On January 10, the US Treasury Department (Treasury) and the US Internal Revenue Service (IRS) released proposed regulations under Section 45W of the US Internal Revenue Code of 1986, as amended (the Code), which provides a US federal income tax credit (Commercial EV Credit) for the purchase and placing in service of a qualifying commercial electric vehicle (EV) after 2022 and before 2033. The Inflation Reduction Act of 2022 (P.L. 117-169) added the Commercial EV Credit to the Code along with two other EV tax credits: the current new clean vehicle tax credit under Code Section 30D (originally enacted in 2008) and the previously owned clean vehicle tax credit under Code Section 25E. The proposed regulations, among other things, would provide rules with respect to determining the qualification of an EV for the Commercial EV Credit, the amount of the Commercial EV Credit for a qualifying vehicle, and the situations in which the Commercial EV Credit would be unavailable or subject to recapture. Certain requirements of the Commercial EV Credit under Code Section 45W and under the proposed regulations are discussed more fully below.
The proposed regulations leave many important questions open, especially with respect to the recapture provisions. In the last section below, we discuss these issues and others that will likely become topics for taxpayer comments on the proposed regulations, which are due by March 17.
Commercial EV Credit, Generally
The Commercial EV Credit provides for a US federal income tax credit in an amount equal to the lesser of (x) 15 percent of the taxpayer's basis in the commercial EV (30 percent in the case of a commercial EV not powered by a gasoline or diesel internal combustion engine (ICE)), or (y) the "incremental cost" of the commercial EV. The "incremental cost" of a "qualified commercial EV" is an amount equal to the excess of the purchase price for the EV over the purchase price of a comparable ICE vehicle in both size and use. The Commercial EV Credit for each qualified commercial EV cannot exceed $7,500 in the case of an EV with a gross vehicle weight rating (GVWR) of less than 14,000 pounds, or $40,000 in the case of a heavier commercial EV.
The Commercial EV Credit is a general business tax credit under Code Section 38. It is available for qualified commercial EVs that are "placed in service" by a taxpayer during the taxable year. The proposed regulations would provide that a qualified commercial EV is considered "placed in service" on the date that the taxpayer takes possession of the EV.
Qualified Commercial EVs
Under Code Section 45W, a "qualified commercial EV" for purposes of the Commercial EV Credit includes a commercial EV that:
- is made by a qualified manufacturer that has registered as such with the IRS;
- is acquired for use or lease by the taxpayer and not for resale;
- either is a motor vehicle for purposes of title II of the Clean Air Act, or is manufactured primarily for use on public streets, roads and highways, or is mobile machinery;
- either is propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of not less than 7 kWh (for a commercial EV with a GVWR of less than 14,000 pounds) or 15 kWh (for a commercial EV with a higher GVWR) and is capable of being recharged from an external source of electricity, or is a motor vehicle that is a new qualified fuel cell motor vehicle; and
- is used by the taxpayer in a trade or business in the United States (and, therefore, is subject to an allowance for depreciation).
Incremental Cost
Code Section 45W provides that the "incremental cost" of a qualified commercial EV is an amount equal to the excess of the purchase price for the EV over the purchase price of a comparable ICE vehicle in both size and use. The IRS released safe harbors for determining the incremental cost of commercial EVs in 2023 and 2024 (Notices 2023-9 and 2024-5).
Under the proposed regulations, incremental cost is determined by multiplying the manufacturer's cost of the components necessary for the powertrain of the qualified commercial EV by the retail price equivalent (RPE) of that EV and then subtracting from that amount the product of the manufacturer's cost of the powertrain of the comparable ICE vehicle and the RPE of the comparable ICE vehicle. The IRS stated that it intends to determine incremental cost based on the propulsion technologies of the vehicles while eliminating, to the extent possible, any cost differences unrelated to those propulsion technologies. The IRS further stated that it intends to issue RPE safe harbors for different vehicle market segments.
The proposed regulations provide that a vehicle powered solely by a gasoline or diesel ICE is comparable in size and use to a qualified commercial EV if the vehicles have substantially similar characteristics, including GVWRs, number of doors, towing capacity, passenger capacity, cargo capacity, mounted equipment, drivetrain type, overall width, height and ground clearance, and trim level. Where a qualified manufacturer produces an ICE vehicle and a qualified commercial EV of the same model and model year with substantially similar characteristics, such ICE vehicle will be the only comparable vehicle to determine incremental cost. If no comparable ICE vehicle exists for a qualified commercial EV, the proposed regulations would provide that a taxpayer may use the incremental cost safe harbors that the IRS may publish on an annual basis. If a qualified manufacturer discloses its incremental cost calculation for a qualified commercial EV, then taxpayers may rely upon that incremental cost calculation to determine the amount of Commercial EV Credit. In addition, taxpayers may rely on the incremental cost safe harbors in Notices 2023-9 and 2024-5, as any subsequent safe harbors issued by the IRS.
Previously Owned Commercial EVs
Unlike the EV tax credit under Section 30D, the Commercial EV Credit under Code Section 45W is not limited to "new" commercial EVs. The proposed regulations would provide that the incremental cost of a qualified commercial EV previously placed in service by another person is calculated by multiplying the incremental cost of that EV when new by a residual value factor determined by the age of the vehicle and as provided in the residual value factor table in the proposed regulations. The proposed regulations also would provide that the age of such a vehicle is determined by subtracting the vehicle's model year from the calendar year in which the taxpayer places the vehicle in service as a qualified commercial EV.
Although a previously used commercial EV may be eligible for the Commercial EV Credit under Code Section 45W, the Commercial EV Credit is only allowed once per EV, and the Commercial EV Credit is not allowed for any EV for which an EV tax credit under Code Section 30D was previously allowed. A taxpayer claiming the Commercial EV Credit under Code Section 45W for an EV previously placed in service must maintain evidence in their books and records sufficient to establish that no EV tax credits under Code Sections 30D or 45W have been allowed previously with respect to the EV, and in the case of any prior EV tax credit allowed under Code Section 25E, the amount of such prior credit and the taxpayer must provide such information to the IRS upon request. That evidence may include signed attestations from all previous owners of an EV that a credit was not claimed with respect to that EV.
Ineligibility for the Commercial EV Credit and Recapture
- Cancelled Sales. If the sale of a qualified commercial EV is cancelled before the taxpayer places the EV into service, then the proposed regulations would provide that the taxpayer cannot claim the Commercial EV Credit for that EV and a subsequent buyer of that EV will not be required to apply the proposed residual value rules applicable to previously owned commercial EVs in determining the incremental cost of the EV.
- Returned Commercial EVs. If a taxpayer returns a qualified commercial EV to the seller within 30 days of placing that EV into service, then the proposed regulations would provide that the taxpayer cannot claim the Commercial EV Credit for the returned EV, the returned EV may still be eligible for the Commercial EV Credit, and a subsequent buyer of that EV must apply the proposed residual value rules applicable to previously-owned commercial EVs in determining the incremental cost of the EV.
- Commercial EVs Sold Within 30 Days. If a taxpayer sells a qualified commercial EV within 30 days of placing that EV into service, then the proposed regulations would provide that the taxpayer is treated as having acquired the EV with the intent to resell, the taxpayer cannot claim the Commercial EV Credit for that EV, the EV may still be eligible for the Commercial EV Credit, and a subsequent buyer must apply the proposed residual value rules applicable to previously-owned commercial EVs in determining the incremental cost of the EV.
- Commercial EVs With Less Than 100 Percent Business Use. If a taxpayer's trade or business use of a qualified commercial EV for the taxable year that the taxpayer places the EV into service is less than 100 percent of the taxpayer's total use of that EV for that taxable year (other than incidental personal use, for example, a stop for lunch on the way between two job sites), including because the EV is sold or otherwise disposed of, then the proposed regulations would provide that the EV is ineligible for the Commercial EV Credit.
- General 18-Month Recapture Rule. If a taxpayer ceases to use the qualified commercial EV for 100 percent trade or business use during the 18-month period beginning on the date that the EV is placed in service — including because the EV is sold or otherwise disposed of — then the taxpayer cannot claim the Commercial EV Credit for that EV (and if the taxpayer already claimed the Commercial EV Credit for that EV then the credit is recaptured), the EV may still be eligible for the Commercial EV Credit. A subsequent buyer must apply the proposed residual value rules applicable to previously owned commercial EVs in determining the incremental cost of the EV.
Reporting Requirements
Code Section 45W provides that no Commercial EV Credit is allowed for an EV unless the taxpayer includes the vehicle identification number (VIN) of such EV on the taxpayer's tax return for the taxable year the EV is placed in service by the taxpayer. To report the VIN, the proposed regulations would provide that the taxpayer must attach to its US federal income tax return for the year the qualified commercial EV is placed in service, a completed IRS Form 8936, Clean Vehicle Credits, along with a completed IRS Form 8936 Schedule A, Clean Vehicle Credit Amount.
The proposed regulations would provide that the Commercial EV Credit may only be claimed by a single taxpayer, and the credit cannot be allocated or prorated if a qualified commercial EV is placed in service by multiple individual taxpayers who do not file a joint tax return. In the case of a qualified commercial EV placed in service by a grantor trust, the Commercial EV Credit is allocated among the trust's grantors. In the case of a qualified commercial EV placed in service by a partnership or S corporation, the Commercial EV Credit is allocated among the partners or shareholders under the partnership tax rules or S corporation rules, respectively.
Comments and Public Hearing
Written or electronic comments on the proposed regulations under Code Section 45W must be received by March 17, 2025. A public hearing on the proposed regulations is scheduled for April 28, 2025.
Effective Date
The proposed regulations under Code Section 45W will generally apply to qualified commercial EVs placed in service in taxable years ending after the date that final regulations are published in the Federal Register and to taxpayers' taxable years ending after the date that final regulations are published in the Federal Register.
Further Considerations and Subjects for Taxpayer Comments
Code Section 45W(d)(1) provides that rules similar to the rules of Code Section 30D(f), including the recapture rules under Code Section 30D(f)(5), shall apply for purposes of Code Section 45W. The recapture rules in the proposed regulations deviate from Code Section 30D(f)(5) in several significant ways. For example, the regulations under Code Section 30D provide for the recapture of that credit if a sale is cancelled or if an EV is returned or sold within 30 days. That credit does not otherwise provide for recapture upon a later sale or other disposition of the EV. The proposed regulations, however, would provide for recapture if a commercial EV is not used for 100 percent business use (other than incidental personal use) or if the commercial EV is sold or otherwise disposed of within 18 months of the date of the commercial EV is placed in service. This longer and broader recapture provision raises several questions:
- Why is the proposed recapture period 18 months? The notice of proposed rulemaking states that Treasury and the IRS considered longer and shorter periods of time to require as a minimum period for the vehicle to be used in a trade or business. "Based on knowledge of commercial vehicle leasing practices (fleet leasing), the Treasury and the IRS determined that it was appropriate to require a qualified commercial clean vehicle to be used for 100 percent trade or business use for 18 months after it is placed in service." The drafters' focus on fleet leasing does not seem to take into account the practices of the large consumer lease market. A recapture period ending after 12 months of business use would be less burdensome for taxpayers and still prevent the "lease for sale" abuses that could occur with a shorter recapture period (e.g., 30 days). A 12-month period coordinates well with depreciation rules and "pull ahead" incentives sometimes offered to consumer lessees.
- Why are there no reasonable exceptions from recapture for certain sales or dispositions occurring in fewer than 18 months? When most leased vehicles come off-lease and are returned to the lessor, they are not re-leased and are sold to third parties. The proposed recapture rule does not take into account or provide reasonable exceptions for many common events that result in a consumer lessee returning a vehicle (that will then be sold) in less than 18 months. Casualty losses: EVs are moveable property and often are subject to casualty losses such as accidents and weather events. These can happen at any time and are not indicative of the lessor's intention to sell the vehicle or to stop using the vehicle for a commercial purpose. Death of the lessee: Most consumer leases are terminated at the lessee's death. Upon termination of the lease and return of the vehicle, the vehicle generally will be sold. Recapture in this circumstance doesn't serve the purpose of incentivizing uninterrupted business use of the vehicle. SCRA: The Servicemembers Civil Relief Act allows active duty military members to terminate consumer lease obligations. Upon termination of the lease and return of the vehicle, the vehicle generally will be sold. Recapture in this circumstance doesn't serve the purpose of incentivizing uninterrupted business use of the vehicle. Similar exceptions were allowed under the regulations issued under former Code Section 30 (Credit for Qualified Electric Vehicles) and apparently were not considered for inclusion in the proposed regulations.
- Why are there no exceptions for certain returned commercial EVs? If a lessee leases a vehicle and immediately regrets the transaction, the lessee often may return the vehicle to the lessor within a fairly short period. Sometimes the lease agreement is cancelled then as a matter of courtesy, and other times, it is required to be cancelled under state law (i.e., during a 3-5 day contract rescission period). That vehicle may then go on to be leased again as a "new" vehicle because of its excellent condition and low mileage; however, the proposed regulations would treat that vehicle as a previously owned vehicle for the purpose of determining the Commercial EV Credit.
