New Tax Credit Makes Used EVs More Appealing

A new tax credit for used cars that qualify as “clean vehicles” is making used electric cars much more appealing to cost-conscious drivers. While used-car prices are estimated to have dropped by as much as 8% year-over-year, secondhand electric vehicle prices are still higher than they were before the pandemic.

New electric cars tend to be too pricey for the average consumer, meaning many drivers can only transition to electric cars by buying from the secondhand market. But with used EV prices remaining higher than prepandemic levels, many prospective EV drivers are holding back from making the plunge and going electric.

The new tax credit comes at a time when electric vehicle demand in major markets such as the United States is dipping due to high prices and surging interest rates.  It would allow customers to buy battery electric vehicles (BEVs), fuel cell vehicles and plug-in hybrids at lower prices as long as they meet certain requirements.

Under Section 25E of the 2022 Inflation Reduction Act, preowned “clean” vehicle buyers will qualify for a new tax credit if they purchase renewable energy vehicles that were put into service after Dec. 31, 2022,  for a decade to 2032. In addition, used electric cars have to be meant for personal use, not resale, to qualify for the tax credit. Eligible EVs will qualify for credits equaling up to $4,000 or 30% of the used EV’s cost. The credit may also be transferred similarly to Section 30D credits for new green-energy vehicles starting in 2024. This means drivers will be able to receive the tax credit at the purchase point in the form of either a down payment or cash payment.

Each American taxpayer will be allowed up to two clean vehicle credit transfers per year in the form of one used clean-vehicle credit and one new clean-vehicle credit or two new clean-vehicle credits. Additionally, taxpayers will not be allowed to transfer two used clean-vehicle credits in a single tax year. To qualify for the tax credit, a given electric car must weigh less than 14,000 pounds and cost below $25,000. Its model year must be at least two years earlier than the purchase year, and it must be bought from a licensed vehicle dealer who is involved in automotive sales.

Taxpayers can claim the new tax credit by filing form 8936, “Qualified Plug-In Electric Drive Motor Vehicle Credit,” in the tax year the preowned clean-energy vehicle was purchased and include the vehicle identification number (VIN).

As used EVs become more appealing due to their affordability aided by the tax incentive, new models from various automakers such as ElectraMeccanica Vehicles Corp. Ltd. (NASDAQ: SOLO) could enjoy higher sales volumes once buyers know that they can resell them if the need to upgrade arises.

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