The Inflation Reduction Act — Incentives for Clean Motor Vehicles and Refueling Property


The Inflation Reduction Act of 2022 (the “IRA”) released by U.S. Senate Democrats on July 27, 2022 would, if enacted, provide a number of financial incentives to encourage the purchase of electric and hydrogen fuel cell powered vehicles as well as the deployment of charging stations. As described in more detail below, it would do so by significantly modifying existing tax credits for vehicles and charging stations under sections 30D and 30C of the Internal Revenue Code, respectively, adding a new domestic assembly requirement, and adding new tax credits for commercial clean vehicles and the acquisition by individuals of pre-owned clean vehicles. The changes would be effective for property acquired after December 31, 2022.

Expansion of Existing Tax Credits

Revised Clean Vehicle Credit – Section 30D

  • The IRA would make a number of significant changes to the existing tax credit for electric vehicles in section 30D of the Internal Revenue Code. The changes would include the following:

    • Eliminating a provision in which the tax credit phases out once a manufacturer sells 200,000 vehicles;
    • Requiring final vehicle assembly to occur in North America;

    Observation:  Adding an assembly in North America requirement, as compared to one requiring manufacture in the United States, appears designed to not run afoul of the United States’ existing free trade agreements.

    • Extending the credit to apply equally to both electric and hydrogen fuel cell powered vehicles;
    • Increasing the minimum battery capacity a qualifying vehicle must have from four kilowatt hours to seven;
    • Bifurcating the $7,500 credit amount so that a vehicle will qualify for a $3,750 tax credit if it meets a “critical materials” requirement and another $3,750 if it meets a “battery component” requirement.

      • The critical materials requirement provides that a specified portion of the materials contained in the battery must be extracted or processed in a country with which the United States has a free trade agreement or that they be recycled in North America.This requirement starts at 40% and increases to 80% after 2026.
      • The battery component requires that a specified portion of the components must be manufactured or assembled in North America.This requirement starts at 50% and increases to 100% after 2028.
    • Disqualifying vehicles in which the critical materials or components of a battery are sourced from a “foreign entity of concern” (e.g., an entity owned or controlled by the government of China or Russia).
  • Permitting taxpayers to transfer the credit to the dealer from which the vehicle has been purchased if the dealer has been registered with the Secretary of the Treasury and meets other requirements.
  • Observation: This provision is conceptually similar to separate IRA proposals for certain renewable energy tax credits. It appears designed to permit taxpayers who cannot efficiently use the tax credit to benefit from them indirectly in exchange for a payment from the dealer. Any payment received from the dealer is tax free to the recipient.

  • Setting the following price caps for qualifying vehicles and modified adjusted gross income limitations on eligible taxpayers:

    Type of Vehicle




    Sport Utility Vehicle


    Pickup Truck


    Other Vehicles


    Taxpayer Filing

    Income Limitation

    Joint Return


    Head of Household




Observation:  The income thresholds are designed to make the credit unavailable to high income taxpayers. Taxpayers cannot skirt the income thresholds by transferring the credit to dealers. The threshold appears to be a response to public statements by Senator Manchin who was concerned that the credit would be made available to persons who did not need it.

  • The credit is not available for vehicles placed in service after December 31, 2032.

Alternative Fuel Refueling Property Credit – Section 30C

  • Section 30C – a currently expired tax credit for alternative fuel refueling property, such as electric charging stations or hydrogen fuel cell recharging stations, would be extended through 2032 and equal a maximum of 30% of the property’s cost. The credit is limited to $100,000 per item of property (increased from $30,000 under existing law).
  • To qualify for the maximum 30% credit, the taxpayer will need to ensure that laborers and mechanics employed in the construction of the facilities meet new prevailing wage and apprenticeship requirements similar to those that the IRA would apply to new renewable energy projects. The credit for projects that do not meet these requirements is reduced to 6%.
  • The proposals would also clarify that bidirectional charging equipment is qualifying property.

Observation: The reinstatement of this credit should spur much needed investment in this sector of the renewable energy industry.

New Tax Credits

Credit for Clean Commercial Vehicles – Section 45W

  • The IRA would provide a new business tax credit of up to 15% of the cost of certain commercial clean vehicles (or if less, the incremental cost of the purchase price for a comparable vehicle powered solely by a gasoline or a diesel internal combustion engine), increased to 30% if the vehicle is not powered by a gasoline or a diesel internal combustion engine.

Observation: It is unclear how taxpayers are to determine what is a “comparable vehicle” for purposes of claiming the proper tax credit amount. If the IRA is passed, this is an area where future IRS guidance will be helpful. 

  • The credit is subject to a per-vehicle limit of $7,500 in the case of a vehicle weighing less than 14,000 pounds, and $40,000 for a larger vehicle (in each case, further limited by the incremental cost as compared to a comparable vehicle which is powered solely by a gasoline or a diesel internal combustion engine).
  • Among other requirements, the vehicle must be:

    • Treated as a motor vehicle for purposes of title II of the Clean Air Act and manufactured primarily for use on public streets, roads and highways, or qualify as “mobile machinery” (e.g., vehicles that are designed to perform a function of transporting a load over public highways); and
    • Either (1) propelled to a significant extent by an electric motor which draws electricity from a battery with a minimum capacity of 15 kWh (reduced to 7 kWh if the vehicle’s gross vehicle weighting is less than 14,000 pounds) and capable of being recharged from an external source of electricity, or (2) satisfies certain requirements for “qualified fuel cell motor vehicles” under existing section 30B of the Internal Revenue Code.
  • Unlike the clean vehicle credit, there are no income limits on the eligibility of the taxpayer purchasing the vehicle. There is also no North American Assembly requirement.

Observation:  The credit for commercial vehicles, at a maximum of $40,000 (for vehicles weighing 14,000 pounds or more), is far more significant than the credit for other clean vehicles, which is limited to $7,500. For instance, it appears that an electric semi, such as the Tesla Semi, lists for $150,000; the credit would bring the cost down to $110,000.  A change to electric and hydrogen fueled vehicles could have a significant impact on the Administration’s decarbonization goals as medium and heavy-duty vehicles produce about 23% of all U.S. transportation sector emissions. 

  • Unlike many other business tax credits in the IRA, such as for renewable energy facilities, the tax credit does not benefit from a new transfer provision that would allow taxpayers to sell the tax credit to an unrelated party (such as a dealer) for cash.

New Tax Credit for Previously Owned Clean Vehicles – Section 25E

  • The IRA provides a tax credit for individuals worth the lesser of $4,000 or 30% of the sale price of pre-owned electric vehicles. The tax credit is not available for taxpayers with gross income that exceeds $150,000 (for joint filers), $112,500 (for heads of household), and $75,000 (for others). To qualify as a previously owned clean vehicle, the model year of the vehicle must be at least two years earlier than the calendar year in question. The tax credit for previously owned clean vehicles is not contingent on regional assembly or sourcing requirements.

Observation: The credit for previously owned vehicles is novel, but it is consistent with the provisions in the Tax Cuts and Jobs Act allowing bonus depreciation for used property purchases.  It will further incentivize individuals to transition to clean vehicles.