The Inflation Reduction Act’s Impact on Dealers

The Inflation Reduction Act’s Impact on Dealers

August 10, 2022 — The Inflation Reduction Bill is not yet law, but it may be as soon as this weekend. The impact on dealers will be immediate.

Members of the House of Representatives are slated to return to the chamber on Friday to vote on the version the Senate passed 51-50 on Sunday. The House should pass the bill with few changes, at which point, President Biden is expected to quickly sign it.

The legislation is broad and is aimed at reducing inflation while addressing climate issues, healthcare benefits, and corporate taxes. As part of the climate portion, the bill extends the current $7,500 tax credit for new electric vehicle purchases to the end of 2032, but adds several qualifications governing which vehicles are eligible.

Once signed, the legislation goes into effect on January 1, 2023. Despite that, the bill includes one clause that may make as many as 47 electric vehicles ineligible for the current $7,500 tax credit the minute President Biden signs the law — which could as early as Friday evening. The one caveat here is, we do not have the final version of the bill. So everything is subject to change.

The qualifier that kicks in once the legislation is signed eliminates the $7,500 credit for any electric vehicle built outside of North America (U.S., Mexico, Canada) — about 47 according to The Alliance for Automotive Innovation which says the number of eligible vehicles will drop from 72 to 25. (We provide a partial list below).

Based on our understanding of the bill and several conversations with legal experts familiar with it, any vehicle currently eligible for the federal tax credit remains eligible provided the customer has a binding purchase order that is signed before President Biden signs the bill.

Note, this does not include reservations or deposits that have been paid on those vehicles. The vehicle can be delivered after the legislation is signed (enacted), but a signed purchase order has to be in place prior to the bill’s signing.


(We compiled the list based on our research and knowledge of current vehicle production. It may not be 100%)

1. Audi E-Tron

2.  Audi E-Tron GT

3.  BMW i4

4.  BMW i7

5. BMW iX

6.  Fisker Ocean

7. Genesis GV60

8.  Genesis G80 Electric

9. Hyundai Ioniq 5

10. Hyundai Ioniq 6

11. Hyundai Kona Electric

12.  Hyundai Nexo

13. Jaguar I-Pace

14. Kia EV6

15. Kia Niro Electric

16.  Lexus RZ

17. Mazda MX-30

18.  Mercedes-Benz EQB

19. Nissan Ariya 

20. Polestar 2

21. Subaru Solterra

22. Toyota bZ4x

23.  Toyota Mirai

24. Volkswagen ID.4 (certain models)

25. Volvo C40

With inventory being a challenge, though, dealers should check with the Federal Trade Commission’s Mail, Internet, or Telephone Order Merchandise Rule which stipulates disclosure requirements if the delivery may exceed 30 days.


In addition to the requirement that EVs need to be built in North America in order to be eligible the proposed law adds other stipulations that will go into effect January 1, 2023.

  1. Passenger cars must have an MSRP of $55,000 or lower, while SUVs and trucks must be $80,000 or less.
  2. Salary requirements call for a modified adjusted gross income of $150,000 or less for single tax filers; $225,000 for individuals filing as head of household; $300,000 for married couples filing jointly.
  3. Critical minerals and materials used in battery composition must originate from the United States or from countries with whom the U.S. has free trade agreements. This requirement includes an increasing percentage that culminates with 80% of the minerals and 100% of the battery components coming from the U.S. or its free trade partners for vehicles placed into service after 2028.

The bill also eliminates the 200,000 sales cap that makes automakers who have sold that many EVs ineligible for the current $7,500 tax credit. As of now, General Motors and Tesla are the only two automakers who are ineligible due to the cap. Toyota reached it last quarter, but still has till the fourth quarter before the credit begins to decrease.

Editor’s Note: A common misunderstanding of the cap is that when an automaker hits the 200,000 number, the $7,500 tax credit immediately stops. But it’s much more complicated. The government established a convoluted formula in which a wind-down conceivably could take 18 months.

The wind-down begins during the second calendar quarter after the calendar quarter in which the automaker hits the magic 200,000 number. The full tax credit will still be available to customers for at least a full quarter or more after the 200,000th sale. It depends on the timing of that sale.

During the second calendar quarter, the wind down begins with a 50% ($3,750 tax credit will still be available) reduction in the tax credit for six months. And then another 50% reduction (or 25% of the original $7,500, meaning, $1,875 will still be available) for another six months. After the second six month period, the tax credit disappears entirely.

The proposed legislation also adds a $4,000 credit for used electric vehicles $25,000 or less provided the buyer’s income is $75,000 or less for single filers and $150,000 or less for married filers.


Under the current program, customers claim the credit when filing their taxes. The new program allows customers to benefit at the point of sale by electing to transfer their credit to the dealer selling them the vehicle, which then gives the dealer the ability to reduce the price of the vehicle by the amount of the eligible tax credit.

The dealer has to disclose to the customer prior to the customer electing whether to transfer their credit and no later than the sale of the vehicle:

  1. The MSRP
  2. The value of the credit along with any other incentives available
  3. The amount of the transferred credit provided to the customer by the dealer — whether it is in cash or in a reduction of the down payment — which must equal the credit allowed to the customer.

A key point — if the dealer fails to disclose the required information to the customer, their registration of the sale can be revoked.

Dealers can recoup the cash for the amount transferred from their customers either by participating the advance payment program or by offsetting their federal income tax liability via the transferred credits. Details of the advance payment program are not available yet, but should be by December 31, 2022.

It will be critical for dealers to understand the rules governing the credit and the amounts they are allowed to claim. The penalties for overstating the value of the credits owed the dealer includes the amount of the excessive payment plus an additional 20%.

One final note: based on current projections, the proposed law will make most current EVs ineligible for the the tax credit — either due to price, assembly location, or battery material origination.

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