IRS Issues Final Regulations Regarding Clean Vehicle Credits

(Parker Tax Publishing May 2024)

The IRS issued final regulations regarding federal income tax credits under the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169) for the purchase of qualifying new and previously-owned clean vehicles. The final regulations provide guidance: (1) for taxpayers who purchase qualifying vehicles and intend to transfer the amount of any previously-owned clean vehicle credit or new clean vehicle credit to dealers that are entities eligible to receive advance payments of either credit; (2) for dealers to become eligible entities to receive advance payments of previously-owned clean vehicle credits or new clean vehicle credits, and rules regarding recapture of the credits; and (3) on the meaning of three new definitions added to the exclusive list of mathematical or clerical errors relating to certain assessments of tax without a notice of deficiency. T.D. 9995.

Background

The Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169) added Code Sec. 25E to provide a personal credit for a qualified buyer who during a tax year places in service a previously-owned clean vehicle. The Code Sec. 25E credit is allowed for the tax year equal to the lesser of: (1) $4,000, or (2) the amount equal to 30 percent of the sale price with respect to such vehicle.

Code Sec. 25E(b)(1) sets a limitation based on modified adjusted gross income (MAGI) and provides that no credit is allowed for any tax year if (1) the lesser of (i) the MAGI of the taxpayer for such tax year, or (ii) the MAGI of the taxpayer for the preceding tax year, exceeds (2) the threshold amount. The threshold amount is set forth in Code Sec. 25E(b)(2) and varies based on a taxpayer's filing status. In the case of a taxpayer filing a joint return or who is a surviving spouse, the threshold amount is $150,000. In the case of a taxpayer who is a head of household, the threshold amount is $112,500. In the case of any other taxpayer, the threshold amount is $75,000.

Code Sec. 25E(c) defines certain terms for purposes of the Code Sec. 25E credit. Code Sec. 25E(d) provides that no credit is allowed under Code Sec. 25E(a) with respect to any vehicle unless the taxpayer includes the vehicle identification number (VIN) of such vehicle on the return of tax for the tax year. Code Sec. 25E(e) and (f) provide, respectively, that rules similar to the rules of Code Sec. 30D(f) and the rules of Code Sec. 30D(g) apply for purposes of Code Sec. 25E. Section 13402(e)(2) of the IRA provides that the ability of a taxpayer to elect to transfer a Code Sec. 25E credit under Code Sec. 25E(f) applies to vehicles placed in service by the taxpayer after December 31, 2023. Code Sec. 25E(g) provides that no Code Sec. 25E credit is allowed with respect to a vehicle acquired after December 31, 2032.

Code Sec. 30D(a) provides a credit with respect to each new clean vehicle that a taxpayer purchases and places in service. The credit is determined and allowable with respect to the tax year in which the taxpayer places the new clean vehicle in service. Code Sec. 30D has been amended several times since its enactment in 2008, most recently by Section 13401 of the IRA. The amount of the Code Sec. 30D credit is treated as a personal credit or a general business credit, depending on the character of the vehicle. In general, the Code Sec. 30D credit is treated as a personal credit under Code Sec. 30D(c)(2). However, under Code Sec. 30D(c)(1) the amount of the credit that is attributable to property that is of a character subject to an allowance for depreciation is treated as a current year business credit under Code Sec. 38(b). Code Sec. 38(b)(30) lists as a current year business credit the portion of the Code Sec. 30D credit to which Code Sec. 30D(c)(1) applies.

The IRA made several amendments to the Code Sec. 30D credit. The IRA amended Code Sec. 30D(b) to provide a maximum credit of $7,500 per vehicle, consisting of $3,750 in the case of a vehicle that meets certain requirements relating to critical minerals and $3,750 in the case of a vehicle that meets certain requirements relating to battery components. The IRA also amended Code Sec. 30D(d) to make the credit applicable to "new clean vehicles," and defines a "new clean vehicle" as a motor vehicle that satisfies the eight requirements set forth in Code Sec. 30D(d)(1)(A) through (H).

The IRA also adds four new special rules under Code Sec. 30D(f) applicable to vehicles placed in service after December 31, 2022. First, Code Sec. 30D(f)(8) permits only one credit to be claimed for each VIN. Second, Code Sec. 30D(f)(9) requires taxpayers to include on the taxpayer's return for the tax year the VIN of the vehicle for which the Code Sec. 30D credit is claimed. Third, Code Sec. 30D(f)(10) provides that no credit is allowed for any tax year if the taxpayer's MAGI exceeds: (1) $300,000 for a joint return or a surviving spouse; (2) $225,000 for a head of household; and (3) $150,000 for any other return. Fourth, Code Sec. 30D(f)(11) excludes from the Code Sec. 30D credit vehicles that exceed certain manufacturer's suggested retail price (MSRP) thresholds. The applicable limitation is (1) $80,000 for vans, sport utility vehicles, and pickup trucks, and (2) $55,000 for any other vehicle.

In addition, the IRA added new Code Sec. 30D(g), which allows the taxpayer to elect to transfer the Code Sec. 30D credit in certain situations for vehicles placed in service after December 31, 2023. If the taxpayer who acquires a new clean vehicle makes a credit transfer election under Code Sec. 30D(g) with respect to such vehicle, the Code Sec. 30D credit that would otherwise be allowed to such taxpayer with respect to such vehicle is allowed to the eligible entity specified in such election (and not the taxpayer). Code Sec. 30D(g)(2) defines an "eligible entity" as the dealer that sold such vehicle to the taxpayer and that satisfies certain requirements.

Section 13403 of the IRA added Code Sec. 45W, which is effective for vehicles acquired after December 31, 2022, and before January 1, 2033. A taxpayer can claim a Code Sec. 45W credit for purchasing and placing in service a qualified commercial clean vehicle, as defined in Code Sec. 45W(c), during the tax year. Code Sec. 45W(e) provides that no Code Sec. 45W credit is allowed with respect to any vehicle unless the taxpayer includes the VIN of such vehicle on the tax return for the tax year.

Code Sec. 6213(b)(1) authorizes the IRS to make certain assessments of mathematical or clerical errors without first issuing a notice of deficiency under Code Sec. 6213(a). Section 13401(i)(4) of the IRA amended Code Sec. 6213(g)(2) to provide the IRS with math error authority for the omission of a correct VIN required under Code Sec. 25E(d), Code Sec. 30D(f)(9), and Code Sec. 45W(e) to be included on a return.

2023 Proposed Regulations

On April 17, 2023, the IRS issued proposed regulations under Code Sec. 30D (REG-120080-22) (April Proposed Regulations). The April Proposed Regulations provided proposed definitions for certain terms related to Code Sec. 30D; proposed rules regarding personal and business use of new clean vehicles and other special rules; and additional proposed rules related to the Critical Minerals and Battery Components Requirements of Code Sec. 30D(e). On October 10, 2023, the IRS issued proposed regulations (REG-113064-23) which provided guidance for elections to transfer clean vehicle credits under Code Secs. 25E(f) and 30D(g) (October Proposed Regulations). On December 4, 2023, the IRS issued proposed regulations (REG-118492-23) which provided guidance regarding the excluded entities limitation of Code Sec. 30D(d)(7) (December Proposed Regulations).

Final Regulations

On May 6, the IRS published final regulations in T.D. 9995 regarding the clean vehicle credits under Code Sec. 25E and Code Sec. 30D. The final regulations adopt the April Proposed Regulations, the October Proposed Regulations, and the December Proposed Regulations (collectively, the proposed regulations) with clarifying changes and additional modifications in response to practitioners' comments.

Code Sec. 25E(e) provides that, for purposes of Code Sec. 25E, rules similar to the rules of Code Sec. 30D(f) apply. Code Sec. 30D(f)(5) instructs the Treasury Secretary to provide regulations for recapturing the benefit of any Code Sec. 30D credit with respect to any property that ceases to be eligible for the Code Sec. 30D credit. Prop. Reg. Sec. 1.25E-2(c) and Prop. Reg. Sec. 1.30D-4(d) provided corresponding rules under Code Sec. 30D(f)(5) for cancelled sales, returns, and resales of the vehicle. The final regulations clarify that for purposes of Code Sec. 30D(f)(5), and by extension, Code Sec. 25E(e), the amount of the benefit recaptured due to a recapture event is considered an increase to income tax.

Proposed Reg. Sec. 1.25E-2(f) and Prop. Reg. Sec. 1.30D-4(g) provided that taxpayers must file an income tax return, together with Schedule A (Form 8936), Clean Vehicle Credit Amount, or successor form, and any additional forms, schedules, or statements prescribed by the IRS for the purpose of making a federal income tax return that includes all of the information required on the forms and in the instructions, for the tax year in which the clean vehicle is placed in service to be entitled to the credit under Code Sec. 25E or Code Sec. 30D. The final regulations under Code Sec. 30D clarify that this requirement also applies to information returns because a partnership or S corporation may claim a Code Sec. 30D credit as a general business credit under Code Sec. 38.

Prop. Reg. Sec. 1.30D-6(b) provided due diligence requirements for qualified manufacturers to determine compliance with the Code Sec. 30D(d)(7). Under that provision, the term "new clean vehicle" does not include (1) any vehicle placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the battery of such vehicle were extracted, processed, or recycled by a foreign entity of concern (FEOC) (i.e., China, Russia, North Korea, and Iran), or (B) any vehicle placed in service after December 31, 2023, with respect to which any of the components contained in the battery of such vehicle were manufactured or assembled by a FEOC.

Prop. Reg. Sec. 1.30D-6(b)(2) provided that for any new clean vehicles for which the qualified manufacturer provides a periodic written report before January 1, 2027, the due diligence requirement may be satisfied by excluding identified non-traceable battery materials (and associated constituent materials). Prop. Reg. Sec. 1.30D-6(c)(2) provided that identified non-traceable battery materials (and associated constituent materials) may be excluded from the determination of whether a battery cell is FEOC-compliant.

Prop. Reg. Sec. 1.30D-6(a)(13)(i) defined "non-traceable battery materials" to mean specifically identified low-value battery materials that may originate from multiple sources and are often commingled during refining, processing, or other production processes by suppliers to such a degree that the qualified manufacturer cannot, due to current industry practice, feasibly determine and attest to the origin of such battery materials. Prop. Reg. Sec. 1.30D-6(a)(13)(ii) was reserved to contain the specific list of identified non-traceable battery materials. The Explanation of Provisions to the December Proposed Regulations identified as exemplar materials, for potential inclusion on the list, applicable critical minerals contained in electrolyte salts, electrode binders, and electrolyte additives.

Consistent with the expectation and requirement that original equipment manufacturers (OEMs) will develop tracing processes in the future, the final regulations retain the list provided in the December Proposed Regulations, but change the name to "impracticable-to-trace battery materials," in order to better describe the rationale underlying the list. The final regulations also add a definition of "impracticable-to-trace battery materials" to Reg. Sec. 1.30D-2(b), and specify identified impracticable-to-trace battery materials as applicable critical minerals in the following circumstances: graphite contained in anode materials and applicable critical minerals contained in electrolyte salts, electrode binders, and electrolyte additives. Reg. Sec. 1.30D-6(b)(2) provides that for any new clean vehicles for which the qualified manufacturer provides a periodic written report before January 1, 2027, the due diligence requirement may be satisfied by excluding identified impracticable-to-trace battery materials (and associated constituent materials). Reg. Sec. 1.30D-6(c)(3)(iii) provides that identified impracticable-to-trace battery materials (and associated constituent materials) may be excluded from the determination of whether a battery cell is FEOC-compliant.

Observation: The inclusion of graphite to the definition of impracticable-to-trace battery materials allows vehicles with batteries containing graphite produced by China to qualify for the Code Sec. 30D credit until 2027.

For a discussion of the new clean vehicle credit, see Parker Tax ¶101, 701. For a discussion of the credit for previously-owned clean vehicles, see Parker Tax ¶101,705. For a discussion of the credit for qualified commercial vehicles, see Parker Tax ¶101,710.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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