January 12, 2023
IRS starts issuing guidance on clean vehicle credits under IRC Sections 30D, 45W and 25E
The IRS ended 2022 by releasing several pieces of guidance on the new clean vehicle credits enacted or revised under the Inflation Reduction Act. The guidance addresses credits under IRC Sections 30D (clean vehicles), IRC Section 45W (commercial clean vehicles) and IRC Section 25E (previously-owned clean vehicles). For the most part, this guidance applies to vehicles sold and purchased beginning in 2023.
Specifically, the Treasury and IRS released the following:
Revenue Procedure 2022-42, addressing credits under IRC Sections 30D, 45W and 25E: Guidelines for manufacturers and sellers of clean vehicles on (1) how clean vehicle manufacturers make their vehicles eligible for clean vehicle (EV) credits by entering into a written agreement with the IRS to provide periodic written reports with required information on each clean vehicle manufactured, and (2) the sellers' requirements.
FS-2022-42, addressing credits under IRC Sections 30D, 45W and 25E: FAQs on eligibility rules, income and price limitations, when the new requirements apply, and how to claim the clean vehicle credits. The FAQs also include the 2023 list of vehicles that qualify for the credits.
Notice 2023-1, addressing credits under IRC Section 30D: Announcement that Treasury and the IRS intend to propose regulations on the definitions of the relevant terms under IRC Section 30D for new clean vehicles placed in service after December 31, 2022, and the critical mineral and battery component requirements under IRC Section 30D(e).
Notice 2023-9, addressing credits under IRC Section 45W: Safe harbor regarding the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year 2023 for purposes of the new credit for qualified commercial clean vehicles under IRC Section 45W.
IRC Section 30D credit for clean vehicles
The Inflation Reduction Act (IRA) changed the IRC Section 30D "new qualified plug-in electric drive motor vehicles credit" to a "clean vehicle credit." The clean vehicle credit is a dollar-for-dollar reduction of federal income taxes by up to $7,500 for new clean vehicles placed in service by a taxpayer during the tax year before January 1, 2033.
For taxpayers to claim the credit, the following conditions must be met:
According to the FAQs, discussed later, fuel cell vehicles are also new clean vehicles "if (1) the original use begins with the taxpayer, (2) the final assembly is in North America, and (3) the seller of the vehicle provides a report to the taxpayer and the IRS."
The IRC Section 30D credit can reach $7,500, so long as the sourcing requirements are satisfied for each of the critical minerals contained in the clean vehicle's battery and the battery components. The credit is broken into two parts. Taxpayers may be eligible for up to $3,750 of the credit for the critical minerals, with the credit value dependent on meeting the requirements for the percentage of the critical minerals that were either extracted or processed in the US (or in any country with which the US has a free trade agreement in effect) or recycled in North America. The applicable percentage is 40% for vehicles placed in service before 2024, with the percentage increasing over time. Taxpayers may also be eligible for up to $3,750 of the credit for the battery components, dependent on meeting the requirements for the applicable percentage of the value of the battery components that were manufactured or assembled in North America. The applicable percentage is 50% for clean vehicles placed in service before 2024, with the applicable percentage increasing over time.
To qualify for the credit, price caps on the retail price of vehicles (e.g., $80,000 for vans, SUVs and pickup trucks, $55,000 for sedans and others), as well as limitations on taxpayer's adjusted gross income apply, along with exclusions for vehicles that source battery components or critical minerals from foreign entities of concern. Further, taxpayers can elect to transfer credits to an eligible dealer subject to certain requirements. Additionally, certain recapture rules apply.
IRC Section 25E credit for previously owned clean vehicles
The IRA added IRC Section 25E to allow taxpayers who acquire a used clean vehicle (i.e., at least two years old) before January 1, 2033, to claim a federal tax credit for the tax year of the vehicle's acquisition. The credit equals the lesser of (1) $4,000 or (2) 30% of the sales price. The credit can be used once every three years for clean vehicles sold for $25,000 or less and is based on the taxpayer's adjusted gross income.
IRC Section 45W credit for qualified commercial clean vehicles
The IRA created IRC Section 45W to provide a new credit for qualified commercial clean vehicles acquired before January 1, 2033. The credit is the lesser of (1) 30% of the basis of a vehicle not powered by a gasoline or diesel internal combustion engine, or (2) the incremental cost of that vehicle (i.e., the excess of the purchase price of that vehicle over the price of a comparable vehicle). The IRC Section 45W credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for other vehicles.
Guidance for manufacturers and sellers of clean vehicles regarding credits under IRC Sections 30D, 45W and 25E
In Revenue Procedure 2022-42, the Treasury Department and IRS specify how clean vehicle manufacturers can become qualified manufacturers, and thereby make their vehicles eligible for the EV credits, by entering into a written agreement with the IRS to provide periodic written reports with required information on each clean vehicle manufactured. The reporting requirements apply to credits under IRC Sections 30D, 45W and 25E. This guidance comes after a set of frequently asked questions (FAQs) in August addressed which vehicles qualify for the credit (see Tax Alert 2022-1262).
Requirements for qualified manufacturers
Clean vehicle manufacturers that want their vehicles to be eligible must be "qualified manufacturers," which they can become by entering into a written agreement with the IRS to make periodic written reports about each vehicle.
For the IRC Sections 30D, 45W and 25E credit to apply, qualified manufacturers must file written reports with the IRS by the fifteenth of every month. Once a manufacturer sends an email to the IRS indicating its intent to submit monthly reports, the IRS will respond with instructions on how to do so.
The written reports must include the qualified manufacturer's name, address and taxpayer identification number (TIN). It must also contain information about each vehicle, including its model, model year, weight, battery capacity, vehicle identification number (VIN) and certification that it was made by a qualified manufacturer.
There are additional requirements that are specific to each credit, such as the specific battery capacity, that the vehicle is for use on public roads, certification that the vehicle was assembled in North America and the percentage of critical minerals contained in the battery.
For the vehicle to qualify for the IRC Section 25E credit as a previously-owned clean vehicle, a qualified manufacturer must submit a written report with the required information for prior model year vehicles to the extent such information has not already been provided for purposes of IRC Section 30D and/or IRC Section 45W.
Taxpayers who acquire the new or used vehicles can rely on the manufacturer's certification for the tax credits.
Requirements for sellers
For vehicle sales in 2023 or later, sellers of clean vehicles must submit a report to (1) the buyer no later than the date the vehicle is purchased, and (2) the Treasury Secretary within 15 days of the end of the calendar year. The first reports will be due from sellers to the Treasury Secretary on January 15, 2024. The Treasury Secretary will provide the format and method for submitting the report.
The report must include the seller's and buyer's TINs, and the vehicle's battery capacity, sales date, price and maximum credit under IRC Section 30D or 25E. For buyers who elect to transfer the credit to an eligible entity (under IRC Section 30D(g)(1)), the report must include the buyer's partial payment or down payment for sales after December 31, 2023.
Proposed regulations defining IRC Section 30D terms
In Notice 2023-1, the Treasury and the IRS announced that they intend to propose regulations on the definitions under IRC Section 30D for new clean vehicles placed in service after December 31, 2022.
The IRS said it will issue proposed regulations defining the following terms: (1) final assembly; (2) North America; (3) manufacturer's suggested retail price; (4) vehicle classifications for vans, sport utility vehicles, pickup trucks, and other vehicles; and (5) placed in service. The proposed regulations will also provide guidance regarding the critical mineral and battery component requirements under IRC Section 30D(e), which, according to FAQs (see below), will be released in March 2023.
Critical mineral and battery components
In FS-2022-42, the IRS issued FAQs on the credits under IRC Sections 30D, 45W and 25E.
According to the FAQs, the requirements under IRC Section 30D(e) will apply until the proposed regulations on the critical mineral and battery components are released. "However, vehicles ordered or purchased prior to but placed in service after Treasury and the IRS issue this proposed guidance will be subject to the critical mineral and battery component requirements," according to the FAQs.
The anticipated guidance in March 2023 will cover both the critical minerals requirement to qualify for half the value of the IRC Section 30D credit as well as the battery component requirement for the other half of the credit. These are different requirements — e.g., critical minerals includes the concept of extraction and processing and Free Trade Agreement (FTA) countries; battery components includes the concept of manufacturing and assembling in North America.
The FAQs clarified that a qualified commercial vehicle can be acquired for use or lease by the taxpayers so long as it is not for resale. The FAQs specified that features of a vehicle lease agreement that would make it more likely to be recharacterized as a resale are:
Safe harbor for incremental costs of certain qualified commercial vehicles under IRC Section 45W
In Notice 2023-9, the IRS provides a safe harbor regarding the incremental cost of certain qualified commercial clean vehicles placed in service in calendar year 2023 for purposes of the new credit for qualified commercial clean vehicles under IRC Section 45W. The incremental cost will not limit the available credit for street vehicles (other than compact car plug-in hybrid EVs (PHEVs)) that have a gross vehicle weight rating of less than 14,000 pounds and are placed in service in calendar year 2023.
This guidance clarified several issues for implementing the new and revised credits. Taxpayers are eagerly awaiting more guidance for issues that still haven't been addressed, such as the critical mineral and battery components.
It is helpful that taxpayers purchasing vehicles can rely on reporting and certification provided by the manufacturer/seller for purposes of the tax credit. Placing this documentation requirement on the manufacturer/seller makes these incentives more accessible for end users. The relatively complexity of qualifying for credits, however, could still make it difficult to take full advantage of them. For example, the manufacturer reporting requirements indicate that qualification for credits may be determined on a per-vehicle basis. Thus, vehicles of identical make and model year might differ in credit eligibility due to the requirements around critical mineral, battery component and assembly location. Additional forthcoming guidance around battery component and critical mineral certification could provide clarity around these issues.
Some vehicles that might be assumed to be "qualified clean vehicles" may not be credit-eligible due to the retail price limitations imposed on sedans/vans/SUVs/pickup trucks or otherwise. Additionally, vehicles that fail to be classified as vans/SUVs/pickup trucks could be limited to the sedan retail price limitation of $55,000. Before assuming which vehicles qualify and associated MSRPs, taxpayers can refer to the IRS-provided model and manufacturer listing here: Manufacturers and Models for New Qualified Clean Vehicles Purchased in 2023 or After | Internal Revenue Service (irs.gov).
The tax credit for leased cars can be claimed by the entity deemed as the owner of the vehicle for federal income tax purposes. The lease structure can help determine whether the lessor or lessee are eligible for the credit, so it is important for entities to include the appropriate clauses in leasing agreements for qualified clean vehicles.
Finally, the guidance explains how incremental cost is calculated and determines that the incremental cost restriction in IRC Section 45W will not limit the available credit for street vehicles (other than compact car PHEVs) that have a gross vehicle weight rating of less than 14,000 pounds and are placed in service in calendar year 2023. This provides much needed clarity to purchasers of the vehicles around how the tax credits will be calculated.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor