What You Need to Know
- While used car prices have fallen recently, they remain much higher than before the COVID-19 pandemic.
- Those considering a purchase may be interested in available tax credits on used cars that qualify as “clean” vehicles.
- Electric vehicles, plug-in hybrid electric vehicles and fuel cell vehicles may all qualify, but the car and the car’s buyer must also satisfy certain requirements.
The price of used cars is falling across the board.
According to some estimates, used car prices are about 8% lower today than a year ago. Still, prices remain much higher than before the COVID-19 pandemic.
That means that clients who are considering a used car purchase may be particularly interested in learning more about available tax credits that can serve to reduce the price of used cars that qualify as “clean” vehicles.
Electric vehicles, plug-in hybrid electric vehicles and fuel cell vehicles that meet certain standards may all qualify the buyer for a tax credit under IRC Section 25E. However, both the vehicle and the vehicle’s buyer must satisfy certain requirements to qualify for the credit in the first place.
Section 25E: The Basics
The Inflation Reduction Act of 2022 created a new tax credit for buyers of qualified pre-owned “clean” vehicles. The credits are available for green energy vehicles placed into service after Dec. 31, 2022, for 10 years, through 2032.
Under IRC Section 25E, the maximum amount of the credit equals $4,000 or 30% of the used electric vehicle’s cost, whichever is less. Used electric vehicles qualify only if they are purchased for personal use, rather than for resale.
To claim the credit, the buyer must file Form 8936, “Qualified Plug-In Electric Drive Motor Vehicle Credit,” in the tax year the vehicle was purchased and include the vehicle’s VIN number.
Beginning in 2024, the Section 25E credit can also be “transferred” in the same manner as the Section 30D credit for new green energy vehicles. In other words, the buyer can receive the value of the credit at the time of purchase, either in the form of a cash payment or down payment to reduce the vehicle’s purchase price.
Taxpayers will be permitted to transfer up to two clean vehicle tax credits per year, either in the form of two clean vehicle credits or one clean vehicle credit and one previously owned clean vehicle credit. Taxpayers cannot transfer two previously owned clean vehicle credits in the same tax year.
Which Vehicles Qualify?
As an initial matter, the vehicle must cost less than $25,000 and weigh less than 14,000 pounds to qualify for the credit. The vehicle’s model year must also be at least two years earlier than the year of purchase (for example, only vehicles made in 2021 or earlier qualify if the vehicle is purchased in 2023). The vehicle must be purchased from a licensed dealer whose business involves the sale of vehicles.
