Texas legislation enhances R&D franchise tax credit, repeals R&D sales and use tax exemption
Texas legislation sent to Governor Greg Abbott (R) on June 1 provides for an enhanced research and development (R&D) franchise tax credit.
Final regulations address clean vehicle tax credit eligibility, transfers, other issues
June 2024
In brief
What happened?
The IRS and Treasury on May 6 published final regulations on tax credits under Section 30D for new clean vehicles and under Section 25E for previously owned clean vehicles. For applicability dates, see the PwC Insight Regulations on clean vehicle tax credits are finalized. Rev. Proc. 2024-26, issued on June 8, provides updated and expanded procedures for qualified manufacturer and seller reporting.
Why is it relevant?
The final regulations consolidated three separately issued sets of proposed regulations under Sections 25E and 30D. The PwC Insight Final regulations address Section 30D clean vehicle credit battery requirements discusses rules relating to eligibility for the Section 30D credit and to excluded foreign entities that pertain to battery requirements. This insight discusses other Section 30D eligibility requirements, eligibility for the Section 25E credit, transfers of the Section 30D and 25E credits, credit recapture, reporting procedures (including Rev. Proc. 2024-26), and other issues.
Action to consider:
The final regulations make only minor changes and clarifications to the proposed regulations. Taxpayers, manufacturers, and dealers may find additional information on the proposed regulations in the PwC Insight Guidance issued on clean vehicle credit registration, reporting, and transfers. Qualified manufacturers and sellers of clean vehicles should familiarize themselves with the reporting requirements and procedures outlined in Rev. Proc. 2024-26 and earlier guidance discussed in that insight.
In detail
Statutory background
A credit of up to $7,500 under Section 30D may be available to a taxpayer purchasing a new clean vehicle. The Section 30D credit also may be claimed by businesses, including partnerships and S corporations, estates, and trusts. A Section 30D credit attributable to a depreciable vehicle is treated as a general business credit under Section 38. A vehicle purchased for resale is not eligible.
For vehicles placed in service after 2022, a qualified buyer may claim a credit under Section 25E of the lesser of $4,000 or 30% of the sales price of a previously used clean vehicle. Only individuals may claim the Section 25E credit. Section 25E incorporates many of the Section 30D rules by reference, including rules on eligible vehicles, qualified manufacturers and registered dealers, credit transfers, recapture, and registration and reporting.
Credit eligibility
Section 25E qualified sale
The Section 25E credit applies only to vehicles acquired in a “qualified sale.” A qualified sale must be the first transfer of the vehicle after August 16, 2022, to a qualified buyer other than the person who had the original use of the vehicle. The sale price may not exceed $25,000.
The proposed regulations provided that a taxpayer could rely on the “vehicle history” provided by a dealer to determine that a sale is the first vehicle transfer. For clarity, the final regulations change the terminology to “vehicle history report,” modify the reliance rule to read “vehicle history report obtained on the date of sale or as part of the sale transaction,” and add that the issuer may be a data provider approved by the National Motor Vehicle Title Information System rather than the dealer.
Under the regulations, for purposes of the $25,000 limitation, the sale price is determined after applying incentives. The proposed regulations defined “incentive” as a “reduction in total sale price” by a dealer or manufacturer and accepted by a taxpayer. The final regulations modify this definition to “reduction in price.”
Section 30D MAGI limitation
An individual taxpayer is not eligible for the Section 25E or Section 30D credit if the lesser of modified adjusted gross income (MAGI, adjusted gross income plus certain excluded foreign income) for the current or previous tax year exceeds a threshold amount.
The proposed Section 30D regulations provided that the MAGI limitation under Section 30D does not apply for a vehicle placed in service by a corporation or other taxpayer that does not compute adjusted gross income under Section 62. However, the MAGI limitation applies to partners and S corporation owners who are individuals for vehicles placed in service by a partnership or S corporation.
The final regulations extend the Section 30D MAGI limitation to estates and trusts. For estates and non-grantor trusts, MAGI is determined under Section 67(e). An estate or non-grantor trust is treated as having MAGI above the threshold amount for any year it is not in existence. The limitation applies to a grantor of a grantor trust and may be allocated to multiple grantors or persons treated as owning part of the trust.
Observation: These rules on the scope of the MAGI limitation do not apply to the Section 25E credit because it is available only to individuals.
Qualified manufacturer
For purposes of both Section 25E and Section 30D, unless a vehicle is a qualified fuel cell motor vehicle, a clean vehicle must be produced by a manufacturer (as defined under EPA regulations) that has entered into a written agreement with Treasury to periodically report vehicle identification numbers (VINs) and other information Treasury specifies about each of the manufacturer’s vehicles (qualified manufacturer).
The final regulations incorporate the Section 30D statutory definition of “manufacturer” and add that, if multiple manufacturers are involved in the production of a vehicle, the manufacturer that satisfies the reporting requirements for greenhouse gas emissions set by the EPA under the Clean Air Act is the “qualified” manufacturer that must enter into an agreement with Treasury and perform the required reporting.
Observation: By cross-reference to Section 30D, vehicles eligible for Section 45W, the commercial clean vehicle credit, also must be made by a qualified manufacturer. The preamble to the final regulations notes that the Section 30D regulations relating to qualified manufacturers also apply to Section 45W.
The final regulations clarify that an upfitter, a company that converts new internal combustion engine motor vehicles purchased from manufacturers into clean vehicles, may be a manufacturer if the modification is made before the vehicle is placed in service.
The final regulations add a rule providing that whether a manufacturer is a qualified manufacturer is determined when the manufacturer provides the required written report to the IRS under a written agreement.
Observation: The preamble to the final regulations explains that this timing rule allows a vehicle produced before enactment of Section 25E, when there were no qualified manufacturers, to qualify as a previously owned clean vehicle if the manufacturer becomes a qualified manufacturer and reports to the IRS before the vehicle is sold.
The final regulations specify that the IRS may terminate qualified manufacturer status for fraud, intentional disregard, or gross negligence regarding the requirements of Section 25E, 30D, or 45W or their regulations.
Credit transfers
Incentive
In lieu of claiming a credit, Sections 25E and 30D allow a taxpayer to elect to transfer the credit to an eligible entity. An “eligible entity” is a dealer that registered with the IRS and sold the vehicle and made certain disclosures to the taxpayer, including the value of any available incentive. The dealer must pay the taxpayer the amount of the otherwise allowable credit and ensure that any available purchase incentive does not limit the taxpayer’s ability to make a transfer election and that the election does not limit the value or use of an incentive.
The proposed regulations did not separately define “incentive” in connection with the definition of an eligible entity. The final regulations provide that, for this purpose, “incentive” means any reduction in price available to the taxpayer from the dealer or manufacturer, including in combination with other incentives, other than a reduction in the form of a partial payment or down payment for the purchase of a new or previously owned clean vehicle.
Observation: Treasury has announced that more than $1 billion in credits have been transferred and advance payments issued as of June 12.
Excessive payments
Treasury is authorized to establish a program to make advance payments to registered dealers in the cumulative amount of the allowable credits transferred. The dealer, and not the taxpayer, claims a transferred credit. If the amount of a transferred credit exceeds the allowable amount, the dealer is subject to tax on the excess plus 20% unless there is reasonable cause.
The final regulations provide that a taxpayer may rely on the information in a qualified manufacturer’s written reports to the IRS. A vehicle will be deemed to meet certain credit requirements as attested to and certified in reports on which a taxpayer relies. The final regulations add an example of a taxpayer that relies on an incorrect certification and transfers the full credit. The example concludes that the credit amount transferred to the dealer is not an excessive payment because it was allowable to the taxpayer.
VIN reporting
Sections 25E and Section 30D provide that a taxpayer claiming a clean vehicle credit must report the vehicle’s VIN on the taxpayer’s tax return, but that this requirement is satisfied if the taxpayer transfers the credit and the dealer reports the VIN. The final regulations require a taxpayer that transfers a credit, as well as the dealer, to report the vehicle’s VIN.
Observation: The preamble to the final regulations advises that this rule is adopted under Treasury’s general authority and is necessary to reconcile advance payments with taxpayer eligibility.
Section 30D credit claim
The proposed regulations required a taxpayer, including a taxpayer that transfers a clean vehicle credit, to claim the credit on the taxpayer’s federal income tax return and provide certain forms and information. Because taxpayers other than individuals may claim the Section 30D credit, the final regulations provide that a taxpayer, including a dealer that has received a transferred credit, may claim the credit on an information return.
Credit recapture
The proposed regulations described the effect on Section 25E or 30D credit eligibility and reporting if a sale is cancelled, the taxpayer returns the vehicle within 30 days of taking possession, the taxpayer resells the vehicle within 30 days of taking possession, or for other returns and resales.
The proposed and final regulations provide that a taxpayer that resells a vehicle within 30 days of taking possession is not eligible to claim the Section 25E or Section 30D credit because the taxpayer is treated as having purchased the vehicle for resale. The taxpayer, not the dealer, is liable to recapture the value of a transferred credit. The final regulations add an example illustrating that the 30-day resale rule does not apply to a dealer that claimed the Section 30D credit for a vehicle that it used as a demonstrator and then sold after 30 days.
Reporting procedures
For a vehicle to qualify for the Section 25E or 30D credit, qualified manufacturers and vehicle sellers must report certain information to Treasury.
Rev. Proc. 2022-42 and Rev. Proc. 2023-38 provided detailed procedures for qualified manufacturers and sellers to register with the IRS and perform required reporting. See the PwC Insights IRS and Treasury issue clean vehicle reporting procedures and Guidance issued on clean vehicle credit registration, reporting, and transfers for a detailed discussion. Rev. Proc. 2024-26 provides additional information and procedures for qualified manufacturers to submit a report on the critical mineral content of batteries for both excluded entity and eligibility purposes and a second report on the battery component requirements for eligibility. These reports are submitted to the Department of Energy (DOE).
In the first report on excluded entity compliance, a qualified manufacturer must submit the attestation of the projected number of compliant batteries and other information to DOE for upfront review. In connection with this reporting:
- Qualified manufacturers applying the transition rule for impracticable-to-trace battery materials must report specified information in accordance with certain procedures, and
- Section 5.06 of Rev. Proc. 2023-38 is modified to require a qualified manufacturer to report for vehicles placed in service or expected to be placed in service during calendar year 2024 by September 1, 2025, but information on applicable critical minerals and associated constituent materials does not need to be included.
Qualified manufacturers must concurrently submit the second report to DOE for each calendar year, including specified information and in accordance with certain procedures, to support compliance of their vehicles with the critical mineral and battery component credit eligibility requirements.
DOE will specify the method for submitting these reports at a later time. The IRS and DOE will make available an optional template report and workbook by July 1 of the year before the compliance year.
Rev. Proc. 2024-26 also provides additional information on updating or rescinding seller reports and repaying advance payments.
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