As the automotive industry continues its march towards vehicle electrification, the role of EVs is becoming increasingly prominent. As an accelerant, state and federal governments have implemented financial incentives, including tax credits.

In August 2022, the federal Inflation Reduction Act (IRA) was signed into law and among other provisions, introduced a federal tax credit for qualified EV purchases. The new federal tax credits became effective April 18, 2023. Questions remain about the potential impact of these tax credits on EV production and retail sales and the significance to franchised dealers and their customers.

The federal EV tax credit has been touted as an enticement to purchase electric vehicles. The tax credit allows eligible buyers to claim up to $7,500, depending on fulfillment of certain IRA requirements. The manufacturers ascertain whether a particular vehicle qualifies depending on certain criteria, including the vehicle’s battery components and origin of manufacture, and source of minerals. A further criterion relates to the manufacturer’s suggested retail price. Additionally, to qualify for the tax credits, consumers must satisfy certain income threshold requirements, along with having an affirmative tax liability amount in the purchase year that is equal to the credit. Finally, the dealer is required to provide customers with requisite disclosures to claim the tax credit, as well as report to the Internal Revenue Service the vehicle sales at the end of each year.

Some argue that the tax credit has the potential to stimulate EV production in several ways. For example, by offering a financial incentive, the tax credit reduces upfront EV manufacturing costs, encouraging investment in expansion of EV production capacities and contributing to an increase in EV supply and availability for purchase by consumers. Additionally, elimination of the prior cap on vehicle production per manufacturer eliminates a potential roadblock for popular EV brands. As such, manufacturers continue to benefit from the federal tax credit, maintaining their competitive edge and driving further investment in EV production.

Others assert, however, that because the number of EV models meeting the regulatory criteria for the tax credit is minimal, few EV purchases will actually qualify. For example, models may not comply with the regulations because of where the batteries and parts are sourced. Presently, many of the vehicles eligible to receive credits are expensive and in limited supply.

For franchised dealers, expansion of EV production represents an opportunity to diversify inventory and cater to the growing demand for EVs. Dealers are leading in the arena of EV and infrastructure investments, which include equipment acquisitions, charging station installations, and staff training — all to better serve their customers.

Success of the federal tax credit in stimulating EV retail sales is important for franchised dealers if it has the effect of reducing the purchase price of electric vehicles, making them more affordable and attractive to more consumers. In turn, this may incentivize consumers’ EV purchases as a cost-effective alternative to internal combustion engine vehicles. For dealers, the tax credit would then present an opportunity to increase EV sales and expand their customer base. By actively promoting the benefits of EVs and educating consumers about available incentives, dealers can position themselves as trusted advisors in the EV market.

However, based on price mark-ups implemented by manufacturers, including around the time the IRA was enacted last year, the benefits of the tax credits to dealers and their customers are debatable. Some within the industry have suggested that the tax credits “pass-through” consumers and are effectively a transfer of funds into the pockets of manufacturers.

Franchised dealers should be aware of additional challenges associated with the federal EV tax credits. While an earlier version of the tax credit was subject to a phase-out period once a manufacturer reached a volume cap of a number of units, as amended by the IRA, the cap was eliminated. Such limitations, however, if instituted in the future, may impact the long-term availability of the tax credit and associated sales incentives. Additionally, with the recent banking crisis, coupled with rising inflation and interest rates, lenders have become more cautious, with many institutions withdrawing from the dealership floorplan finance space. At the time of the writing of this article, legislation had been introduced (i.e., H.R. 2811) in the 118th U.S. Congress seeking to repeal or modify tax credits for EVs as part of the proposed increases to the federal debt limit. Moreover, the success of the tax credit in stimulating EV sales relies on EV adoption at scale which will of necessity require significant investment in and enhancements of the charging infrastructure nationwide.

The tax credit offers opportunities for franchised dealers to diversify their inventory, cater to the growing demand for electric vehicles, and position themselves as key players vital to the successful distribution, sale and servicing of electric vehicles. However, there remain significant obstacles in the road ahead.