On May 3, 2024, the IRS released final regulations for clean vehicle credits under Section 25E, Previously-Owned Clean Vehicles, and §30D, Clean Vehicle Credit. This guidance addresses such topics as the critical mineral and battery component requirements, the ability for taxpayers to transfer these credits to eligible dealers, and how dealers can become eligible entities to participate in the transfer of the credits, among other topics. This article provides a summary of some of the most significant changes or clarification included within the final regulations.
Section 25E
For purposes of determining whether the first transfer rule that requires the transfer of the vehicle to be the first transfer since August 16, 2022 is met, taxpayers will need to reference a vehicle history report. To meet this requirement, taxpayers may—but are not required to—rely on vehicle history reports that are issued by data providers approved by the National Motor Vehicle Title Information System (NMVTIS). In addition, while the vehicle history report can be obtained from the dealer, it is not required to be, but the report should be obtained in some form either at the time of sale or at some point prior to the sale to satisfy the rule.
The definition of sale price was left relatively unchanged by the final regulations and will generally mean the total agreed-upon price including any delivery charges but after the application of any incentives, which would reduce the total sale price. Sale price will not include any separately stated taxes and fees so long as they are required by any state or local law. Therefore, it appears that any additional amounts such as documentary fees that are included in a written contract will be required to be included in the determination of the sale price. Further, sale price will be determined without any adjustment for a trade-in value. For purposes of the definition of sale price, an incentive will not include any reduction resulting from a taxpayer who makes the transfer of credit election under Internal Revenue Code §25E(f).
Sections 25E & 30D
The final regulations explain that for purposes of §25E or §30D, a clean vehicle that is either a battery electric vehicle, a plug-in hybrid electric vehicle, a fuel cell motor vehicle, or a plug-in hybrid fuel cell motor vehicle may qualify for a credit if all other requirements are met.
The final regulations adopt the proposed regulations’ definition of “placed in service” with minor changes intended to clarify the meaning. The final regulations also examine but deny the request to change the definition of “placed in service” for purposes of the critical minerals and battery component requirements. Therefore, for purposes of all instances where the term “placed in service” is used, it will be defined to mean the date on which the taxpayer takes physical possession of the vehicle.
For a clean vehicle returned within 30 days of the taxpayer placing the vehicle in service where the taxpayer made the election to transfer the credit to the participating eligible entity dealer, the dealer will be deemed to have received an excessive payment and will be subject to repaying the amount, not the taxpayer. The dealer in this case is not subject to the additional 20% that would otherwise apply in the case of an excessive payment because reasonable cause will be presumed to apply. Further, the final regulations incorporate the guidance from Revenue Procedure 2022-42, which provided that dealers would not be deemed to have received an excessive payment if they relied on a qualified manufacturer’s periodic written report to determine the amount of credit a clean vehicle is eligible for and it is later determined that information is inaccurate. For taxpayers who make the transfer election and resell the vehicle within 30 days, taxpayers will be subject to repaying the credit on the tax return for the year which the recapture event occurred.
While taxpayers may not be subject to recapture of the credit if they fail to file the required tax forms to report the credit on their individual tax return if the dealer who the credit was transferred to under the transfer election properly reports the vehicle identification number (VIN) to the IRS, the final regulations remind taxpayers that they are required to file Form 8936 and Schedule A (Form 8936) with their income tax return in the year the vehicle is placed in service. This is true even if a taxpayer would not otherwise be required to file an income tax return to fully comply with the statutory requirements and to help expedite the processing of their tax return.
Section 30D
The final regulations address comments specific to applicable critical minerals, the foreign entity of concern restriction, assembly, associated constituent materials, battery, battery components, battery materials, constituent materials, country with which the U.S. has a free trade agreement, and recycling, among others. In instances where §30D overlaps with §45X, the advanced manufacturing production credit, taxpayers are generally directed to §45X and the underlying regulations for guidance and further clarity, except for when §30D calls for or allows for a deviation.
The proposed regulations provided for—and the final regulations continue to allow—taxpayers to look to either the VIN decoder approach or the vehicle label to determine the final assembly location to determine if the vehicle was final assembled in North America, which is one requirement for a vehicle to qualify for a credit under §30D. In most circumstances, both methods will produce the same result; however, in the limited circumstances they do not, taxpayers may continue to choose whichever approach is more beneficial.
The final regulations also open the door for upfitters of new internal combustion engine vehicles to potentially qualify as manufacturers for purposes of the §30D credit if the modification is made to make an otherwise internal combustion engine vehicle a clean vehicle prior to the vehicle originally being placed into service. In addition, manufacturers that were not qualified manufacturers at the time the vehicle was produced may subsequently become a qualified manufacturer and the vehicle would qualify if the manufacturer submitted the required written report to the IRS with the vehicle included prior to the vehicle being sold.
A commenter requested that low-speed vehicles—those with a maximum speed of 25 miles per hour or less—be included in the “other vehicles” classification; however, because of the definition of motor vehicle being tied to Title II of the Clean Air Act, which excludes vehicles with such a maximum speed, the U.S. Department of the Treasury declined to adopt the recommendation in the final regulations.
The final regulations replaced the 50% Value Added Test provided for in the proposed regulations with the Traced Qualifying Value Test, which is described in detail within the final regulations as it was determined to be more exact and rigorous when calculating the appropriate value needed to determine if the critical minerals requirement is satisfied. Transition relief is provided to allow qualified manufacturers to continue to rely on the 50% Value Added Test in connection with the required periodic written reports submitted on or before December 31, 2026. Also included in the final regulations is a finalized four-step process to calculate the percentage of value of battery components in a battery that count toward meeting the battery component requirement. All these tests provide some flexibility in the calculation but require a certain level of consistency, so taxpayers will want to familiarize themselves with the underlying details.
New qualified fuel cell motor vehicles generally do not have a clean vehicle battery and, therefore, would not have any applicable critical minerals or battery components in such a battery. Accordingly, the final regulations make clear that these vehicles without a clean vehicle battery will qualify for the full $7,500 credit under §30D, assuming the other requirements are met.
The modified adjusted gross income (MAGI) requirement under the final regulations will apply to individuals, estates, and non-grantor trusts. While individuals first look to adjusted gross income under §62 before applying the required modifications to arrive at MAGI, estates and non-grantor trusts will first look to adjusted gross income based on §67(e). Estates and non-grantor trusts will be subject to the $150,000 MAGI threshold for purposes of determining if they are eligible for a credit under §30D and will be deemed to have had a MAGI above the threshold for years not in existence. Corporations per the final regulations and consistent with the proposed regulations will not be subject to the MAGI threshold, while partnerships, S corporations, and grantor trusts will have MAGI applied at the partner, shareholder, and beneficiary or other deemed owner level, respectively. For taxpayers who may have different filing statuses between the two test years applicable to the MAGI threshold, the final regulations make clear that the taxpayer should use the MAGI threshold that applies to applicable filing status on a return-by-return basis. That is, a taxpayer may have a different MAGI threshold for each tax year subjected to the test if they, for example, filed as single the first year of the test period and married filing jointly the second year.
An example was added to the final regulations as it relates to returns or sales of new clean vehicles that are at least 31 days after the date the taxpayer puts the vehicle in service. This example clarifies that if a dealer places in service a new clean vehicle as a loaner, rental, or company vehicle and more than 30 days after doing so moves the clean vehicle to used inventory and sells it to a third party, the dealer will generally not be subject to recapture of the credit claimed on the vehicle.
On July 26, 2024, the IRS released an updated fact sheet with many new and updated FAQs specific to the new, previously owned, and qualified commercial clean credits. Taxpayers should look for either “added July 26, 2024” or “updated July 26, 2024” to easily identify the new or changed FAQs.
How Forvis Mazars Can Help
Taxpayers may need assistance finding out whether they are eligible for a clean vehicle energy credit. Our tax professionals can help look over your situation so you can better understand your options. If you have questions or need assistance, please reach out to a professional at Forvis Mazars.