The Federal Inflation Reduction Act, signed into law in 2022, includes a provision (Section 45W) allowing businesses and tax-exempt organizations to receive tax credits of up to $40,000 for commercial clean vehicles they acquire after December 31, 2022, and before January 1, 2033.
What is a commercial clean vehicle?
A qualified vehicle must satisfy the following items:
- Be subject to the allowance for depreciation which is used in a trade or business or for the production of income, with an exception for clean vehicles placed in service by a tax-exempt organization this test does not apply.
- Be made by a qualified manufacturer. See the IRS list of manufacturers: https://www.irs.gov/credits-deductions/manufacturers-for-qualified-commercial-clean-vehicle-credit.
- Be used in the taxpayer’s trade or business and is not for resale.
- Be used primarily in the United States.
- The clean vehicle tax credit must not have been previously allowed as a new clean vehicle credit under Section 30D
- The vehicle must be:
- Be treated as a motor vehicle for purposes of title II of the Clean Air Act [see IRC § 30D(d)(1)(D)], and manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails), or
- Be mobile machinery as defined by the retail excise tax exemptions in IRC § 4053(8)—machinery unrelated to transportation permanently mounted to a chassis designed to serve only as a mobile carriage, mount, and power source, and cannot be used to transport any other load—including vehicles that are not designed to perform a function of transporting a load over public highways.
- The vehicle must:
- Be propelled to a significant extent by an electric motor that draws electricity from a battery with a capacity of at least 15 kilowatt hours (seven kilowatt hours if the vehicle’s GVWR is less than 14,000 pounds) and is capable of being recharged from an external source of electricity, or
- Satisfy the requirements in IRC § 30B(b)(3)(A) and (B) for a new qualified fuel cell motor vehicle for purposes of the alternative motor vehicle credit [IRC § 45W(c)].
What is the Federal tax credit?
The maximum clean vehicle tax credit per vehicle is $7,500 with a gross vehicle weight rating (GVWR) of less than 14,000 pounds and $40,000 for vehicles with GVWR of 14,000 pounds or more. The credit is generally equal to the lesser of:
- 15% of the vehicle cost basis (purchase price plus taxes and fees) for a plug-in hybrid vehicle powered by gas or diesel and 30% if the vehicle is not powered by gas or diesel; or,
- The incremental cost of the vehicle, which is the excess of the clean vehicle’s purchase price over the price of gas or diesel powered vehicles comparable in size or use.
Recognizing that determining the incremental cost for these vehicles can be difficult for taxpayers, the IRS stated in notices 2023-9 (tax year 2023) and 2024-5 (tax year 2024) that it will accept the incremental cost analysis provided by the department of energy found here.
The eligible tax credit per vehicle reduces the cost basis of the vehicle allowable for Federal tax depreciation purposes. A taxpayer can elect out of taking the credit, therefore, not reducing the basis for depreciation purposes.
The overall commercial clean vehicle tax credit for the tax year is the sum of all commercial vehicles placed in service during the tax year used in the taxpayer’s business.
How to claim the tax credit:
Business and tax exempt entities must file Form 8936, Clean Vehicle Credits. This is a general business tax credit which ultimately will flow to Form 3800, General Business Credits. The taxpayer must include the vehicle identification number (VIN) on Form 8936, Schedule A to disclose the specific vehicle the credit is being claimed on; note this credit is only allowed once for each VIN.
Benefits of the Commercial Clean Vehicle Credit
Among the benefits provided by the credit:
- It is a tax credit as opposed to a tax deduction. A tax credit is a dollar-for-dollar reduction of tax owed, whereas a deduction reduces the amount of your income subject to Federal income tax. While the credit is nonrefundable for businesses (see below for tax exempt entities), meaning you cannot claim tax credits in excess of your tax liability, any unused amount can be carried back 1 tax year or forward 20 years to offset other years’ Federal tax liabilities.
- Tax-exempt organizations may receive the credit as a direct cash payment instead of a nonrefundable credit.
- There is no limit to the number of credits your business can claim per vehicles placed in service.
We’re here to help you minimize your tax burden and maximize your tax credit benefits. For more information on the Inflation Reduction Act and the Commercial Clean Vehicle Tax Credit, please contact Sean McKenna or Nick Walters of the HBK Dealership Solution Group.
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