January 2024
The IRS and Treasury on January 14 published proposed regulations on the Section 45W tax credit for commercial clean vehicles. The regulations are proposed to apply to tax years ending after the date of publication of final regulations.
The IRS also released Notice 2025-9, which provides safe harbors for determining the incremental cost and classes of qualified commercial clean vehicles.
The proposed regulations are the first substantive guidance on Section 45W, which was added by the Inflation Reduction Act of 2022. Notice 2025-9 updates previous incremental cost guidance issued in Notice 2023-9 and Notice 2024-5.
Taxpayers must submit comments on the proposed regulations by March 17, 2025. A public hearing is scheduled for April 28, 2025.
Section 45W provides a tax credit for qualified clean commercial vehicles and mobile machinery acquired after 2022 and before 2033. The credit is the lesser of (1) 15% of the basis of a qualified clean commercial vehicle (30% if the vehicle is not also powered by gas or diesel) or (2) the incremental cost of the vehicle. Incremental cost is the excess of the purchase price of a qualified vehicle over the purchase price of a vehicle powered solely by gas or diesel and comparable in size and use. The maximum credit is $7,500 for vehicles under 14,000 gross vehicle weight rating and $40,000 for all other qualified vehicles.
A qualified clean commercial vehicle is (1) made by a qualified manufacturer, (2) acquired for use or lease and not for resale, (3) depreciable (unless placed in service by a tax-exempt entity), (4) either treated as a motor vehicle under the Clean Air Act and manufactured primarily for use on public streets, or is mobile machinery, and (5) either propelled to a significant extent by a battery with at least a 15 kilowatt capacity (seven kilowatts for vehicles of less than 14,000 pounds gross vehicle weight rating) that can be recharged from an external electricity source, or is a qualified fuel cell vehicle.
A qualified manufacturer is defined under Section 30D as a manufacturer (as defined under EPA regulations) that enters into a written agreement with Treasury to make periodic written reports.
Mobile machinery is a chassis on which machinery or equipment has been permanently mounted for a function such as construction or mining unrelated to transportation and that could not without substantial structural modification be used to transport a different load.
The Section 45W credit may be recaptured if the vehicle ceases to be eligible for the credit.
The proposed regulations provide that a vehicle lease that is treated as a sale for federal income tax purposes is treated as a resale and no Section 45W credit is allowable to the lessor. A qualified commercial clean vehicle is placed in service when the taxpayer takes possession.
The proposed regulations provide that the qualified manufacturer of a vehicle that is produced by multiple manufacturers is the manufacturer that satisfies EPA greenhouse gas emissions reporting requirements. A manufacturer that modifies a new motor vehicle before it is placed in service and that after modification is a qualified commercial clean vehicle, may be a qualified manufacturer.
Whether a manufacturer is a qualified manufacturer is determined when the manufacturer provides the required written report to the IRS under a written agreement. The IRS may terminate qualified manufacturer status for fraud, intentional disregard, or gross negligence of the Section 45W requirements, or the requirements of Section 25E (the previously owned clean vehicle credit) or 30D (the new clean vehicle credit).
The procedures for qualified manufacturers to submit periodic written reports to the IRS are provided in guidance published in the Internal Revenue Bulletin. A vehicle will fail to be a qualified clean commercial vehicle if a qualified manufacturer fails to provide a periodic written report as required, provides incorrect information in the report, or fails to update a report when there is a material change regarding the vehicle. However, a taxpayer may rely on the information and certifications contained in the qualified manufacturer’s reports and, to the extent of that reliance, the vehicle is deemed to be a qualified commercial clean vehicle.
The proposed regulations provide that the incremental cost of a qualified commercial clean vehicle is the excess of the product of the cost of components necessary for a vehicle’s powertrain and the vehicle’s retail price equivalent, minus the cost of components necessary for the powertrain of a comparable vehicle powered solely by a gasoline or diesel internal combustion engine and the comparable vehicle’s retail price equivalent. Detailed equations and calculations are provided for battery, plug-in hybrid, and fuel cell electric vehicles.
“Cost” includes only direct manufacturing costs. A retail price equivalent is the ratio of a vehicle’s manufacturer’s suggested retail price (MSRP) to the cost to manufacture the vehicle. The MSRP is the sum of the manufacturer’s suggested retail price of the vehicle and the retail delivered price suggested for each accessory or item of optional equipment physically attached to the vehicle when delivered to the dealer that is not included in the vehicle’s price.
Incremental cost is zero when the cost of the qualified commercial clean vehicle’s powertrain is less than the cost of the comparable vehicle’s powertrain. However, any safe harbor for determining incremental cost provided in guidance may apply.
The incremental cost of a qualified commercial clean vehicle previously placed in service by another person or entity is the product of the incremental cost of the qualified commercial clean vehicle when new and the residual value factor that corresponds to the age of the vehicle. The age of the vehicle is determined by subtracting the model year of the vehicle from the calendar year the taxpayer places the vehicle in service. A negative year, which may occur if a vehicle is sold twice before the model year, is treated as zero. The proposed regulations include a table providing residual value factors for classes of vehicles.
A vehicle is comparable to a qualified commercial clean vehicle in size and use if it has substantially similar features, such as gross vehicle weight rating, number of doors, towing capacity, passenger capacity, cargo capacity, mounted equipment, drivetrain type, width, height and ground clearance, and trim level.
A qualified commercial clean vehicle and a comparable vehicle do not have to be made by the same manufacturer. However, a vehicle powered solely by a gasoline or diesel engine with substantially similar features to a qualified commercial clean vehicle and produced by the same manufacturer is the only comparable vehicle for that qualified commercial clean vehicle.
The incremental cost of a qualified commercial clean vehicle is zero if a taxpayer or manufacturer cannot identify a comparable vehicle. However, any safe harbor for determining incremental cost provided in guidance may apply.
A taxpayer may rely on a qualified manufacturer’s written documentation of incremental cost that identifies the comparable vehicle used for the incremental cost calculation. The taxpayer must maintain the incremental cost documentation in the taxpayer’s records for the period of limitations for the tax period of the credit claim.
Notice 2023-9 and Notice 2024-5 provided safe harbors for computing the incremental cost of certain commercial clean vehicles placed in service in calendar years 2023 and 2024, respectively. The safe harbors were based on Department of Energy (DOE) analyses of classes of street vehicles that modeled the costs of representative street electric vehicles and comparable internal combustion engine vehicles. “Street electric vehicles” included battery, plug-in hybrid, and fuel cell electric cars; SUVs; minivans; and pickup trucks.
For each year, DOE concluded that the modeled incremental cost of all street electric vehicles, other than compact plug-in hybrid electric cars, under 14,000 pounds gross vehicle weight rating would be greater than $7,500. Thus, the credit for these vehicles would not be limited by incremental cost because the modeled amount was more than the credit limit. The incremental cost and credit limit for compact plug-in hybrid electric cars was $7,000.
Notice 2025-9 advises that DOE in January 2025 issued a report updating and refining its analysis and expanding certain vehicle classes. The report includes a table (ES-2) that provides incremental costs for 13 classes of vehicles. The IRS will accept these figures as the incremental cost for a qualified commercial clean vehicle placed in service by a taxpayer after 2024 and not previously placed in service by another person or entity.
Observation: All incremental costs in Table ES-2 exceed the $7,500 credit limit except for compact and mid-size plug-in hybrid electric cars, for which incremental costs are $7,100 and $7,200, respectively.
Notice 2025-9 provides that, for a 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 vehicle when new, based on the safe harbor guidance (Notice 2023-9, 2024-5, or 2025-9) that corresponds to the model year of the vehicle. The safe harbor applies to any qualified commercial clean vehicle placed in service after 2022.
The DOE report also explicitly identified retail price equivalents used in its analysis. Notice 2025-9 advises that taxpayers that do not rely on a safe harbor may use the retail price equivalents from the DOE report in performing their own incremental cost analysis.
The proposed regulations treat a cancelled sale as if it never occurred. The taxpayer may not claim the credit, the credit may be available to another taxpayer for that vehicle, and the subsequent buyer will not be required to apply the residual value rules to determine incremental cost.
A sale also is treated as not having occurred if a taxpayer takes possession of the vehicle and returns it within 30 days. The taxpayer may not claim the credit and the credit may be available to another taxpayer for that vehicle, but the subsequent buyer must apply the residual value rules to determine incremental cost.
A taxpayer that resells the vehicle within 30 days of taking possession is treated as acquiring the vehicle for resale and is ineligible for a credit. The credit may be available to another taxpayer for that vehicle and the subsequent buyer must apply the residual value rules to determine incremental cost.
The proposed regulations provide that a taxpayer may not claim the Section 45W credit if the taxpayer’s business use of the vehicle in the placed-in-service year is less than 100%. The taxpayer must recapture the credit if the taxpayer ceases to use the vehicle for 100% business use or the vehicle is disposed of within 18 months of placing it in service. For a tax-exempt entity, business use may be for an exempt purpose or in an unrelated business. The credit may be available to another taxpayer for that vehicle and the subsequent buyer must apply the residual value rules to determine incremental cost.
The proposed regulations provide that the credit may be claimed on only one tax return. The credit may not be allocated or prorated to multiple taxpayers, except to partners or S corporation shareholders for a vehicle placed in service by the entity. The credit may be claimed by the grantor of a grantor trust.
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