The Latest Guidance for Clean Vehicle Tax Credits
On December 29, 2022, the U.S. Department of the Treasury (Treasury) and the IRS issued Notice 2023-1, which announces their intent to provide regulations related to the new Section 30D clean vehicle tax credit and Notice 2023-9, which provides insight into how to determine the incremental cost for 2023 in connection with the §45W commercial clean vehicle tax credit. The IRS also published fact sheet FS-2022-42 containing frequently asked questions (FAQs) specific to the clean vehicle credits related to new, previously-owned, and commercial clean vehicles.
On February 3, 2023, the IRS issued Notice 2023-16 to change how vehicles are classified for purposes of these credits and FS-2023-04 to update some of the FAQs contained in FS-2022-42.
Notice 2023-1 – Definitions for the new clean vehicle credit (IRC 30D)
Notice 2023-1 indicates that Treasury and the IRS intend to issue proposed regulations specific to §30D, including defining certain terms as they relate to vehicles placed in service after December 31, 2022. Key takeaways from these definitions are:
- Final Assembly – The definition provides two pieces of information for which the taxpayer may rely on when determining where final assembly occurred.
- North America – Generally, North America is defined to mean the United States, Canada, and Mexico.
- Manufacturer’s Suggested Retail Price (MSRP) – An automobile’s MSRP includes the “base” retail price of the automobile pursuant to 15 U.S.C. 1232(f)(1) plus the retail price suggested for accessories or optional equipment items attached to the automobile upon delivery from the manufacturer as described in 15 U.S.C. 1232(f)(2).
- Vehicle Classifications (vans, sports utility vehicles, pickup trucks, and other vehicles) – A vehicle’s classification is based upon 40 CFR 600.002 which may or may not be the same as how the automobile is generally advertised by the manufacturer/seller or how the public views the vehicle. However, this definition was modified by Notice 2023-16. See below for information on the updated definition.
- Placed in Service – Possession of the vehicle will determine when it is placed in service for purposes of IRC 30D.
Similar to prior guidance related to §30D (Rev. Proc. 2022-42), this Notice does not provide guidance specific to the critical mineral and battery components requirements, which will change how the calculation of the credit is determined. The Inflation Reduction Act of 2022 instructed the IRS and Treasury to issue guidance on the battery and battery material sourcing requirements for the §30D credit by December 31, 2022, but Treasury likely won’t issue guidance until this spring, which delays changes to how the credit is computed.
Notice 2023-9 – Incremental cost for the qualified commercial clean vehicle credit (IRC 45W)
For purposes of calculating the potential credit for a qualified commercial clean vehicle, taxpayers must make two prongs of initial determinations. The first prong is whether the vehicle is powered by a gas or diesel internal combustion engine. If the vehicle is not, the taxpayer calculates 30% of the basis of the vehicle. If the vehicle is powered by gas or diesel, the taxpayer calculates 15% of the basis of the vehicle. The second prong requires the taxpayer to determine the incremental cost of the vehicle by comparing the qualified commercial clean vehicle cost to that of a comparable vehicle which is a vehicle powered only by a gas or diesel internal combustion engine and must be of comparable size and use. The lesser of these two prongs is then compared to the applicable credit limitation to determine if the calculated credit amount needs to be further limited.
Notice 2023-9 also provides a safe harbor for 2023 in connection with certain classes of street vehicles that will allow taxpayers to rely on the incremental cost analysis published by the Department of Energy. This is taxpayer-favorable guidance as it seems to indicate that for all street vehicles, except for compact car plug-in hybrid electric vehicles (PHEV), that have a gross vehicle weight rating less than 14,000 pounds, the incremental cost of the vehicle will not be a limiting factor in connection with calculating the qualified commercial clean vehicle tax credit. Additional guidance is still needed for qualifying property not covered by this safe harbor.
For additional information related to the calculation of the credit, see Q3 within Topic G of FS-2022-42.
FS-2022-42 – Frequently asked questions related to new, previously-owned, and qualified commercial clean vehicle credits (IRC 30D, 25E, and 45W)
To expedite the issuance of guidance, the IRS released a fact sheet containing seven topics of FAQs. Although this is not considered authoritative guidance, it may be reasonably relied upon in good faith and may provide penalty relief for taxpayers.
The seven topics covered by FS-2022-42 are:
- Topic A: Eligibility Rules for the New Clean Vehicle Credit
- Topic B: Income and Price Limitations for the New Clean Vehicle Credit
- Topic C: When the New Requirements Apply to the New Clean Vehicle Credit
- Topic D: Eligibility Rules for the Previously-Owned Clean Vehicles Credit
- Topic E: Income and Price Limitations Previously-Owned Clean Vehicles
- Topic F: Claiming the Previously-Owned Clean Vehicles Credit
- Topic G: Qualified Commercial Clean Vehicles Credit1
Taxpayers in the business of leasing vehicles will want to pay particular attention to Q5 – Q7 in Topic G as they address such issues as how to determine what type of lease is involved and who the owner of the vehicle is for tax purposes.
Notice 2023-16 – Certain Definitions of Terms in Section 30D Clean Vehicle Credit
With the issuance of Notice 2023-16 the IRS has indicated that the proposed regulations still forthcoming will define vehicle classification for purposes of the new, previously-owned, and qualified commercial clean vehicle credits based upon the fuel economy labeling found within 40 CFR 600.315-08 rather than upon 40 CFR 600.002 as previously indicated in Notice 2023-1. This change is retroactive to January 1, 2023. It is expected that this change will allow for more vehicles to qualify for the new clean vehicle credit.
FS-2023-04 – IRS Updates Frequently Asked Questions (FAQs) Related to New, Previously Owned, and Qualified Commercial Clean Vehicle Credits
The changes to the FAQs include the following:
- Providing additional information regarding the definition of “original use.”
- Guidance specific to the retroactive change in vehicle classification made by Notice 2023-16.
- Additional guidance involving lessor/lessee situations when the qualified motor vehicle operating agreement includes a terminal rental adjustment clause.
How FORVIS Can Help
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- 1FS-2022-42, December 2022