One highlight of the recently passed Inflation Reduction Act of 2022 (IRA; HR 5376) includes modifications to what is more commonly referred to as EV credits. Specifically, Section 30D of the Act is where the most important modifications are, and where the present tax credit for electric vehicles is spelled out in the U.S. Code. There is also new stimulus for previously owned electric vehicles, industrial vehicles and “alternative fuel refueling property.”

According to the Joint Committee on Taxation’s estimates, in lieu of what was previously known as the credit for plug-in electric vehicles, there is now a new clean vehicle credit. It is expected to be worth $7.5 billion over the next decade. Other noteworthy tax credits include $1.7 billion for “alternative fuel refueling property,” $1.3 billion available for buying a previously owned qualified plug-in EV, and $3.6 billion in tax credits for qualified commercial clean vehicles.

How the IRA Changes Section 30D and EV Tax Credits

For eligible, new clean vehicles, purchasers may receive $7,500 in federal tax credits and $4,000 for similarly used vehicles. It is important to note that taxpayers who purchase such vehicles are eligible for this tax credit if their modified adjusted gross income (MAGI) during the current or preceding tax year is no greater than $300,000 for joint filers; $225,000 for heads of household; and $150,000 for single filers. It is also limited to pickup trucks, vans, and sport utility vehicles up to a MSRP of $80,000. All other vehicles costing up to $55,000 are similarly eligible.

Critical Mineral Standards

Another important qualification for this tax credit is if the vehicle’s battery has a minimum threshold of critical minerals and if it has been processed in the required geographies. Section 30D(e) requires progressively increasing percentages of critical minerals either processed or extracted in the United States or another country the U.S. has an existing free-trade agreement with. If the stated percentages are recycled in North America, a vehicle’s battery components may also qualify for the tax credit.

Once guidance is issued by the U.S. Treasury and before the start of 2024, there must be at least 40 percent of eligible critical minerals to qualify. Vehicles placed in service in 2024 must have at least 50 percent critical minerals in their batteries. Critical minerals must be 60 percent, 70 percent and 80 percent of a battery’s components in 2025, 2026 and after Dec. 31, 2026, respectively. Dependent on future guidelines developed by the Internal Revenue Service, manufacturers will have to sign off on battery component makeup.

Requirements for Battery Manufacturing/Assembly Requirements

According to Section 30D(e)(2), prior to Jan. 1, 2024, at least half of the components of an EV battery must be assembled or manufactured in North America. Starting in 2024 and through 2025, 60 percent of a battery must meet such requirements. Beginning in 2026 through 2028, this requirement will increase by 10 percent annually, eventually requiring 100 percent of a battery’s construction to meet these standards beyond Dec. 31, 2028.

Other Considerations for Tax Credit Eligibility

If any critical minerals were extracted, handled or recycled by a “foreign entity of concern,” it is prohibited by the IRA for tax credit eligibility. Similarly, final assembly also must take place within North America to retain eligibility for the tax credit. Being considered a “qualified manufacturer” is another requirement that is necessary to maintain tax credit eligibility. This is any manufacturer that adheres to the EPA’s Title II Clean Air Act rules.

With the push for cleaner and greener energy evolving, this is one of many tax credits for consumers and businesses alike to reduce emissions and navigate the U.S. Tax Code.

Despite borrowing massive amounts of money, the government still needs to find ways to raise revenue to pay for new programs and spending. The current democratically controlled Congress is looking to potentially implement new social programs and a climate bill. As a way of funding these initiatives, they are considering an expansion of the Net Investment Income Tax (NIIT).

The NIIT is proposed to raise revenue since it is seen as politically more palatable, given that it typically only impacts a small group of wealthier taxpayers. Critics, however, say the plan in its current form would also hurt small family businesses.

Who Pays NIIT Now?

Under the Affordable Care Act (ACA), the NIIT applied a 3.8 percent tax on investment income. Investment income includes both passive sources like dividends, capital gains, interest, royalties, and rents as well as passive business income. Under the ACA, the NIIT applied only to single taxpayers earning $200k or more and joint filers with $250k or more.

When it comes to the taxability of business income under the NIIT, because the law only captures passive business income, most owners of pass-through entities must pay the NIIT; however, active owners of S-corporations are exempt. Likewise, if someone qualifies as a real estate professional, their income is considered active and so their rental income is also exempt.

Who Would Pay Under the New Proposed Law?

The current version of the House bill makes two major changes. First, the NIIT expands to capture all business income. Essentially, S-corporation shareholders, limited partners, and pass-through entity owners that are currently exempt would be impacted.

Second, when it comes to removing the exemption on this business income, the income threshold rises from $200k to $400k for single filers and from $250k to $500k for taxpayers filing jointly. The effect of this would be to exclude most business owners from the tax, but make filing more complex for those impacted.

Under the new rules, the Tax Policy Center projects that in 2023 the tax hike would fall on those in the top 1 percent of household incomes or those making approximately $885k or more. Further, even among the top 1 percent, more than 50 percent of the tax increase would be borne by the top 0.1 percent for those making $4 million and up.

Impact No Small Businesses

Overall, about 14 percent of taxpayers report some form of business income on their federal tax returns. The amount reported, however, is usually not a material amount for most as a percentage of their income. For example, only approximately 5.5 percent of taxpayers with reported business income had this as the source of 50 percent or more of their total income. As a result, the impact will be mostly on a small percentage of small businesses. At the same time, as business income is far more variable than employment income, someone could easily fall in and out of the tax range.

Conclusion

Overall, the House bill looks to raise the threshold of where the NIIT expansion applies by the type of income it captures. We will have to wait and see if there are changes as the bill makes its way through – if it even passes at all. No matter what happens, there will certainly be tax increases of some kind.