Executive summary: New reporting required to qualify vehicles for credit
The Inflation Reduction Act of 2022 (Act) created or modified three vehicle-related federal income tax credits. The Department of the Treasury recently issued Rev. Proc. 2022-42, outlining key procedures for manufacturers and sellers of clean vehicles to follow to be eligible for the clean vehicle tax credits.
Manufacturers of such vehicles are required to enter into written agreements to be considered qualified manufacturers and submit periodic reports to the Department of the Treasury for their vehicles to qualify for income tax credits claimed by buyers. Dealers of certain clean vehicles are also subject to reporting requirements.
The Act created new requirements on the critical minerals and battery components used in clean vehicles, tying these requirements to the credit’s value for a vehicle sold after. These two requirements apply to vehicles placed in service after the date on which the Secretary of the Treasury (or their delegate) issues proposed guidance with respect to these requirements. The critical minerals and battery components requirements are not triggered by Rev. Proc. 2022-42.
Guidance on reporting obligations for clean vehicle tax credits
The Inflation Reduction Act of 2022 (Act) created or modified three vehicle-related federal income tax credits. First, the Act modified and renamed the clean vehicle credit. This credit was formerly the credit for new qualified plug-in electric drive motor vehicles.
Second and third, the Act created credits for qualified commercial clean vehicles and previously-owned clean vehicles. These credits are claimed by the buyer in the year in which a qualifying vehicle is placed in service. Credit requirements are imposed on the vehicle’s manufacturer, seller and buyer. Some of these requirements are written reports to be submitted by a vehicle’s manufacturer and seller:
- A manufacturer must enter into written agreement with Treasury to become a qualified manufacturer
- A qualified manufacturer must periodically submit written reports on vehicles manufactured that may qualify for a credit
- A seller of a qualifying vehicle must submit reports to the IRS and to the buyer of such vehicle
Rev. Proc. 2022-42 provides information on the contents and timing of these reporting obligations.
Qualified manufacturer written agreements
To claim any of these credits, a buyer must purchase a vehicle that, among other requirements, is produced by a qualified manufacturer. Rev. Proc. 2022-42 provides standard language for a manufacturer’s use in entering into a written agreement with the Treasury Secretary to become a qualified manufacturer. Such written agreement must be filed via email with the IRS before any vehicles produced by the manufacturer may qualify for an applicable credit. The IRS has indicated that the contents of the written agreement are subject to change. According to the revenue procedure, any changes to the content or format of these written agreements will be provided on the IRS website.
Periodic written reports
Qualified manufacturers must periodically submit written reports on vehicles manufactured that may qualify for an applicable credit. Rev. Proc. 2022-42 provides a list of information that must be included in these periodic written reports.
The list includes descriptive information about manufactured vehicles, confirmation of credit qualification requirements and additional information that is unique to vehicles qualifying for the clean vehicle credit, the credit for qualified commercial clean vehicles or the credit for previously-owned clean vehicles. The IRS has indicated that the existing list of required information may be modified as provided by the Treasury Secretary on the IRS website.
Written reports must include a manufacturer’s certifications with respect to the new critical minerals and battery components requirements but only after Treasury issues proposed guidance on these two requirements. The critical minerals and battery components requirements are determinants of the value of the clean vehicle credit if a qualifying vehicle is placed in service after the date on which proposed guidance on these requirements is published. This revenue procedure confirms such guidance is yet to be issued as of this writing. The Act’s modifications to the clean vehicle credit include the mandate that Treasury issue guidance with respect to certain credit requirements, including the critical minerals and battery components requirements, not later than Dec. 31, 2022.
Written reports submitted by qualified manufacturers must be submitted at least as frequently as monthly, by the 15th day of the month. Qualified manufacturers are instructed to contact the IRS via email to indicate their intent to submit monthly reports. The IRS will reply with instructions for periodic report submissions. The IRS has indicated additional information regarding written reports will be provided on the IRS website.
The person or dealer selling a vehicle that may qualify for the clean vehicle credit or previously-owned clean vehicle credit must furnish a report to the buyer and the IRS. Rev. Proc. 2022-42 includes a list of required contents of a seller’s report, including the seller and buyer identification information and other information used to verify the vehicle’s credit qualification.
For vehicle sales occurring after Dec. 31, 2023, any portion of the buyer’s credit made as a partial or complete down payment, pursuant to the taxpayer’s election, must also be included in the seller’s report.
A seller’s report must be furnished to the buyer no later than the date the vehicle is purchased. For vehicle sales occurring in 2023 or later, the seller’s report must be submitted to the Treasury Secretary not later than 15 days after the end of the calendar year in which the vehicle was sold.
Washington National Tax takeaways
Clean vehicle manufacturers should take immediate steps to prepare their vehicles for credit qualification. First, manufacturers should enter into written agreements with Treasury to become qualified manufacturers as soon as practicable. Second, manufacturers should establish procedures to gather information and submit written reports at least monthly.
Prior to the Act’s enactment, manufacturers interested in qualifying their vehicles for the qualified plug-in electric drive motor vehicles credit were required to submit a certification application for their vehicles pursuant to Notice 2009-89. Such notice provided for a 30-day period in which the IRS would evaluate the vehicle’s eligibility for the credit. Unlike prior guidance, Rev. Proc. 2022-42 does not provide a timeline in which the IRS will verify a manufacturer’s status as a qualified manufacturer or provide a determination that a motor vehicle or mobile machinery qualifies for one of the three applicable credits.
To the extent possible, dealers of clean vehicles should work with their supplier(s) of clean vehicles to establish internal procedures for furnishing seller’s reports to buyers and the IRS.
The election for buyers of new and previously-owned clean vehicles to transfer their credit to the dealer or seller as a partial or complete down payment on the vehicle is a new option provided by the Act. The election is available for vehicles placed in service after Dec. 31, 2023. Many questions on this credit transfer remain.
However, Rev. Proc. 2022-42 confirms that a seller’s report will contain information on a vehicle’s buyer and the credit transfer that can be matched against returns later filed with the IRS. Nevertheless, buyers of qualified vehicles placed in service during the calendar year 2023 should be prepared to receive the seller’s report and maintain such report with their personal tax records.