IRS issues guidance on clean vehicle credits

The IRS has released a string guidance (Notice 2023-1, Notice 2023-9, a White Paper, and FAQs) providing key details on the clean vehicle tax incentives enacted and amended under the Inflation Reduction Act of 2022. The guidance provides useful preliminary information on the Section 30D clean vehicle credit for consumers, while there are still many unanswered questions on the Section 45W qualified clean commercial vehicle credit.

The Section 30D clean vehicle generally offers consumers a credit of up to $7,500 if mineral and battery sourcing requirements are met and the vehicle undergoes final assembly in North America. The vehicles also must meet cost requirements based on manufacturer suggested retail prices, and there are income limitations for taxpayers claiming the credit.

Notice 2023-1 provides that the critical minerals and battery component requirements will not take effect until the IRS issues guidance, which the IRS has said will come in March. The IRS has posted on its website a list of vehicles that will qualify, but taxpayers should verify specific vehicles underwent final assembly in North America by inputting their vehicle identification numbers on a Department of Energy website, using the “VIN Decoder tool” under "Specific Assembly Location Based on VIN.”

Section 45W qualified clean commercial vehicle credit

The Section 45W credit is generally 30% of the basis but is reduced to 15% if the vehicle is also powered by gas or diesel. There are no final assembly or battery and mineral sourcing requirements for the credit. It is capped at the lesser of:

• The incremental cost of the vehicle in excess of the purchase price of a comparable gas or diesel vehicle, or
  
• $7,500 for vehicles under 14,000 pounds or $40,000 for vehicles above 14,000 pounds

Notice 2023-9 provides a safe harbor for determining the incremental cost. Vehicles under 14,000 pounds other than compact car plug-in hybrid electric vehicles will not need to perform an incremental cost calculation because the Department of Energy (DOE) has determined that the incremental cost for those vehicles will always be less than the $7,000 credit cap in 2023.

For all other vehicles, the safe harbor will allow taxpayers to rely on the DOE incremental cost analysis.

The IRS has not so far released a list of vehicles that specifically qualify for the Section 45W credit like it has for the Section 30D consumer credit. Presumably all the manufacturers certified under Section 30D are also certified for purposes of Section 45W, and all the vehicles under 14,000 pounds qualifying for the Section 30D credit also qualify for Section 45W. But the IRS site does not list any vehicles over 14,000 pounds, or any qualifying mobile machinery.

Because the Section 45W credit isn’t restricted by final assembly or mineral or battery sourcing, some carmakers and dealers have begun exploring whether they can retain ownership and lease to customers the vehicles that do not qualify under Section 30D but do qualify under Section 45W. This would allow them to claim the Section 45W credit themselves based on using the credits in a trade or business of leasing. The IRS FAQs provide that whether a lease will be respected will be determined under existing rules, and the FAQ offers some basic information on how the determination of tax ownership is typically made.