Proposed Regs Provide Guidance on Sec. 45W Commercial Clean Vehicle Credit

(Parker Tax Publishing January 2025)

The IRS issued proposed regulations that would provide guidance on the qualified commercial clean vehicle credit enacted under Code Sec. 45W by the Inflation Reduction Act of 2022 (Pub. L. 117-169). The IRS also issued a notice providing updated incremental cost and retail price equivalent safe harbors for purposes of Code Sec. 45W. REG-123525-23; Notice 2025-9.

Background

Code Sec. 4W was added by the Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169) to provide a credit for each qualified commercial clean vehicle place in service by a taxpayer during the tax year (Section 45W credit). The Section 45W credit is effective for vehicles placed in service after December 31, 2022. The Section 45W credit is one of three related clean vehicle credits enacted under or revised by the IRA. Code Sec. 25E provides a credit for previously-owned clean vehicles. Code Sec. 30D provides a credit for new clean vehicles.

Code Sec. 45W(a) provides that, for purposes of the general business credit under Code Sec. 38, the qualified commercial clean vehicle credit for any tax year is an amount equal to the sum of the credit amounts determined under Code Sec. 45W(b) with respect to each qualified commercial clean vehicle placed in service by the taxpayer during the tax year. The amount of the Section 45W credit is treated as a general business credit. Code Sec. 38(b)(37) lists as a current year business credit the qualified commercial clean vehicle credit determined under Code Sec. 45W.

Code Sec. 45W(b)(1) provides that, subject to the limitation in Code Sec. 45W(b)(4), the amount of the Section 45W credit is the lesser of: (1) 15 percent of the taxpayer's basis in the vehicle (30 percent in the case of a vehicle not powered by a gasoline or diesel internal combustion engine (ICE)), or (2) the incremental cost of the vehicle. Code Sec. 45W(b)(2) provides that the incremental cost of any qualified commercial clean vehicle is an amount equal to the excess of the purchase price for such vehicle over the purchase price of a comparable vehicle. Code Sec. 45W(b)(3) defines "comparable vehicle" to mean, with respect to any qualified commercial clean vehicle, any vehicle that is powered solely by a gasoline or diesel ICE and is comparable in size and use to such vehicle. Code Sec. 45W(b)(4) provides that the section 45W credit amount determined under Code Sec. 45W(b) with respect to any qualified commercial clean vehicle cannot exceed: (1) in the case of a vehicle that has a gross vehicle weight rating of less than 14,000 pounds, $7,500; and (2) in the case of a vehicle not described in Code Sec. 45W(b)(4)(A), $40,000.

Code Sec. 45W(c) defines "qualified commercial clean vehicle" for purposes of the Section 45W credit as any vehicle which: (1) meets the requirements of Code Sec. 30D(d)(1)(C), and is acquired for use or lease by the taxpayer and not for resale; (2) either meets the requirements of Code Sec. 30D(d)(1)(D), and is manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails), or is mobile machinery, as defined in Code Sec. 4053(8) (including vehicles that are not designed to perform a function of transporting a load over the public highways); (3) either is propelled to a significant extent by an electric motor which draws electricity from a battery that has a capacity of not less than 15 kilowatt hours (or, in the case of a vehicle that has a gross vehicle weight rating of less than 14,000 pounds, 7 kilowatt hours) and is capable of being recharged from an external source of electricity, or is a motor vehicle that satisfies the requirements under Code Sec. 30B(b)(3)(A) and (B); and (4) is of a character subject to the allowance for depreciation.

Code Sec. 45W(d) establishes special rules for purposes of the Section 45W credit. Code Sec. 45W(d)(1) provides that rules similar to the rules of Code Sec. 30D(f)(1) through (9) apply to Code Sec. 45W. Code Sec. 45W(d)(2) provides that Code Sec. 45W(c)(4) does not apply to any vehicle that is not subject to a lease and which is placed in service by a tax-exempt entity described in Code Sec. 168(h)(2)(A)(i), (ii), or (iv). Code Sec. 45W(d)(3) provides that no Section 45W credit is allowed with respect to any vehicle for which a credit was allowed under Code Sec. 30D. Code Sec. 45W(e) provides that no Section 45W credit is allowed with respect to any vehicle unless the taxpayer includes the vehicle identification number of such vehicle on the return of tax for the tax year.

Code Sec. 45W(g) provides that no Section 45W credit is allowed with respect to a vehicle acquired after December 31, 2032.

Prior Guidance

In Notice 2023-9, the IRS provided a safe harbor for purposes of the Section 45W credit regarding the incremental cost of certain qualified commercial clean vehicles placed in service in 2023. In Notice 2024-5, an incremental cost safe harbor was provided for 2024.

In May of 2024, the IRS published final regulations (T.D. 9995) providing rules and definitions for the Section 25E credit and the Section 30D credit. In addition, the final regulations provide guidance under Code Sec. 6213(g)(2) on the meaning of "mathematical or clerical error" with regard to certain assessments of tax without a notice of deficiency in connection with the Section 25E credit, the Section 30D credit, and the Section 45W credit.

REG-123525-23

On January 14, the IRS published proposed regulations in REG-123525-23 regarding the Section 45W credit. The proposed regulations provide: (1) definitions applicable to Section 45W and the Section 45W regulations; (2) rules for determining the amount of the section 45W credit, including the determination of incremental cost for qualified commercial clean vehicles; (3) rules related to a vehicle's qualification as a qualified commercial clean vehicle; (4) special rules relating to the credit eligibility of a vehicle involved in certain transactions and uses, the interaction of the Section 45W credit with other credits, and recapture of the Section 45W credit; and (5) reporting requirements for purposes of the Section 45W credit.

Incremental Cost Calculation

Rules for determining the amount of the Section 45W credit, including the determination of incremental cost for qualified commercial clean vehicles, are provided in Prop. Reg. Sec. 1.45-2. 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 clean vehicle by the retail price equivalent (RPE) of that vehicle, and then subtracting from that amount the product of the manufacturer's cost of the powertrain of the comparable vehicle and the RPE of that vehicle.

According to the IRS, this approach attempts to eliminate, to the extent possible, any cost differences unrelated to the propulsion technologies of the vehicles. In consultation with the DOE, the IRS is proposing an incremental cost equation based on the incremental cost of the powertrain because the powertrain is a large fraction of the incremental cost between a clean vehicle and comparable vehicle and because there is robust data available to verify the difference in costs between vehicles.

The proposed regulations allow taxpayers to calculate the incremental cost of a qualified commercial clean vehicle using the RPE applicable to such vehicle. Under the proposed regulations, a qualified commercial clean vehicle's RPE is determined by calculating the ratio of the manufacturer's suggested retail price (MSRP) of such vehicle to the manufacturer's cost to manufacture such vehicle. Since providing the precise RPE for a vehicle may involve the effective disclosure of proprietary information, the IRS intends to provide RPE safe harbors for different segments of the vehicle market in the near term.

Information regarding a qualified manufacturer's cost for the components of a qualified commercial clean vehicle powertrain may not be readily available to taxpayers. If a qualified manufacturer discloses this information to a taxpayer to facilitate the taxpayer's calculation of incremental cost, or if the qualified manufacturer discloses its incremental cost calculation for a qualified commercial clean vehicle it manufactures as provided in section 45W and the proposed regulations, Prop. Reg. Sec. 1.45W-2(c)(10) permits taxpayers to rely on such disclosure. Alternatively, taxpayers may rely on the incremental cost safe harbors published in Notice 2023-9 and Notice 2024-5, and any succeeding guidance, for the tax year in which a credit is claimed.

Leased Vehicles

Code Sec. 45W(c)(1) provides, in part, that a qualified commercial clean vehicle must be acquired for use or lease by the taxpayer and not for resale. Under the proposed regulations, a taxpayer generally acquires a vehicle for use or lease if the taxpayer acquires it for use or lease in a trade or business of the taxpayer. Thus, for example, if a taxpayer that is engaged in the business of leasing vehicles to customers acquires a commercial clean vehicle for the purpose of leasing the vehicle to customers as part of that business, this requirement would be satisfied.

Observation: The proposed regulations provide that, if the lease of a qualified commercial clean vehicle would not be respected for federal income tax purposes, the lessor would be treated as having acquired the vehicle for resale and thus would not be allowed a Section 45W credit with respect to the purportedly leased vehicle. This rule, which recognizes that a sale may, in some cases, be mischaracterized as a lease for tax purposes, aligns with Code Sec. 45W(c)(1) to limit "use and lease" to the scenarios in which the Section 45W credit is allowable to a taxpayer.

Off-Road Mobile Machinery

Code Sec. 45W(c)(2) provides, in part, that the term "qualified commercial clean vehicle" includes "mobile machinery, as defined in Code Sec. 4053(8) (including vehicles that are not designed to perform a function of transporting a load over the public highways)." According to the IRS, the parenthetical in Code Sec. 45W(c)(2) contradicts the definition of mobile machinery in Code Sec. 4053(8), which is relevant only to highway vehicles, and arguably expands the traditional category of mobile machinery to include off-road vehicles. For purposes of Code Sec. 45W, such an expanded category might include certain agricultural vehicles, construction vehicles, forestry vehicles, utility vehicles designed for airport operations, and other types of off-road vehicles. The IRS states that Code Sec. 4053(8) and several provisions of Code Sec. 45W present significant challenges with respect to the administrability of a Section 45W credit that encompasses such off-road vehicles.

To mitigate these challenges, the IRS said that it is considering an approach that would deem off-road vehicles (that is, "vehicles not designed to perform a function of carrying a load over the public highways") to satisfy the requirements of Code Sec. 4053(8). However, one issue with this approach is that, while Code Sec. 45W(e) provides that no Section 45W credit can be determined with respect to a vehicle unless the taxpayer includes its vehicle identification number (VIN) on the return for the tax year, manufacturers of off-road vehicles are not required by the National Highway Traffic Safety Administration (NHTSA) to assign VINs to such vehicles. Thus, the IRS states that a more general understanding of the term "vehicle identification number" is required to in order to give effect to the VIN requirement. The IRS is studying various potential options for an integrated system of VINs for purposes of Code Sec. 45W. Until guidance is published detailing any such future system, vehicles without a NHTSA-required VIN are unable to satisfy the statutory VIN requirement in Code Sec. 45W(e) and are therefore ineligible for the Section 4W credit.

Notice 2025-9

The safe harbors provided in Notice 2023-9 and Notice 2024-5 regarding the incremental cost of certain qualified commercial clean vehicles placed in service in 2023 and 2024, respectively, were based on a December 2022 incremental cost analysis by the Department of Energy (DOE) across classes of clean vehicles (DOE Analysis). In January of 2025, the DOE updated the DOE Analysis (DOE's January 2025 Report).

The DOE's January 2025 Report updates the analysis of component and vehicle manufacturing costs, including refinements to the approach previously employed for determining an incremental purchase cost for battery electric, plug-in hybrid electric, and fuel cell electric vehicles. Second, the DOE's January 2025 Report expands medium- and heavy-duty vehicle classes previously analyzed and updates results based on current costs of technology. These modifications changed the results of the analysis conducted in December 2022 and updated in December 2023.

In Notice 2025-9, the IRS provides updated safe harbors regarding the incremental cost and retail price equivalent (RPE) of certain qualified commercial clean vehicles under Code Sec. 45W. For any qualified commercial clean vehicle not previously placed in service by another person or entity, the IRS will accept a taxpayer's use of the modeled incremental cost published in Table ES-2 in the DOE's January 2025 Report for the appropriate class of clean vehicle to establish the incremental cost of a qualified commercial clean vehicle placed in service by the taxpayer on or after January 1, 2025.

In addition, for any qualified commercial clean vehicle previously placed in service by another person or entity, the IRS will accept a taxpayer's application of the modeled incremental cost of the qualified commercial clean vehicle when new, as determined by reference to the IRS safe harbor guidance that corresponds to the model year of such vehicle, to the rules found in Prop. Reg. Sec. 1.45W-2(f) of the proposed regulations to establish the incremental cost of such qualified commercial clean vehicle. Prop. Reg. Sec. 1.45W-2(f)(1) provides that the incremental cost of a qualified commercial clean vehicle previously placed in service by another person or entity is the product of (1) the incremental cost of the qualified commercial clean vehicle (that is, the incremental cost of such vehicle when new) and (2) the residual value factor that corresponds to the age of the qualified commercial clean vehicle. A taxpayer may use this safe harbor with respect to any qualified commercial clean vehicle placed in service by the taxpayer after December 31, 2022.

The DOE's January 2025 Report provides the RPEs used by the DOE for purposes of modeling incremental cost across several classes of clean vehicles. In cases where taxpayers do not use a modeled incremental cost safe harbor, the IRS will accept taxpayers' use of the RPEs published in Table 4 of the DOE's January 2025 Report for the appropriate class of clean vehicle to calculate the incremental cost of qualified commercial clean vehicles. A taxpayer may use this safe harbor with respect to any qualified commercial clean vehicle placed in service by the taxpayer after December 31, 2022.

For a discussion of the qualified commercial clean vehicle credit, see Parker Tax ¶101,710.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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