IRS Issues Updated Frequently Asked Questions on Clean Vehicle Credits

(Parker Tax Publishing August 2024)

The IRS issued updated frequently asked questions (FAQs) to provide guidance on the new clean vehicle credit under Code Sec. 30D, the previously owned clean vehicle credit under Code Sec. 25E, and the qualified commercial clean vehicle credit under Code Sec. 45W. The updated FAQs supersede earlier FAQs that were posted in FS-2024-14. FS-2024-26.

Background

The Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169) was enacted on August 16, 2022. The IRA made several changes to the new clean vehicle credit under Code Sec. 30D. The IRA also added new credits under Code Sec. 35E for previously owned clean vehicles and under Code Sec. 45W for qualified commercial clean vehicles.

On July 26, the IRS issued FS-2024-26 to provide updated answers to frequently asked questions (FAQs) related to the credits for new, previously owned and qualified commercial vehicles. The updated FAQs supersede earlier FAQs that were posted in FS-2024-14.

Eligibility Rules for the New Clean Vehicle Credit

The fact sheet provides the following updated guidance regarding the IRA changes to the new clean vehicle requirements:

(1) Qualified manufacturers identify and report eligible vehicle identification numbers (VINs) to the IRS. The IRS Energy Credits Online portal provides real-time confirmation of a vehicle's eligibility using VINs provided by qualified manufacturers. Qualified manufacturers submit VINs of qualifying vehicles which are matched to time-of-sale reports. If a qualified manufacturer has not provided the IRS with a VIN for an eligible vehicle, the time-of-sale report will be rejected until the manufacturer provides the VIN to the IRS. A buyer-friendly version of the IRS's list of potentially eligible clean vehicles is hosted by the Department of Energy at FuelEconomy.gov.

(2) One credit is allowed per each new clean vehicle. A taxpayer may make no more than two credit transfer elections per tax year. In the case of a joint income tax return, each spouse may make two transfer elections per tax year, for a maximum of four credit transfer elections in a tax year.

(3) The manufacturer reports the VIN as eligible to the IRS and the battery capacity of the vehicle entered on that report should be at least 7 kilowatt hours (kwh). If the battery capacity on the seller report provided to the buyer does not match the battery capacity reported by the manufacturer, the seller report will not be rejected if the manufacturer has reported the VIN as eligible to the IRS and the battery capacity entered is at least 7 kwh.

When the New Requirements Under the IRA Apply to the New Clean Vehicle Credit

The fact sheet contains the following updated guidance regarding the IRA changes to the new clean vehicle requirements:

(1) The new critical mineral and battery components requirements under Code Sec. 30D(e) for new clean vehicles apply to vehicles placed in service on or after April 18, 2023, the day after the proposed regulations issued in REG-120080-22 were published in the Federal Register (the proposed regulations were finalized in May 2024 in T.D. 9995). Vehicles ordered or purchased prior to April 18, 2023, but place in service on or after that date, will be subject to the critical mineral and battery component requirements.

(2) If a taxpayer orders (or purchases) a vehicle on or after August 16, 2022, but does not take delivery until after April 18, 2023, the vehicle may be eligible for the new clean vehicle credit depending on whether or not it meets the critical mineral and battery component requirements. A vehicle's eligibility for the new clean vehicle credit is generally based on the rules that apply as of the date the vehicle is placed in service, meaning the date the taxpayer takes delivery of the vehicle. New clean vehicles placed in service on or after April 18, 2023, are subject to the critical mineral and battery component requirements even if the vehicle was ordered or purchased before April 18, 2023.

Transfers of New and Previously Owned Clean Vehicle Credits

The fact sheet contains the following updated guidance regarding transfers of new and previously owned clean vehicle credits:

(1) Only an "eligible entity" can receive a transferred new or previously owned clean vehicle credit. An eligible entity is generally a dealer that registers with the IRS as required by the applicable regulations. The fact sheet advises buyers to obtain a copy of the seller report submitted by the dealer to the IRS to ensure that there are no errors, and then confirm with the dealer that the dealer's submission of the report through the IRS Energy Credits Online portal was successful.

(2) When a taxpayer transfers the new clean vehicle to a dealer as a down payment on the new clean vehicle, the credit amount does not lower the MSRP for purposes of meeting the MSRP limitation and qualifying for the credit.

(3) If someone else pays for a vehicle, the registered owner of the vehicle is the party eligible to claim the credit. The credit will be allowed only on the federal income tax return of the taxpayer listed in the seller report. Thus, if a minor is listed on the seller report as buying the car, the minor must also be the tax return filer. Rev. Proc. 2023-33 requires a copy of the electing taxpayer's government issued photo ID, not the ID of who is paying for the vehicle.

(4) When a transferred credit is used as the down payment on a new clean vehicle, or a payment is received from the dealer in the amount of the credit as cash, a taxpayer must report the purchase for which they elected to transfer the credit on their federal tax return using Form 8936, Clean Vehicle Credits, and Schedule A (Form 8936) Clean Vehicle Credit Amount. The buyer will need the time-of-sale report from the dealer in order to complete Form 8936.

(5) Dealers are not required to offer a credit transfer option. Although the dealer may decide whether or not to register with the IRS to become an eligible entity to receive the advance payment of the credit, the dealer is required to register with the IRS and report all sales of vehicles qualifying for the credits under Code Sec. 30D and Code Sec. 25E to the IRS to enable the buyer to claim the credit, regardless of whether or not the buyer elects to transfer the credit to the dealer.

(6) A credit may be transferred if the buyer and dealer are in different states. There is no restriction on the buyer's location if the vehicle is sold by a state-licensed dealer to an eligible individual for use within the United States.

Previously Owned Clean Vehicle Credit

The fact sheet contains the following updated guidance regarding the previously owned clean vehicle credit:

(1) The transfer of a previously owned clean vehicle from a dealer to another dealer does not make the vehicle ineligible for the Code Sec. 25E previously owned clean vehicle credit in a subsequent sale to an individual.

(2) A previously owned clean vehicle that is sold for the first time after August 16, 2022, to an individual for more than $25,000 is not eligible for the previously owned clean vehicle credit, and will not be eligible for the credit in any subsequent sale (including a sale for less than $25,000) regardless of whether the taxpayer is eligible for the credit or chooses to claim or transfer the credit. Only the first transfer of the vehicle after August 16, 2022, is eligible for the previously owned clean vehicle credit.

(3) A taxpayer will be able to determine if a credit has already been claimed on a previously owned clean vehicle because the time of sale system will show that the VIN is ineligible for the credit. The taxpayer will need to check the vehicle history report of the vehicle to ensure that the purchase qualifies as the first transfer of the previously owned vehicle after August 16, 2022, other than to the person who was the original user of the vehicle.

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.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com