Earlier this year, Treasury and the IRS published proposed regulations regarding the qualified commercial clean vehicle credit under section 45W of the Internal Revenue Code (code). The proposed regulations implement changes to the credit by the Inflation Reduction Act of 2022 (IRA) and provide several examples of the various new rules.
It remains to be seen whether these rules will be finalized by the Trump Administration, or whether Congress will amend these rules. Regardless, these credits are currently effective and eligible taxpayers purchasing or leasing these vehicles may be able to claim incentives.
The credit for qualified commercial clean vehicles under section 45W was first enacted in 2022 as part of the IRA and applies to vehicles placed in service after 2022 that are of a character subject to the allowance for depreciation. The section 45W credit is one of three credits for clean vehicles either created or modified by the IRA. The other two, the credits for clean vehicles and previously-owned clean vehicles under sections 30D and 25E, respectively, of the code are generally aimed toward individual taxpayers. However, section 30D may also be claimed as a general business credit.
Generally, the section 45W credit is the lesser of three values:
On Jan. 10, 2025, the Biden Administration’s Treasury Department released REG-123525-23 which serves as a notice of proposed rulemaking for the section 45W credit. The proposed regulations contain several developments, including:
The proposed regulations provided terms for use in the qualification and quantification of the commercial clean vehicle credit. These included the different categories of clean vehicles:
Additionally, the proposed regulations introduce, and define related terms, the concept of a Retail Price Equivalent (RPE), which is used when determining the incremental cost of a clean vehicle. The RPE of a vehicle is its manufacturer’s suggested retail price (MSRP) divided by the manufacturer’s direct costs to produce the vehicle.
Also, for purposes of incremental cost analysis, the proposed regulations define a “comparable vehicle,” generally, as a vehicle that is powered solely by a gasoline or diesel ICE and is comparable in size and use to the qualified commercial clean vehicle. The manufacturer of the comparable vehicle need not be the manufacturer of the qualified commercial clean vehicle, unless the manufacturer produces a solely gasoline or diesel-powered ICE version of the same vehicle.
The proposed regulations provide the methodology to calculate the incremental cost of a qualified commercial clean vehicle. Taxpayers calculate their incremental cost by multiplying the cost of the powertrain of the clean vehicle by its RPE, and the cost of the powertrain of the comparable vehicle by its RPE and taking the different of the two numbers. If the incremental cost is negative, it is treated as zero.
While the RPE is calculated using the manufacturer’s cost to produce the vehicle, the incremental cost computation uses the manufacturer’s cost to produce only the powertrain of the vehicle. After consultation with the Department of Energy, the Treasury Department proposed to use the cost of the powertrain because it is a large fraction of the incremental cost between a clean vehicle and a comparable vehicle and because there is robust data available to verify the difference in costs between vehicles.
The proposed regulations provide equations needed to compute the RPE and the cost of the applicable powertrains for the respective types of vehicles. The proposed regulations also provide examples to help clarify the calculations. The Treasury Department may annually publish safe harbors which taxpayers may rely on for both the RPE and incremental cost of different segments of the vehicle market. A taxpayer may rely upon qualified manufacturer-provided written documentation of the incremental cost that identifies the comparable vehicle used by the manufacture for the incremental cost calculation, and the taxpayer retains the documentation for any potential audit.
The preamble of the proposed regulations clarify that the section 45W credit is available for vehicles that have been previously used by another taxpayer (provided no section 45W credit was claimed by the original taxpayer) because section 45W does not explicitly prohibit it. However, the proposed regulations provide that when computing the incremental cost of used vehicles, taxpayers must utilize a residual value factor table published by the Treasury. Taxpayers may then compute their section 45W credit using this modified incremental cost.
A section 45W credit is allowed only for vehicles acquired by the taxpayer for use or lease by the taxpayer (and not for resale). If a lease would not be respected as a lease for Federal income tax purposes, the proposed regulations provide that the taxpayer may be deemed to have acquired the vehicle for resale which would disallow the taxpayer’s section 45W credit.
While section 45W generally requires that a qualified commercial clean vehicle be subject to depreciation, a vehicle placed in service by a tax-exempt entity (such as a school district) is not required to be depreciable. However, this only applies to vehicles not subject to a lease. The proposed regulations clarify that a vehicle is subject to a lease if it is leased within 30 days of being placed in service by the tax-exempt entity. For example, a bus purchased by a school district and then leased to a transportation company 25 days after the school district placed the bus in service is subject to a lease. Further, while a vehicle need not be of a character subject to the allowance for depreciation, it still must be used 100% in either the entity’s exempt purpose, or an unrelated trade or business purpose.
The proposed regulations provide an 18-month recapture period, beginning on the date which the vehicle is placed into service, for situations where the vehicle is sold, disposed of or fails to meet a 100% trade or business use standard (except for incidental personal use). If the recapture event occurs in the 18-month recapture period, and the return claiming the section 45W credit has not yet been filed, taxpayers are not allowed to claim the 45W credit with their return. If the return has already been filed claiming the section 45W credit, the taxpayer must recapture the credit.
In the case of a section 45W credit claimed by a tax-exempt organization via elective payment under section 6417, the proposed regulations add to the regulations under section 6417 to include the recapture rules for section 45W as a basis for recapture under section 6417, including the 100% trade or business use requirement.
Mobile machinery may be eligible for a section 45W credit, and the statute references IRC section 4053(8) for the definition of mobile machinery. Some vehicles may qualify as both an on-road vehicle and mobile machinery. The preamble to the proposed regulations noted that section 4053(8) and provisions of section 45W present significant challenges with respect to the administrability of a section 45W credit that encompasses off-road vehicles, and the Treasury Department and IRS requested comments on issues, including how to define off-road vehicles and how off-road vehicles can meet the vehicle identification number requirement.
The Treasury Department and IRS published these proposed regulations without taxpayer reliance language. Instead, and as is done commonly, the proposed regulations have proposed applicability dates where the regulations will generally apply to taxable years ending after the date of the publication in the Federal Register of the regulations in their final form. As a result, taxpayers are unable to rely on these proposed regulations.
The proposed regulations provide clarity for section 45W, most notably perhaps being the computation of the incremental costs of qualified commercial clean vehicles. The definitions and formulas provided by the proposed regulations hopefully give industry stakeholders most of the tools needed to calculate and substantiate the section 45W credit. Importantly, the proposed regulations provide needed clarity related to the potential recapture of the section 45W credit. The Treasury Department and IRS are soliciting public comments, and a public hearing is scheduled for April 28, 2025.
It remains to be seen whether these rules will be finalized by the Trump Administration, or whether Congress will amend these rules. Regardless, these credits are currently effective and eligible taxpayers purchasing or leasing these vehicles may be able to claim incentives.
Taxpayers should consult with their tax advisors and the resources in the new guidance prior to accounting for any section 45W credits. Taxpayers should also consider submitting a public comment if they have any questions or concerns relating to the content of the proposed regulations.
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