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Inflation Reduction Act EV Tax Credit

Robert Ebin /

President Biden has just signed into law the Inflation Reduction Act (IRA). Most of you have probably heard of the IRA by now, and soon may be hearing much more about it than you probably want to!  The IRA includes various provisions, among which are a creation of a corporate minimum tax, prescription drug price reform, increased IRS enforcement, and energy security and climate change investments.

While we could go on and on about all the different facets of the IRA, perhaps the part most germane to dealers currently (and our discussion in this article) is the new rules regarding the federal income tax credit for the purchase of electric vehicles (EVs). Specifically, under the IRA, a purchaser of a new EV can receive a tax credit of up to $7,500 (and up to $4,000 for a used EV).  Now, some of you may be saying that there was already a tax credit like that in place.  Although that is true to some extent, as we will discuss shortly, this is the crux of the problem that dealers will be facing as the changeover occurs to the IRA’s EV tax credit provisions.

The old (i.e., existing) tax credit included a phase-out provision whereby once a manufacturer reached the threshold of 200,000 eligible vehicles sold, the tax credit would no longer apply to vehicles from that manufacturer. The good news is that the IRA removes this threshold. The not-so-good news is that the IRA also creates other restrictions that may make either the purchaser or vehicle ineligible for the tax credit.  The IRA puts certain income limitations on customers in order to be eligible for the tax credit.  Importantly for our discussion here, the IRA also places pricing cut-offs for vehicle eligibility as well as certain manufacturing and parts/materials requirements, including the requirement that the vehicle must be assembled inside North America. Many manufacturers have already announced that their vehicles will lose tax credit eligibility once IRA is signed, including Audi, Porsche, and Kia, as noted in this NADA article. In fact, estimates show that as many as 70% of the electric, plug-in hybrid, and fuel-cell EV vehicles currently on the market are ineligible under the IRA.

Accordingly, the new IRA requirements make certain vehicles that were once eligible for the tax credit now ineligible.  So, as some of you may already be thinking, what about those customers who have ordered a vehicle that was eligible under the old tax credit, the vehicle is not yet ready to be delivered to that customer, and that vehicle is now ineligible under the IRA?

Because of this issue, we have been receiving a high volume of calls from dealers whose customers want to enter into binding “purchase orders” for these ordered vehicles in an attempt to retain their “old” tax credit. Many of you are probably thinking: “Purchase orders? We don’t really do those in California.” Your instincts are correct. Although California law does not directly prohibit the use of purchase orders, it imposes various, onerous requirements on their use. Civil Code section 2981(l) defines a “purchase order” as a “sales order, car reservation, statement of transaction or any other such instrument used in the conditional sale of a motor vehicle pending execution of a conditional sale contract.” Section 2981(l) also requires vehicle purchase orders, among other things, to comply with all the finance itemization requirements of a conditional sale contract.  In other words, it must have all the same information that is found in the LAW 553-CA’s Itemization of Amount Financed section. Some may now be thinking: “Well, why can’t we just use a 553 then as a purchase order?” Unfortunately, the 553 was just not created for that purpose, as it involves current customer obligations related to vehicle financing. In fact, we do not know of any form that can be used in such a manner and comply with California law.

Consequently, because of the IRA’s passage, dealers should consider the following:

  • Reach out to your manufacturer to obtain information as to whether the eligibility of any EVs you offer for sale will be affected by the new IRA restrictions.
  • After you have obtained such information, make sure you train your staff and update any signage, etc. Staff should understand that current and future customers may be impacted by this. Also, all references at the dealership to tax credit eligibility that are now outdated must be removed.
  • Do not use the 553 as a “purchase order” for customers.
  • If you are considering using another document as a “purchase order,” you should only do so at the direction of competent counsel.

Questions?

If you have any questions regarding this, or any other situation that may arise in your sales or service departments, hotline clients are invited to contact us at (800) 785-2880 (then press “4” for hotline) or hotline@autoadvisory.com.

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