Continued on page 18 Pending Transactions Some vehicles that qualified for the $7,500 income tax credit on August 15 do not qualify starting August 16. For example, the North American assembly requirement may suddenly make a vehicle ineligible for the credit. However, if your customer entered into a “binding contract” to purchase a vehicle before Aug. 16, 2022, but takes possession on or after Aug. 16, 2022, the customer may still claim the credit. The Treasury Department’s attempt to define “binding contract” is quoted verbatim immediately below: What Is a Written Binding Contract? In general, a written contract is binding if it is enforceable under State law and does not limit damages to a specified amount (for example, by use of a liquidated damages provision or the forfeiture of a deposit). While the enforceability of a contract under State law is a facts-and-circumstances determination to be made under relevant State law, if a customer has made a significant non-refundable deposit or down payment, it is an indication of a binding contract. For tax purposes in general, a contract provision that limits damages to an amount equal to at least 5% of the total contract price is not treated as limiting damages to a specified amount. For example, if a customer has made a non-refundable deposit or down payment of 5% of the total contract price, it is an indication of a binding contract. A contract is binding even if subject to a condition, as long as the condition is not within the control of either party. A contract will continue to be binding if the parties make insubstantial changes to its terms and conditions. Generally, under Illinois law, deposits on motor vehicles must be refunded if a customer is unable to complete the purchase, such as when a customer cannot get approved for financing at the quoted rate. If you have specific instances of a “carryover” deal and are unsure of whether the purchase will qualify for the tax credit, we recommend that you seek counsel. Coming Changes The Inflation Reduction Act will usher in several changes to the EV Income Tax Credit over the next several years, some making the credit more accessible and others limiting the credit. Changes Effective January 1, 2023 • The 200,000-unit sales threshold that triggers the phase-out of the income tax credit will be eliminated, making GM and Tesla eligible once again for vehicles that can meet the other eligibility requirements. • The credit will not be allowed for vans, SUVs, and pickup trucks with an MSRP over $80,000 nor any other vehicle with an MSRP over $55,000. • The credit will not be allowed for buyers with a modified gross income over $150,000 ($300,000 for married couples filing jointly and $225,000 for head of household filers) in both the year before and the year of the purchase. • At least 40% of the critical minerals in the vehicle’s battery must be (1) extracted or processed in the U.S. or a U.S. free trade partner or (2) recycled in North America. The 40% minimum will increase to 80% by 2027. • At least 50% of the value of the components in the vehicle’s battery must be manufactured or assembled in North America. The 50% minimum will gradually increase to 100% by 2029. ▫ Implementation of the critical minerals and battery component limitations could be delayed if IRS does not adopt formal guidance by January 1, 2023. • Separate income tax credits for pre-owned clean vehicles and qualified commercial clean vehicles will take effect. Details about the pre-owned clean vehicle and qualified commercial clean vehicle credits will be provided in a subsequent bulletin. Changes Effective January 1, 2024 • Vehicles containing parts sourced from a “foreign entity of concern” will not qualify for the credit. The term “foreign entity of concern” is not clearly defined but is intended to prohibit sourcing from businesses in Russia and China. We will update you if IRS provides guidance on the “foreign entity of concern” prohibition. • The $7,500 tax credit is currently constructed as a non-transferable income tax credit, which means that the customer does not realize the benefit until tax time. However, starting in 2024, the credit become assignable to the selling dealer, making it more attractive as it will operate like a “cash on the hood” incentive. Changes Effective January 1, 2025 • If any critical minerals contained in the battery are extracted, processed, or recycled by a “foreign entity of concern,” a vehicle will not qualify for the credit, irrespective of whether the remainder of the battery meets the domestic content threshold. 17
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