint than gasoline cars, even when accounting for the electricity used for charging. If a main reason for buying an EV is to reduce your carbon footprint, then understand the savings you can reap. Dominion Energy lets you compare CO2 emissions for a gas and electric car over a year of driving. You can contrast your current vehicle with an EV you’re considering based on the number of miles you drive each year to see how much CO2 can be saved.
State law changes to note
Currently, there’s no state law requirement that you abandon vehicles powered by fossil fuels. There are, however, state incentives—rebates, tax credits, sales tax exemption, financing programs—for EV purchases. Check your location through NCSL.
What’s more, in an effort to reach 100% carbon-free vehicles by 2035 California announced it would regulate the number of zero-emission light-duty vehicles that automakers deliver to the state, starting with the model year 2026 (35% that year and building to 100% by 2035). By law, Virginia is required to follow California’s emission standards, so it too may soon limit the sale of gas-powered vehicles unless its law is changed.
If you’re in the market for a vehicle, it probably won’t be easy to make a decision about if and when to buy an EV. There are many EVs to choose from and tax rules complicate incentives for purchases. Keep in mind that leasing a new EV won’t get you any tax credit, but leasing usually lets you drive a more expensive vehicle than you could when buying. Still confused? Talk to your CPA or other tax adviser.