On Aug. 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the Act), which allocates over $369 billion in funding for clean energy, energy-efficiency and other eco-friendly technology (CleanTech) development and deployment in the U.S. over the coming ten years. Nestled within the Act are tax breaks, incentives and loan guarantees for a broad waterfront of CleanTech investment opportunities for both businesses and consumers. This article, the first in a series, will provide a current overview of the incentives available for consumers and businesses investing in electric vehicles and charging infrastructure.
Electric Vehicle Incentives – Building an Industry
The Act provides numerous incentives for both consumers and industry, incentivizing investment to drive both the supply and demand side of the emerging CleanTech transportation industry. Fundamental to the Act’s incentives are significant tax breaks for purchasers of electric vehicles (EVs). Prior to the Act, Internal Revenue Code (IRC) Section 30D provided a credit for Qualified Plug-in Electric Drive Motor Vehicles including passenger vehicles and light trucks. The Act modified IRC Section 30D to include “new qualified plug-in electric drive motor vehicles credit” to a “clean vehicle credit.” The clean vehicle credit is a dollar-for-dollar reduction of federal income taxes by up to $7,500 for new clean vehicles placed in service by a taxpayer during the tax year before January 1, 2033.
Under the Act, an IRC Section 30D credit can be as much as $7,500, so long as the sourcing requirements are satisfied for each of the critical minerals contained in the clean vehicle’s battery and its components.
The clean vehicle credit actually consists of two parts:
Allowing taxpayers up to $3,750 of the cost of materials, depending on the percentage of the critical minerals that were either extracted in the US (or extracted or processed in any country with which the US has a free trade agreement in effect) or recycled in North America. The applicable percentage is 40% for vehicles placed in service before 2024, with the percentage increasing over the coming years.
Allowing up to an additional $3,750 of the cost of materials as a credit for the vehicle’s battery components (depending on the applicable percentage of the value of the battery components that were manufactured or assembled in the US). The applicable percentage is 50% for clean vehicles placed in service before 2024, with the applicable percentage also increasing over time.
The modifications to IRC 30D mean that in order to qualify for the credit, the retail price of vehicles, the taxpayer’s adjusted gross income and region where the battery components and minerals for the EVs will all be considered.
OPPORTUNITIES FOR CONSUMERS
New Electric Vehicles
For EVs placed into service after Dec. 31, 2022, the Act (modifying existing IRC 30D) extends the up to $7,500 EV tax credit for 10 years—until December 2032, with the amount of the credit available dependent upon factors like the place of manufacture of the vehicle and its key components. This helpful listing by the US Department of Energy (US DOE) provides a quick index of vehicles that meet the on-shore final assembly requirements set forth in the Act. “Final assembly” in the Act is defined as:
“The process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle.”
For new electric vehicle purchases, individuals may be eligible for the maximum $7,500 tax credit. New electric vehicles are subject to price limitations—vans, sport utility vehicles and trucks must be less than $80,000 while standard cars must be less than $55,000.
Another expansion under the Act is the provision, beginning in 2024, that allows the applicable EV tax credit to be used as a discount off a vehicle’s purchase price, which essentially transfers the credit to the EV dealer.
Plug-in Hybrid EVs
The same credit program will now also apply to plug-in hybrid EVs with 4-7 kilowatt hours of battery capacity. Specific PHEVs for which credits are currently allowed by the U.S. Department of Energy can be found here.
The Act added IRC Section 25E, which allows taxpayers that acquire a used clean vehicle (i.e., at least two years old) before Jan. 1, 2033, to claim a federal tax credit during the tax year the vehicle is placed in service. Used EVs that are at least two years old now have a separate tax credit of either up to the lesser of $4,000 or 30% of the price of the used EV (so long as it was not specifically purchased for resale). The credit can be used once every three years for clean vehicles sold for $25,000 or less and would be based on the taxpayer’s adjusted gross income.
Similar to the used electric vehicle credit, individuals are subject to certain income requirements:
- Individuals filing jointly must have an adjusted gross income of less than $300,000.
- Individuals filing as head of household must have an adjusted gross income of less than $225,000.
- Individuals filing as a single taxpayer must have an adjusted gross income of less than $150,000.
In additional to its numerous consumer-facing incentives, the Act creates new IRC Section 45W to provide a new credit for qualified commercial clean vehicles acquired before Jan. 1, 2033. The credit is the lesser of:
- 30% of the basis of a vehicle not powered by a gasoline or diesel internal combustion engine
- The incremental cost of such vehicle (i.e., the excess of the purchase price of such vehicle over the price of a comparable vehicle).
The Section 45W credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for other vehicles.
The Act also provides for $1 billion in grants for “Clean Heavy Duty Vehicles” to support the replacement of existing Class 6 and Class 7 trucks (buses, garbage trucks and other similarly sized vehicles) with zero-emission vehicles, as well as the construction and operation of associated charging or fueling infrastructure.
The Act will also invest $3 billion for the U.S. Postal Service through the end of the 2031 fiscal year to purchase zero-emission vehicles and related infrastructure, including:
- $1.29 billion for the purchase of zero-emission delivery vehicles
- $1.71 billion for the purchase, design and installation of the infrastructure to support zero-emission delivery vehicles at facilities that the Postal Service owns or leases from non-federal entities.
Importantly, the Act now extends EV tax credits (both consumer and business) to any “clean vehicle.” So, an EV powered by a hydrogen fuel cell car now could qualify. This is important news to states like Ohio, where the development of a fuel cell industry has been underway for decades and where new players, like Hyperion Motors, have decided to set up operations, joining existing companies investing in this emerging industry, like PhMatter in Worthington and Plug Power with a presence in Dayton, which recently announced a major “green hydrogen” supply agreement with Amazon.
EV Manufacturing and the Supply Chain Incentives
In addition to its many demand-side incentives aimed at supporting electric vehicles, significant funding is available for domestic manufacturers and suppliers in this space.
The Advanced Technology Vehicles Manufacturing Loan Program (ATVM) was expanded by the 2022 Bipartisan Infrastructure Law to allow the Loan Programs Office of the US Department of Energy to issue direct loans beyond light-duty vehicles to now support manufacturing facilities for medium- and heavy-duty vehicles, locomotives, maritime vessels (including offshore wind support vessels), aviation and hyperloop – and related qualifying vehicle components. The Act now removes the existing $25 billion statutory cap on the total amount of ATVM loans that could be issued, resulting in an estimate by the US DOE of an additional $40 billion in new ATVM loans to any eligible advanced technology vehicle manufacturing project. The legislation also appropriates $3.6 billion in credit subsidies to support the cost of ATVM loans and sets aside a percentage of these amounts for administrative expenses to help carry out the program, including monitoring and originating new loans.
In July, the US DOE said it planned to loan $2.5 billion to General Motors and LG Energy Solution to build electric-car battery factories in Michigan, Ohio and Tennessee. Immediately prior to the Act’s signature in August, the US DOE’s loan program office was reviewing 77 applications for $80 billion in loans under review before the Act was approved.
The Act also includes $2 billion in competitive grants for domestic manufacturers to retool existing auto manufacturing facilities to manufacture clean vehicles. Earlier this year, the US DOE published its National Blueprint for Lithium Batteries, following its earlier announcement of more than $7 billion to strengthen the U.S. battery supply chain, including the production and recycling of critical minerals and sourcing materials for domestic manufacturing. Open funding opportunities from the US DOE Vehicle Technologies Office are expected to dramatically increase when funds from the Act are appropriated in the coming fiscal year.
Commercial EV Charger Installations
The Act extends the IRC Section 30C credits for the installation of EV charging infrastructure at their facilities. The Act increases the previously allowable maximum tax credit from $30,000 to $100,000 for projects completed after Dec. 31, 2022 (projects completed before then would still be subject to the $30,000 cap). This credit also applies to other “Alternative Fuel Infrastructure” like natural gas, propane, hydrogen, E85 or diesel fuel blends containing a minimum of 20% biodiesel installed through the same time frame.
Note that with the greatly increased credit for charging projects, these stations must be installed in locations that meet census tract requirements set forth by Congress (currently, (1) a population census tract where the poverty rate is at least 20%; or (2) metropolitan and non-metropolitan area census tract where the median family income is less than 80% of the state medium family income level). The Act also requires that eligible projects meet apprenticeships and prevailing wage requirements. Thinking long-term, the Act also allows for bi-directional charging equipment (effectively allowing EVs to be used as a means of providing stored electricity to serve the grid). Instructions for applying for this credit can be found here.
EV Infrastructure Deployment Plans
The Biden-Harris Administration also announced that it has approved plans to deploy EV infrastructure to all 50 States, D.C. and Puerto Rico. With these approvals, all states have access to more than $1.5 billion in funding to facilitate EV charging projects. The Administration estimates that EV stations will now cover approximately 75,000 miles of highways across the country.
This dramatic expansion is aimed at helping ease concerns for many consumers who are cautious to purchase EVs in fear that they will be unable to readily charge their vehicles on long trips (commonly known as “range anxiety”). But the states, D.C. and Puerto Rico now have access to these funds to upgrade and construct necessary EV infrastructure, operate and maintain these stations, develop a workforce, engage communities and stakeholders for support, and better analysis to evaluate EV infrastructure processes.
The funding will ultimately be subject to the National Electric Vehicle Infrastructure formula (NEVI). The Department of Transportation’s projected funding can be found here. For Ohio, just more than $140 million in funding is projected over the next five years. However, additional funding sources are anticipated in the form of grants, federal programs and the CHIPS and Science Act.
With both supply-side and demand-side incentives and new national infrastructure to drive both ends of the equation, the U.S. aims to lead a new industrial revolution in EV manufacture and utilization, along with a host of additional Clean Tech incentive programs we will discuss in future articles.
For advice on these and other federal technology incentive programs, please contact KJK’s IP and Technology attorneys Ted Theofrastous ([email protected]; 216.736.7290) or Kyle Stroup ([email protected]; 216.736.7231).