EV tax credit counting toward capital gains?

[azulejost]

Yet another tax time question, one that I haven’t seen through searching through many earlier threads.

In 2022, we bought a new ’21 Mach-E then traded it in for a ‘22 in a different color 8 months later. There was no intent to resell the ‘21 at the time of purchase. We also happened to by a second ‘22.

Before buying the first Mach-E, we had an Escape PHEV (for which we received the full $6843 plug-in tax credit on our 2021 (purchased in 2021) taxes filed in 2022) bought back by Ford as a lemon in early 2022.

It appears our tax professional is suggesting that in the buyback process for the lemoned Escape, we have to consider the amount of the plug-in tax credit ($6843) as subject to capital gains tax due to it being bough back at the amount of the purchase price.

I am not a tax professional, but I’ve done a lot of leg work with my own taxes over the years, and I’ve kept close eye on the plug-in tax credits over the years (as we have now had 6 qualifying plug-in vehicles). I’ve never seen anything to suggest the up to $7500 credit factors in to the resale value, potential capital gains tax, or any other factor with the subsequent trade/sell/buyback of the vehicle.

Have I missed something, or is this misguided advice?

Along the same lines, if someone like us had purchased a ‘21 in early 2022 at those fondly remembered “low” prices, decided the crazy used market would allow them to sell it later in 2022 and get a ‘22 with a frunk button release (or just a different color or configuration irrelevant for this discussion), would trading in the ’21 be subject to capital gains if the trade-in price were not at least $7500 less than its purchase price because of the pending $7500 credit? And if so, would the capital gains actually apply for 2023 since the tax credit has not been realized until the 2022 taxes are filed?

Hopefully this makes sense. I suspect there may be several people in the second situation given the hot used values the MME once commanded. Hopefully far fewer have a lemon/buyback issue.

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[Neil4Real]

He’s just wrong. So long as you bought the car without the intention to resell it, the tax credit doesn’t specify how long you’ve had to own the car to claim the credit.

Them buying the car back at full cost also doesn’t matter because you still had it for at least a day under your name. It is viewed as you just selling the car to someone.

The tax credit is just that, it does not get added to the total sales price of the car… it’s not income, etc.

Plenty of people have had buybacks and not a single report on them needing to pay back the tax credit. Same with people that bought it, sold it for what they paid or more. Even multiple EVs in the same tax year and multiple credits because of it.

I’d be a bit concerned they’re suggesting it.

 

[MachKet]

Time for a new tax guy

 

[ADDZ71]

I think your tax guy is correct in this. Nearly no one considers the loss on a vehicle or the gain as a capital gains issue but in reality law suggests that they should. It would be treated the same as a piece of art is. Buy a Lamborghini for 100,000 and sell it for 200,000 a few years later and you are supposed to report the gain. In normal cases you would take a loss offset by the usage to calculate and neither anyone does this nor does the IRS puruse anyone. But the law suggests that you should. None of this is tax advice.

 

[SuperRob]

If you bought for X and sold for X, there is no capital gain or loss. The federal tax credit doesn't come off the price of the car. If it did, the less expensive the car, the higher the capital gain incurred due to the tax credit. It doesn't really work that way.

Your tax guy is being extremely conservative. Nothing wrong with that, but I think only a handful would consider your situation as capital gains.

 

[MachKet]

I think your tax guy is correct in this. Nearly no one considers the loss on a vehicle or the gain as a capital gains issue but in reality law suggests that they should. It would be treated the same as a piece of art is. Buy a Lamborghini for 100,000 and sell it for 200,000 a few years later and you are supposed to report the gain. In normal cases you would take a loss offset by the usage to calculate and neither anyone does this nor does the IRS puruse anyone. But the law suggests that you should. None of this is tax advice.

Except it was bought back as a lemon so nothing more than what OP paid for it

 

[kennethjk]

I am not giving tax advice but this is in code sec. 30D that deals with clean vehicle credits -(may not have been updated for recent tax changes)

“(1)Basis reduction
For purposes of this subtitle, the basis of any property for which a credit is allowable under subsection (a) shall be reduced by the amount of such credit so allowed (determined without regard to subsection (c)).”

as an FYI, if you sell a personal asset for a loss it is not deductible. If you sell it at a gain it is taxable.

normally but not always credits that are taken to reduce taxes do reduce the tax basis of an asset.

 

[RickMachE]

Yet another tax time question, one that I haven’t seen through searching through many earlier threads.

In 2022, we bought a new ’21 Mach-E then traded it in for a ‘22 in a different color 8 months later. There was no intent to resell the ‘21 at the time of purchase. We also happened to by a second ‘22.

Before buying the first Mach-E, we had an Escape PHEV (for which we received the full $6843 plug-in tax credit on our 2021 (purchased in 2021) taxes filed in 2022) bought back by Ford as a lemon in early 2022.

It appears our tax professional is suggesting that in the buyback process for the lemoned Escape, we have to consider the amount of the plug-in tax credit ($6843) as subject to capital gains tax due to it being bough back at the amount of the purchase price.

I am not a tax professional, but I’ve done a lot of leg work with my own taxes over the years, and I’ve kept close eye on the plug-in tax credits over the years (as we have now had 6 qualifying plug-in vehicles). I’ve never seen anything to suggest the up to $7500 credit factors in to the resale value, potential capital gains tax, or any other factor with the subsequent trade/sell/buyback of the vehicle.

Have I missed something, or is this misguided advice?

Along the same lines, if someone like us had purchased a ‘21 in early 2022 at those fondly remembered “low” prices, decided the crazy used market would allow them to sell it later in 2022 and get a ‘22 with a frunk button release (or just a different color or configuration irrelevant for this discussion), would trading in the ’21 be subject to capital gains if the trade-in price were not at least $7500 less than its purchase price because of the pending $7500 credit? And if so, would the capital gains actually apply for 2023 since the tax credit has not been realized until the 2022 taxes are filed?

Hopefully this makes sense. I suspect there may be several people in the second situation given the hot used values the MME once commanded. Hopefully far fewer have a lemon/buyback issue.

I don't agree on the Escape.

On any car, if you sell it / trade it and gain in value from the original cost, you have to pay short term (in your case of the 2021) or long term capital gains tax.

No, the capital gains tax applies for 2022, the tax year you are filing for in 2023. You aren't taking a 2023 tax credit.

We sold our 2021 a year and a few days after buying it. I have computed the adjusted cost basis of the 2021, and used that to calculate the gain that we achieved (thousands). I am not including the tax credit we got on the 2021, and I haven't seen ANY tax professional say that you needed to, and I've looked.

 

[dmastro]

Further clarification from the instructions to Form 8936

Basis Reduction​

Unless you elect not to claim the credit, you may have to reduce the basis of each vehicle by the sum of the amounts entered on lines 11 and 18 for that vehicle.​

Seems pretty clear that for purposes of determining capital gains, that the credit needs to be factored. Accountant seems to be correct. That said, odds are probably that it doesn't get scrutinized heavily. Individuals should let their conscience and tolerance for risk of audit guide them.

 

[SuperRob]

It says, '... you may have to ...' not that you must. There is some other criteria there that line is considering. Gotta love vague tax code.

The problem is that even if you claim the credit, it's not refundable (at least, not this year). So some people may not actually 'get' all of that $7500; it depends on your tax liability. There is no reasonable way to reduce your tax basis on an asset ... at least, not in the same year when you don't know what that will be until you've done all the calculations, and even then, that credit will keep adjusting every time you go back to redo the cap gains on it, further reducing the realized credit.

This is why think we're overthinking this.

 

[azulejost]

Right, I think on the Escape buyback, it’s not an applicable “recapture event” in which case the basis reduction does not get applied. It is worded “may have to” because basis reduction only applies in the cases of applicable recapture events.

 

[kennethjk]

It says, '... you may have to ...' not that you must. There is some other criteria there that line is considering. Gotta love vague tax code.

The problem is that even if you claim the credit, it's not refundable (at least, not this year). So some people may not actually 'get' all of that $7500; it depends on your tax liability. There is no reasonable way to reduce your tax basis on an asset ... at least, not in the same year when you don't know what that will be until you've done all the calculations, and even then, that credit will keep adjusting every time you go back to redo the cap gains on it, further reducing the realized credit.

This is why think we're overthinking this.

yes it is a circular calculation if someone doesn’t use the full credit but it is doable and you can estimate the number.

most Likely, the answer is, the credit reduces your tax basis.

 

[RedStallion]

Your car buyer should have issued 1099-MISC or perhaps 1099-K this year. You then would have offset that with your cost basis (price you paid minus deductions, rebates you've got) to calculate capital gains. If positive, you'd need to pay capital gains tax.
1099 forms are required to be issued by the end of this month (with some exceptions).

 

[JRSNoVa]

He’s just wrong. So long as you bought the car without the intention to resell it, the tax credit doesn’t specify how long you’ve had to own the car to claim the credit.

Them buying the car back at full cost also doesn’t matter because you still had it for at least a day under your name. It is viewed as you just selling the car to someone.

The tax credit is just that, it does not get added to the total sales price of the car… it’s not income, etc.

Plenty of people have had buybacks and not a single report on them needing to pay back the tax credit. Same with people that bought it, sold it for what they paid or more. Even multiple EVs in the same tax year and multiple credits because of it.

I’d be a bit concerned they’re suggesting it.

I don't think you understand the original question. It's not about whether OP can claim the credit, it's whether OP need to reduce the cost basis (what they paid) on the vehicles they sold by the amount of the credit for capital gains purposes.

It's an interesting question I've not yet seen a clear answer on.

 

[JRSNoVa]

The problem is that even if you claim the credit, it's not refundable (at least, not this year). So some people may not actually 'get' all of that $7500; it depends on your tax liability.

That's why it says "credit so allowed." Based on that, it looks like once IRS accepts a return with an EV credit, any sale of that vehicle should carry a cost basis of the original price minus the allowed credit.

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