Statutory Requirements for EV Credits

New Clean Vehicle Credit (Section 30D)

Effective 16 August 2022 as a result of the Inflation Reduction Act of 2022 (IRA), section 30D provides a maximum credit of USD 7,500 per new EV, of which USD 3,750 can be claimed if certain critical mineral requirements are met and USD 3,750 can be claimed if certain battery component requirements are met, which are described in section 30D(e)(1) and (2).

Generally, the section 30D credit is treated as a personal credit.  However, if the character and use of the vehicle is subject to an allowance for depreciation, the section 30D credit can be treated as a current year general business credit under section 38(b).  In the case of mixed-use vehicles, the ultimate credit amount depends on whether the business-use of the vehicle is 50% or more of the total use. If the business-use is less than 50% of the total, then the credit must be apportioned between the personal and business use. Vehicles placed into service after 31 December 2023 are not eligible for credit.

To qualify for section 30D, the taxpayer’s AGI cannot exceed USD 225,000 for head of household taxpayers, USD 300,000 for married couples filing jointly, and USD 150,000 for single filers. However, the IRS indicated in Prop. Reg. § 1.30D-4(b)(5)(i) that this AGI limit does not apply to corporations.

Previously-Owned Clean Vehicle Credit (Section 25E)

In the case of a buyer of a previously-owned clean vehicle, section 25E allows a credit equal to 30% of the sale price of the vehicle up to a maximum of USD 4,000. To qualify for the pre-owned vehicle credit, each of the following requirements must be met:

• The model year of the vehicle must be at least two years earlier than the calendar year the taxpayer acquired the vehicle.
• The original use of the vehicle must start with a different person than the taxpayer.
• The taxpayer must acquire the vehicle through a sale.
• The vehicle must meet the other necessary requirements in section 30D (except for original use), or the vehicle must satisfy the requirements in section 30B (related to new qualified fuel cell motor vehicles) and have a gross weight of less than 14,000 pounds.

Additionally, the section 25E credit may only be claimed on one tax return (see Prop. Treas. Reg. § 1.25E-1(d)(1)). To qualify under section 25E, the taxpayer’s AGI cannot exceed: USD 112,500 for head of household taxpayers, USD 150,000 for married couples filing jointly, and USD 75,000 for single filers.

Transfer rules

Generally, section 30D and section 25E credits can be transferred to eligible dealers, if the dealer chooses to make an offer, so long as the dealer pays an amount equal to the amount of credit transferred. The dealer may pay the taxpayer in the form of cash, a partial payment, or down payment for the purchase of the vehicle.

For corporate taxpayers, it is important to note that a taxpayer may not make more than two credit transfers per year, and each must be for the entire amount of the credit (Prop. Treas. Reg. §§ 1.25E-3(i) and 1.30D-5(h)). This means that corporate taxpayers with a fleet of vehicles may not receive much benefit from the transfer of the credits.

To defray the reduction in sales price that results from section 30D and Section 25E credits, section 30D(g)(7)(A) (incorporated by reference in section 25E(f)) established the advance payment program whereby eligible entities may receive the cumulative amount of the credit allowed with respect to any vehicle sold by such entities for which the transfer election was made. Taxpayers should be aware of the Dealer Tax Compliance requirement for dealers under the advance payment program. This refers to a requirement that “all Federal information and tax returns for the dealer have been filed, including for Federal income and employment tax purposes, and all Federal tax, penalties, and interest due of the dealer at the time of sale have been paid.” A dealer that is not in Dealer Tax Compliance for any of the taxable periods during the most recent five taxable years may nonetheless register to become a registered dealer, but is not eligible to receive advance payments under the advance payment program until the Dealer Tax Compliance issue is resolved.” (See Prop. Treas. Reg. §§ 1.25E-3(c)(2) and 1.30D-5(b)(2)).

An increase in tax and 20% penalty may apply to any payment received by the dealer through the advanced payment program if the dealer fails to meet the requirements to be an eligible entity or the payment received through the advanced payment program is determined to be excessive (see Treas. Reg. §§ 1.25E-3(f)-(g) and 1.30D-5(e)-(f)). Dealers are not held responsible for inaccurate AGI claims by purchasers, however, and the amount of the advanced payment is recaptured from the purchaser in these situations.

A taxpayer may elect to transfer a new clean vehicle credit only to an eligible entity (as defined in section 30D(g)(2)(A) and incorporated by reference in section 25E(f)). To be considered an eligible entity, the dealer must:

• Be registered with the Secretary.
• Disclose to the taxpayer the manufacturer's suggested retail price of the vehicle, the value of the section 30D credit allowed and any other incentive available, and the amount to be provided by the dealer to the taxpayer for the transferred credit.
• Have paid the taxpayer an amount equal to the credit no later than the time of the sale; and with respect to any other incentives must ensure the availability or use of such incentives does not limit the ability of the taxpayer to make a credit transfer election.

If the dealer is considered an eligible entity and a transfer election is made, the dealer must provide the vehicle identification number, a seller report, and taxpayer disclosure information through an online portal, all at the time of sale, in order to receive advance payment from the IRS. See Rev. Proc. 2023-33 at § 8.01.  All of the eligible entity requirements must be met no later than the time of sale for the vehicle. Further, the transfer election cannot be made any later than the date on which the vehicle is purchased (see section 30D(g)(3)).

For purposes of the section 25E credit, taxpayers should be aware of the first transfer rule, which requires a transfer to be the first transfer of the previously-owned clean vehicle since 16 August 2022 (see Section 25E(c)(2)(C) and Prop. Treas. Reg. § 1.25E-1(b)(8)(ii)). Absent this rule, there is concern as to whether dealers and taxpayers would be able to determine the details of a previous transfer and whether the vehicle would be eligible for the credit. The proposed regulations would also allow taxpayers to rely on the dealer’s representation of the vehicle’s history when determining whether a credit claim will be accepted by the IRS. Notably, the first transfer rule does not apply to transfers to or between dealers because that would make nearly all vehicles ineligible for the credit and ultimately frustrate Congress’s purpose.