Several changes have been made as the Internal Revenue Service continues to determine a path toward implementing the EV tax credit for years 2023 and beyond. The IRS has released an updated Notice 2023-16 and a Fact Sheet. Additionally, the state of Colorado is proposing a legislative overhaul of its state-level EV tax credit – the Innovative Motor Vehicle Tax Credit. Read more about the latest changes to both initiatives below.
New Federal Incentives for the EV Tax Credit
On January 31, 2023, Governor Jared Polis petitioned the Assistant Secretary for Tax Policy to revise their classification of smaller SUVs, crossover vehicles, and pick-up trucks. Under the initial groupings, both fell in the ‘other’ category and were subjected to a lower cost threshold of $55,000 to qualify for the EV tax credit.
The IRS subsequently revised its categorical definitions of vehicles. For any vehicle whose fuel economy label (in the window of the vehicle) includes “[small or standard] sport utility vehicle,” “[small or standard] pickup truck,” or “[mini]van,” they now fit in those respective categories, which moves the tax credit qualification threshold up to $80,000 MSRP. Any vehicle whose sticker reads otherwise continues to fall into the ‘other’ category, whose qualification threshold remains $55,000.
Any purchaser between January 1, 2023, and February 3, 2023, whose vehicle did not qualify for the tax credit at purchase, but does now qualify after reclassification, will still be eligible to declare this credit in the 2023 tax year.
This impacts Cadillac Lyriq, Ford Mustang Mach-E, Volkswagen ID.4, and Ford Escape Plug-In Hybrid.
Paperwork Requirements for the Federal Incentive
A dealer must still provide paperwork at purchase for a taxpayer to claim their credit. The only exception to the ‘at purchase’ requirement is for those vehicles above who did not qualify by MSRP at purchase but do qualify after reclassification. Their paperwork may be sent after the purchase. These requirements are spelled out in Revenue Procedure 2022-42. Not only must the information be provided to the taxpayer, but the Dealer must also file these reports with the IRS (manner to be determined) no more than 15 days after the tax year when the purchase is made.
The following information is required from the Dealer:
- Name and Taxpayer Identification Number (TIN) of both taxpayer and seller; VIN of the new clean vehicle
- Battery capacity of the vehicle
- Verification that taxpayer is an ‘original user’
- Date of Sale and Sales Price
- Maximum credit allowable for vehicle
- Any transfer credit applied to purchase (trade-in)
- Declaration under penalty of perjury from the Buyer
Colorado Innovative Motor Vehicle Tax Credit
Unlike the federal requirements posted by the regulating agency, the information surrounding the state EV tax credit is still conditional. It will require approval by the legislature, which is never a guarantee.
With that said, conversations dictate that the legislature will seek to extend and increase the state EV tax credit through 2028. Initially, the credit was due to sunset after 2025. For calendar years 2023, 2024, and 2025, it will likely revert to its initial $5,000 per motor vehicle. It will phase out in the years 2026-2028.
Whereas the federal credit has qualification restrictions around the gross income of the purchaser and the MSRP of the vehicle, the original Innovative Motor Vehicle Tax Credit (IMVTC) had no such restrictions, and none are expected in this extension bill. IMTVC has always been a refundable tax credit. Thus, if your tax liability is less than the amount of the credit, the state will simply refund you the excess. Since it applies to all Coloradans, dealers are free to include it in print or electronic advertisements. This is different from the federal tax credit.
Additionally, there will be incentives for medium- and heavy-duty vehicles. The goal is to help shorten the timeframe of turning over the fleet. The state recognizes that there are multiple layers of obstacles to this goal baked into the tax code. Proposed incentives will likely climb back toward $12,000 per vehicle. Discussions also exist around an equalization credit toward the specific ownership tax of these vehicles, which can reach tens of thousands of dollars per vehicle.
Overall, these changes will likely amount to a $35-50 million benefit to EV consumers. The state seeks to create a system that parallels the federal where the credit can be assigned to the dealer, with the cost taken off the hood at purchase, and then can be remitted to the Colorado Department of Revenue for payment every quarter.
CADA will keep you updated as federal policy evolves and the state proposal progresses through the legislative process. In each of these issues, CADA/NADA are partners in the process that should be a considerable augmentation to EV sales.
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