7500 EV tax credit update with new bill

[Babyrocko1908]

Hopefully (and I do mean hopefully!) when the IRS publishes the 2022 form 8936 and the instructions to that form. Right now the form says "Enter Date vehicle was placed in service". It would be nice if that language was expanded to include entered into a binding contract - or if the instructions say to use the binding contract date.

This would be helpful. I think this is Lucid's lawyers thinking as well. All of our binding contracts have the date we ordered and made our deposits non-refundable. My finalized order says August 10, 2022.

 

[Babyrocko1908]

The reason people keep bringing this up is because the IRS provided guidance that specifically called out liquidated damages here (copied below): https://www.irs.gov/businesses/plug-in-electric-vehicle-credit-irc-30-and-irc-30d

What Is a Written Binding Contract?​

In general, a written contract is binding if it is enforceable under State law and does not limit damages to a specified amount (for example, by use of a liquidated damages provision or the forfeiture of a deposit). While the enforceability of a contract under State law is a facts-and-circumstances determination to be made under relevant State law, if a customer has made a significant non-refundable deposit or down payment, it is an indication of a binding contract. For tax purposes in general, a contract provision that limits damages to an amount equal to at least 5 percent of the total contract price is not treated as limiting damages to a specified amount. For example, if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract. A contract is binding even if subject to a condition, as long as the condition is not within the control of either party. A contract will continue to be binding if the parties make insubstantial changes in its terms and conditions.

...

DISCLAIMER: THIS IS NOT LEGAL ADVICE AND I AM NOT COMPETENT TO PROVIDE ANYONE WITH LEGAL ADVICE ON THIS SUBJECT. CONSULT A PROFESSIONAL AND NOT SOMEONE ON THIS FORUM. PLEASE. AT THIS POINT, IT'S JUST PURE ENTERTAINMENT.

There are some linguistics issues mixed in with a bit contracts law if we just (inappropriately) ignore the tax law questions. This has pretty much all been discussed in this thread before, but I do enjoy the ongoing debate.

First, why the hell is the IRS calling out “enforceability” as a pre-requisite for “binding”? Is the IRS trying to use the term "binding" to mean "specific performance"? That is, if either party breaches the contract, can the non-breaching party bring the other to court and have the court require them to perform the contract (for us, pay the full price and take delivery of the car; for Lucid, deliver the car)? Or is the IRS asking whether the liquidated damages provisions are enforceable, thus making the contract binding? Maybe they just mean something else, like not being illegal. As noted again later in this post, this explanation from the IRS was not written carefully.

Point (A)(1): Enforceable under State law
If we tried to sue Lucid in court to nullify the contract and return our money (us in breach), the question we would care about is whether the liquidated damages provision is enforceable. The enforceability of liquidated damages provisions is actually not a simple question, and could vary widely on a state by state basis. However, I would not foresee many states sympathizing with a buyer who is in breach of this contract.

If Lucid wants to cancel the contract (Lucid in breach), then our remedies are also limited to $1K according to the limitation of liabilities section (technically not referred to as liquidated damages). So if we got our deposit back from Lucid, does that mean the contract was enforceable all along? Maybe, but for the sake of moving on with this discussion, let's just say it's enforceable under most state laws.

Point (A)(2): Does not limit damages to a specified amount
So now we see that a "binding" contract apparently also requires that the contract "does not limit damages to a specified amount (for example, by use of a liquidated damages provision or the forfeiture of a deposit)." Well, we definitely fail this test. $1K liquidated damages in both directions. Damages are limited to the specified amount of $1,000. It's specified in the contract, and also called liquidated damages.

So, end of debate, right? Wait, what about the proclamation that "a contract provision that limits damages to an amount equal to at least 5 percent of the total contract price is not treated as limiting damages to a specified amount." Okay, so "an amount ... is not treated as ... an amount"? At this point, the contracts law discussion is over, because we aren't trying to enforce a contract with the government based on this language (although if someone wants to IRAC their takings clause analysis here, I would be interested to read it).

Hmm... maybe an example would help this debate. Okay, so "if a customer has made a non-refundable deposit or down payment of 5 percent of the total contract price, it is an indication of a binding contract." So 5% is only limited to down payments, but non-refundable deposits can be in any amount and that counts? This sentence can technically be read two ways, but it's pretty clear they meant that a 5% deposit/down payment counts as "significant" if you read the two preceding sentences. However, that fact has not stopped people from honing in on the "or" as their Perry Mason moment.

At any rate, on to the real question.

Point (B): For Tax Purposes

Now if we forget all of this and turn to the fact that this is a tax question, you will see that the 5% example being "significant" is "for tax purposes." This entire debate is about whether or not we get a tax credit. The transition rules exist so that people who should have obtained their tax credits under the old rules are not screwed out of their money. This tax credit is a "thank you" for buying an EV. But we haven't actually bought an EV, and that's the problem. We have given a company $1,000 in the hopes that we would qualify under this rule, but it should have been at least 5% if we actually wanted to qualify. The IRS has provided this 5% rule, which has absolutely nothing to do with contracts law (I want pincites from anyone who says otherwise), as a way of recognizing the fact that you have really committed to doing something you're trying to claim on your taxes.

I know this will not end the debate, but maybe it will help a few people understand that this is as far as we can really take this.

P.S. It's extremely clear that taking delivery by the end of the year is okay because that is a separate rule. Lucid has no issues saying that's the case, but if you ask them what happens if you take delivery next year, they will tell you to talk to a tax consultant because they have all been trained not to opine on what looks like a terrible scheme to get everyone tax credits that only resulted in Lucid taking everyone's money for absolutely no benefit to the customer.

I have thoughts on this and will respond later tonight but let me leave you with this. In the transition rule the IRS outlines two scenarios -- before August 16th and after August 16th to December 31st. In the before August 16th section, the IRS states contracts essentially fall under the old rules. Wouldn't it be safe to assume the rules after August 16th doesn't even apply to those of us who entered their binding contracts before August 16th? I'm interpreting we fall outside the new bill rules. Then there's the paid in full vs. the delivery vs. possession issue I raised earlier. Which date controls?

Be back later.

 

[PDiddy]

As currently written:

1. Credit applies for vehicles purchased beginning January 1, 2023. (Page 386, line 1).
2. Transition provision for EVs with written sales orders dated in 2022 prior to the date of President signing the bill but delivered in 2023 allows purchaser to claim the “old” credit in 2023. (Page 386, line 20).

Can you tell me which document your post refers to when you cite Page 386, line 20. Having trouble finding it. Thanks!

 

[CrewChief]

Can you tell me which document your post refers to when you cite Page 386, line 20. Having trouble finding it. Thanks!

If you go to the “Inflation Reduction Act”on line and then to page 146 you’ll see the “Transition Rule”. I believe that language is quite clear.

 

[noobzilla]

Thread has been quiet so I assume no update?

 

[Babyrocko1908]

If you go to the “Inflation Reduction Act”on line and then to page 146 you’ll see the “Transition Rule”. I believe that language is quite clear.

I wholeheartedly agree with you and I've been saying this since the IRA bill passed. The transition rule language is crystal clear in my opinion. The new rules under the IRA don't even apply to those of us who had a written and binding contract prior to the passage of the IRA.

The language in the Bill states "after December 31, 2021, and before the date of enactment of this Act, a taxpayer that purchased or entered into a written and binding contract to purchase a new qualified plug-in electric drive motor vehicle as in effect on the day before the date of enactment of this act, and placed such vehicle in service on or after the date of enactment of this Act, such taxpayer may elect to to treat such vehicle as having been placed in service on the day before the date of enactment of this act.

So again, based on the language in the Bill, vehicles delivered in 2023 and beyond will qualify for the tax credit provided the buyer had a binding contract prior to the passage of the IRA.

 

[idiot900]

So again, based on the language in the Bill, vehicles delivered in 2023 and beyond will qualify for the tax credit provided the buyer had a binding contract prior to the passage of the IRA.

The crux of the debate is not the language in the Bill, which is indeed quite clear, but what is the definition a "binding contract" - which the IRS appears to have discretion over, and our $1k confirmations may not meet. In other areas of tax law it appears the threshold is 5% of the value of the contract.

 

[joec]

I wholeheartedly agree with you and I've been saying this since the IRA bill passed. The transition rule language is crystal clear in my opinion. The new rules under the IRA don't even apply to those of us who had a written and binding contract prior to the passage of the IRA.

The language in the Bill states "after December 31, 2021, and before the date of enactment of this Act, a taxpayer that purchased or entered into a written and binding contract to purchase a new qualified plug-in electric drive motor vehicle as in effect on the day before the date of enactment of this act, and placed such vehicle in service on or after the date of enactment of this Act, such taxpayer may elect to to treat such vehicle as having been placed in service on the day before the date of enactment of this act.

So again, based on the language in the Bill, vehicles delivered in 2023 and beyond will qualify for the tax credit provided the buyer had a binding contract prior to the passage of the IRA.

And what is a binding contract?

It's never been in question, and no one here has argued otherwise, that if you have a binding contract, you are good to go. The question has always been what the IRS considers to be a binding contract. And so far the only example provided excludes what we did back in August.

Nothing has changed on that front so far. But Lucid certainly seems to think it's not a binding contract. I'm guessing their accountants are better than me at figuring this stuff out.

 

[CrewChief]

I wholeheartedly agree with you and I've been saying this since the IRA bill passed. The transition rule language is crystal clear in my opinion. The new rules under the IRA don't even apply to those of us who had a written and binding contract prior to the passage of the IRA.

The language in the Bill states "after December 31, 2021, and before the date of enactment of this Act, a taxpayer that purchased or entered into a written and binding contract to purchase a new qualified plug-in electric drive motor vehicle as in effect on the day before the date of enactment of this act, and placed such vehicle in service on or after the date of enactment of this Act, such taxpayer may elect to to treat such vehicle as having been placed in service on the day before the date of enactment of this act.

So again, based on the language in the Bill, vehicles delivered in 2023 and beyond will qualify for the tax credit provided the buyer had a binding contract prior to the passage of the IRA.

Copy that Babyrocko1908

 

[Babyrocko1908]

And what is a binding contract?

It's never been in question, and no one here has argued otherwise, that if you have a binding contract, you are good to go. The question has always been what the IRS considers to be a binding contract. And so far the only example provided excludes what we did back in August.

Nothing has changed on that front so far. But Lucid certainly seems to think it's not a binding contract. I'm guessing their accountants are better than me at figuring this stuff out.

The I thought the IRS left the definition of a binding contract up to each individual buyer's state law definition? Did I miss something?

 

[misanoblue]

Lucid doesn't have an opinion on the binding contract. They don't know, just like Fisker and Rivian don't know. Nobody knows.

I believe the intent of the law was to grandfather people in who made deposits on cars, so hopefully the IRS will be lenient. Almost no one puts down 5%+ non-refundable deposits when ordering a car, so it doesn't make sense to hold everyone to that standard.

 

[emoylv]

It is abundantly clear - that nothing is abundantly clear. We have to hope that we get our vehicles before 12/31. If not, then wait for the IRS to determine what the rules are.

 

[joec]

Lucid doesn't have an opinion on the binding contract. They don't know, just like Fisker and Rivian don't know. Nobody knows.

I believe the intent of the law was to grandfather people in who made deposits on cars, so hopefully the IRS will be lenient. Almost no one puts down 5%+ non-refundable deposits when ordering a car, so it doesn't make sense to hold everyone to that standard.

I believe the intent of the law, as stated fairly clearly by Joe Manchin, was to stop giving subsidies for products that had long waiting lists. The basic argument was "if a car is in such high demand that you have to wait 6-12 months to get one, you don't need government incentives."

As much as I hate to agree with that guy, he's not totally wrong. I just think we should be pushing people away from ICE cars, regardless.

Also, many lawmakers think by only offering credits to low-cost cars, manufacturers will be coaxed into lowering their prices. Unfortunately, it doesn't really work that way. Cheap EVs aren't scarce because manufacturers want to only sell expensive cars. It's just too hard to make a good cheap EV at this point and make a profit. Large automakers with lots of ICE models can afford to lose money on their cheap EVs. A new company like Lucid can't. So the effect of the law is to crush new entrants into the market before they can get any traction.

Yay capitalism?

Also, the auto manufacturers who benefit the most from this are much larger political donors than Lucid is. Go figure.

 

[Babyrocko1908]

I wholeheartedly agree with you and I've been saying this since the IRA bill passed. The transition rule language is crystal clear in my opinion. The new rules under the IRA don't even apply to those of us who had a written and binding contract prior to the passage of the IRA.

The language in the Bill states "after December 31, 2021, and before the date of enactment of this Act, a taxpayer that purchased or entered into a written and binding contract to purchase a new qualified plug-in electric drive motor vehicle as in effect on the day before the date of enactment of this act, and placed such vehicle in service on or after the date of enactment of this Act, such taxpayer may elect to to treat such vehicle as having been placed in service on the day before the date of enactment of this act.

So again, based on the language in the Bill, vehicles delivered in 2023 and beyond will qualify for the tax credit provided the buyer had a binding contract prior to the passage of the IRA.

To further the point for when I file my taxes in February 2023, say my Touring is delivered between the time I file but after December 31, 2022, I will use the language of the bill for justification. The language of the bill that states "such taxpayer may elect to treat such vehicle as having been placed in service on the day before the date of enactment of this act." Since the IRA was passed on August 16, 2022, I will use the date of August 15, 2022 as the date my Touring was placed in service on the form for the tax credit. I have to stress that it has to be delivery after December 31, 2022 and before I file my taxes. I can't see taking the tax credit and not yet taking delivery. I'm also prepared to postpone filing my taxes after my usual time in February to until I take delivery of the car.

 

[Babyrocko1908]

It is abundantly clear - that nothing is abundantly clear. We have to hope that we get our vehicles before 12/31. If not, then wait for the IRS to determine what the rules are.

LOL. I can't argue this point either.

 

[noobzilla]

Lucid doesn't have an opinion on the binding contract. They don't know, just like Fisker and Rivian don't know. Nobody knows.

I believe the intent of the law was to grandfather people in who made deposits on cars, so hopefully the IRS will be lenient. Almost no one puts down 5%+ non-refundable deposits when ordering a car, so it doesn't make sense to hold everyone to that standard.

I never thought of that. Not usual for dealers to ask for that much deposit if at all unless ordering something very specific. Friend had to put 3000 deposit for his Volvo. Other than that it's mostly "we have one coming soon" and no deposit.. only pay when car is almost ready for delivery or in stock.

Tesla asked for 100% deposit for the new Roadster though lol

 

[emoylv]

LOL. I can't argue this point either.

I've said my novenas, lit candles, carry my luck rabbit's foot and rubbed the tummy of my buddha statue. Anything I missed?

 

[idiot900]

I believe the intent of the law was to grandfather people in who made deposits on cars, so hopefully the IRS will be lenient. Almost no one puts down 5%+ non-refundable deposits when ordering a car, so it doesn't make sense to hold everyone to that standard.

That's an excellent point. I put my deposit down with the expectation I'd get the tax credit, and at a time when the manufacturers have already priced that in. Getting rid of the credit with so little notice echoes of promissory estoppel (I think? Corrections welcome as I'm not a lawyer).

 

[noobzilla]

To further the point for when I file my taxes in February 2023, say my Touring is delivered between the time I file but after December 31, 2022, I will use the language of the bill for justification. The language of the bill that states "such taxpayer may elect to treat such vehicle as having been placed in service on the day before the date of enactment of this act." Since the IRA was passed on August 16, 2022, I will use the date of August 15, 2022 as the date my Touring was placed in service on the form for the tax credit. I have to stress that it has to be delivery after December 31, 2022 and before I file my taxes. I can't see taking the tax credit and not yet taking delivery. I'm also prepared to postpone filing my taxes after my usual time in February to until I take delivery of the car.

This is also my interpretation and what I plan on doing too. Our orders and receipt from Lucid is dated on the day we confirmed back in August. Policy says we can backdate the Placed in Service date which is 2022, which means it belongs in 2022 tax return.

The timing is interesting because what if car is delivered in 2024? IRA would definitely need to clear things up. They can limit it to confirmed orders pre Aug 16 2022 and 2023 delivery latest.

 

[Halodde]

Politicians will say the law is to encourage manufacturers to make/sell EV's that meet the politicians' specifications and thereby increase the adoption of EV's. However, based on the criteria being extremely difficult to meet and the ambiguity of the language, our elected officials are actually making it MORE difficult for those of us who had already ordered cars and those who were on the fence.

I read somewhere that at the time they passed the into law, there were a grand total of ZERO vehicles being offered by manufacturers that met all of the criteria for the full $7,500 tax credit. Not a single one. They all had some part of their components from an unapproved source outside of NA or were assembled somewhere else or were too expensive etc...

While I recognize and appreciate the intent of the law, the application leaves a whole lot of room for improvement since they are currently discouraging immediate adoption of EV technology in favor of potential eventual adoption once manufacturers can finally meet the stringent criteria. They really should have phased in the law better so that they didn't block immediate adoption and still encouraged manufacturers to move towards their goals. IMHO of course