In brief

The Inflation Reduction Act of 2022 (IRA) created, extended, and expanded a number of tax credits intended to address the impact of climate change, including credits that apply to the purchase of ‘clean’ vehicles. The IRS and Treasury have released interim guidance on these credits:

• Notice 2023-1 and a white paper on the Section 30D clean vehicle credit,
• Notice 2023-9 on the Section 45W clean commercial vehicle credit, and
• FAQs on the Section 30D and Section 45W credits and the Section 25E credit on previously owned clean vehicles.

For consideration: These clean vehicle credits will begin to apply to vehicles purchased in 2023. Proposed regulations may be forthcoming in the near future.

Notice 2023-1/Section 30D

Notice 2023-1

Notice 2023-1 provides definitions of certain terms used in Section 30D that are expected to be included in proposed regulations.

Final assembly means the process by which a manufacturer produces a new clean vehicle at a plant or factory from which the vehicle is delivered to a dealer or importer with all component parts necessary for the vehicle’s mechanical operation, whether or not permanently installed. To establish the location of final assembly, a taxpayer may rely on either (1) the vehicle’s plant of manufacture as reported in the vehicle identification number or (2) the final assembly point reported on the label affixed to the vehicle.

North America means the territory of the United States, Canada, and Mexico.

Manufacturer’s suggested retail price is the sum of (1) the retail price of the automobile suggested by the manufacturer and (2) the manufacturer’s suggested retail delivered price for each accessory or item of optional equipment physically attached to the vehicle when delivered to the dealer and not included in the price of the automobile. MSRP is reported on the label affixed to the vehicle windshield or side window.

Vehicle classifications for purposes of determining the MSRP limitation for each vehicle are to be determined for vans, SUVs, pickup trucks, and other vehicles consistent with EPA regulations at 40 CFR 600.002.

A new clean vehicle is considered to be placed in service on the date a taxpayer takes possession.

Notice 2023-1 states that it is not proposed guidance on critical minerals and battery components and does not trigger those requirements.

Treasury white paper

The Treasury white paper discusses definitions and rules relating to the critical mineral and battery component requirements that are anticipated to be included in proposed regulations.

For critical minerals, the white paper describes definitions for terms such as extraction, recycling, processing, and free trade agreement. Because of the complexity of battery supply chains, the IRS and Treasury anticipate proposing a transition rule that would provide for a three-step process for a manufacturer to determine compliance with the critical mineral requirements:

(1) Determine the procurement chains for each critical mineral,

(2) Evaluate each critical mineral procurement to determine whether the critical minerals meet the requirements for where the minerals were extracted, processed, or recycled, and

(3) Calculate the percentage of the value in a battery of the critical minerals that meet the requirements.

For battery components, the white paper provides expected definitions for terms such as battery component, manufacturing, and assembly.  An anticipated proposed rule would apply four steps to determine the percentage of the value of battery components that meet the battery component requirement:

(1) Determine whether each battery component was manufactured or assembled in North America,

(2) Determine the incremental value for each battery component,

(3) Determine the value of all battery components by totaling the incremental values of each battery component, and

(4) Calculate the percentage of the value of the battery components that were manufactured or assembled in North America by dividing the total incremental value of battery components that were manufactured or assembled in North America by the value of all battery components.

Notice 2023-9/Section 45W

Notice 2023-9 provides a safe harbor for determining the incremental cost of a clean vehicle in relation to a vehicle comparable in size and use powered solely by gas or diesel. The safe harbor is based on a Department of Energy incremental cost analysis that concludes that the modeled incremental cost of all street vehicles, other than compact car plug-in hybrid electric vehicles (PHEVs), that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500 in calendar year 2023.

Thus, incremental cost will not limit the allowable Section 45W credit amount for vehicles placed in service in calendar year 2023, and the IRS and Treasury will accept a taxpayer’s use of $7,500 as the incremental cost for all street vehicles, other than compact car PHEVs, with a gross vehicle weight rating of less than 14,000 pounds to calculate the Section 45W credit amount for vehicles placed in service during calendar year 2023.

FAQs

The IRS FAQs provide extensive general information for consumers on the Section 30D, 45W, and 25E clean vehicle credits.

Note:  The FAQs include a disclaimer that advises that they have no precedential value and taxpayers may not rely on the information, but that a taxpayer that reasonably and in good faith relies on an FAQ is not subject to penalties. Additional information on the effect of IRS FAQs is available on irs.gov.