The IRS and other agencies and departments have issued guidance on various aspects of clean vehicle credits. The guidance applies to vehicles placed in service starting in 2024.
We will discuss:
- battery component and critical mineral requirements for new clean vehicles,
- dealer time-of-sale reports for new and previously owned clean vehicles, and
- incremental cost guidance for the commercial clean vehicle credit calculation.
Acronyms used:
VIN = vehicle identification number
DOE = Department of Energy
FEOC = foreign entity of concern
GVWR = gross vehicle weight rating
PHEV = plug-in hybrid electric vehicle
New clean vehicle battery component and critical mineral requirements for 2024
Under the Inflation Reduction Act, new clean vehicles must meet battery component and critical mineral requirements to qualify for the new clean vehicle credit. Also, starting in 2024, an eligible clean vehicle may not contain any battery components that were manufactured by a foreign entity of concern. Starting in 2025, an eligible clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern.
The Treasury Department and IRS issued proposed regulations on foreign entities of concern (FEOCs), also referred to as excluded entities. The proposed regulations generally apply to new clean vehicles placed in service after Dec. 31, 2023. Taxpayers may rely on the proposed regulations until final regulations are published in the Federal Register. And, the Department of Energy also issued concurrent proposed regulations on FEOCs.
A FEOC is defined as an entity that is owned, controlled by, or subject to the jurisdiction or direction of a government of a foreign country that is a covered nation. At this time covered nations are: China, Russia, North Korea, and Iran. Keep in mind that the FEOC limitation for battery components first applies to vehicles placed in service in 2024, regardless of the model year of the vehicle. The IRS updated eligibility rules to correspond to the FEOC limitation in new clean vehicle:
- A vehicle placed in service after Dec. 31, 2023, with battery components manufactured or assembled by a FEOC is not eligible for any amount of the new clean vehicle credit, even if the vehicle meets the critical mineral requirements. Q/A A-13
- Qualified manufacturers are required to include in their written reports an attestation under penalties of perjury demonstrating compliance with FEOC requirements. Q/A A-14
The Department of Energy’s fueleconomy.gov site is now updated to show which vehicles qualify for the new clean vehicle credit for vehicles placed in service in 2024. In the “select date you plan to take delivery” field choose Jan. 1, 2024 - Dec. 31, 2024, as the delivery date to see the list of eligible vehicles.
Dealers must file time-of-sale reports for clean vehicle purchases
Starting in 2024, dealers and sellers of clean vehicles must use IRS’s new Energy Credit Online portal to generate and submit time-of-sale reports to the IRS. The time-of-sale report is required for both the new and previously owned clean vehicle credits and must be submitted within three days of the sale. It provides information about the vehicle (including the vehicle’s VIN), the purchaser, and the seller.
IRS news release IR-2024-02 announces a brief extension of time for dealers and sellers to submit time-of-sale reports. To provide dealers and sellers more time to submit reports into the new system, the three-day time frame for early January is extended to Jan. 19, 2024. This means time-of-sale reports for vehicles sold Jan. 1 through Jan. 16 may be submitted through Jan. 19, 2024. The report for vehicles sold Jan. 17 would be due Jan. 20, and so on.
Note: The dealer or seller must provide a copy of the time-of-sale report to the purchaser. The purchaser uses information from the report to claim a clean vehicle credit, including advance payments of the credit.
Qualified commercial clean vehicles incremental cost guidance
The commercial clean vehicle credit is a general business credit for qualifying vehicles the taxpayer uses in a trade or business. The credit is equal to the lesser of:
- 15% of the taxpayer’s basis in the vehicle (30% for all-electric vehicles), or
- The incremental cost of the vehicle.
The maximum credit is $7,500 for vehicles with a GVWR of under 14,000 pounds and $40,000 for all other vehicles.
IRS news release IR-2023-245 and Notice 2024-05 provide a safe harbor for determining the incremental cost of certain vehicles placed in service in 2024. Incremental cost refers to the difference between the cost of an electric vehicle and a conventional vehicle of the same type. The notice relies on Department of Energy (DOE) analysis released in 2023.
The analysis shows that the modeled incremental cost of all street electric vehicles (vehicles manufactured with the intent to be used on public streets) to be greater than $7,500, with the exception of compact PHEVs. Noting that $7,500 is the maximum credit for a vehicle of this type, under the safe harbor, the IRS will accept $7,500 as the incremental cost of all street electric vehicles with a GVWR of less than 14,000 pounds other than for compact PHEVs.
Compact PHEVs are not included in the safe harbor because their modeled incremental cost in the analysis is less than $7,500. However, the IRS will accept the modeled incremental cost for compact PHEVs, which is currently $7,000. For vehicles with GVWR of 14,000 pounds or more the IRS will also accept the modeled incremental cost in the analysis for vehicles placed in service in 2024.