Tax Advantages of Hybrid Vehicles for Contractors
The discussion over climate change has been ongoing for some time. An often-suggested solution revolves around electrifying vehicles and removing fossil fuels from vehicle operations. This has resulted in many automakers announcing and releasing new electric cars. Fully electric vehicles have been limited to hatchbacks, sedans, or awkward SUVs in the past. While these vehicles work perfectly for an average consumer, they aren’t practical as work vehicles for home professionals. To date, nobody has released a proper work van or truck for use in a commercial setting. However, given the increased prevalence of climate change in the news cycle over the past year, it is largely expected that 2022 will result in the release and proliferation of practical electric vehicles for contractors.
You might be surprised at how much you can save with an electric vehicle. Some of the savings, like less maintenance and no fuel cost, are apparent. Perhaps not as obvious is the tax credits available to EV purchasers. A tax credit is a dollar-for-dollar reduction in taxes owed to the federal government. Currently, up to a $7500 tax credit is available to assist in purchasing an electric vehicle meeting specific requirements. This credit directly reduces your tax liability and works for all types of businesses – not just corporations. For example, if you have $100,000 in net profit at the end of the year, your tax bill will likely be more than $25,000. The EV tax credit could reduce your tax bill down to $17,500.
Savings At The State Level
Certain states will also have tax benefits in place which may also allow you to reduce your state tax bill. This means more savings! These benefits will vary from state to state.
How To Qualify For A Federal Tax Credit
So, what are the requirements to earn this tax credit? First, you need to buy a brand new car. The credit does not work on used cars, as you must be the vehicle’s first owner. This new vehicle can either be an Electric Vehicle (EV) like the Ford e-Transit, or Plug-in Hybrid Electric Vehicle (PHEV) like the Chrysler Pacifica.
Second, make sure you select a manufacturer who still has credits remaining. When this credit was introduced, they were “issued” to manufacturers based on a projected number of sales. As a result, Tesla and GM, including GMC and Chevrolet, do not have any remaining credits. However, Ford, Dodge, and many other mainstream brands still have credits available to you.
Finally, you will need to ensure that the battery pack is large enough because this credit isn’t just for fully electric cars. To qualify for the tax credit, you have to have a battery pack of at least 5 kWh, which all fully EVs and most PHEVs have. However, that pack would only qualify you for a $2500 credit. So to increase this credit to the maximum of $7,500, you need to have a battery pack of at least 16.99 kWh. In short, as long as you are buying a new vehicle with at least a 17 kWh battery from a manufacturer that still has credits, you are eligible to claim it.
How To Claim Your Federal Tax Credit
Once you have purchased the vehicle, you can either inform your accountant or note that you purchased an energy-efficient vehicle when filing your own taxes. You will need information like make, model, year, and purchase date to help quantify the purchase of the vehicle. Some programs will calculate your tax credit for you just like your accountant should. Others may require you to figure out the credit for yourself. Even if you don’t calculate it yourself, using fueleconomy.gov will help you determine if your vehicle is eligible and for how much. You can also get a tax credit for 30% of the cost of installing an electric charging station. This credit caps out at $1,000.00.
Upcoming Changes To The Federal Credit
Changes to the vehicle tax credit are on the table, and they have pros and cons. The current infrastructure bill proposes to increase the current credit amount by $5,000, making EV and PHEV purchasers eligible for a total credit of $12,500. However, the credit will not apply to vans, trucks, or SUVs that exceed $80,000 MSRP or sedans exceeding $55,000. Furthermore, it’s proposed that there would be a few more hoops to jump through to earn the maximum credit. For instance, $4,500 would only be earned if you purchase a vehicle made in the US at a facility comprised of labor union workers. Additionally, $500 of the credit would only be earned if the battery pack in your vehicle was made at least 50% in the US.
An EV or PHEV Could Be An Excellent Tax Strategy
Service trucks regularly must be replaced. With the advancement of technology and electric vehicle options at a marginally higher price, savvy contractors will consider this with their tax plan to help reduce their tax bill when considering replacing and adding vehicles to their fleet over the next few years. In addition to the credit that you claim, you can still write off depreciation and take special depreciation on those vehicle purchases, if eligible, to further help reduce tax liability
Ready to find out more?
Drop us a line today for a free quote!