This month, Treasury and the IRS released proposed regulations and Revenue Procedure 2023-33 to provide guidance for taxpayers electing to transfer credits under sections 25E (previously owned clean vehicle credit) and 30D (new clean vehicle credit) to dealers and for dealers to become eligible entities to receive advance payments of these credits.

Transfers of clean vehicle credits from taxpayers to certain dealers referred as "eligible entities" under section 30(D)(g)(2) are allowed starting on January 1, 2024. Section 30D, as modified by the 2022 Inflation Reduction Act (IRA), provides a maximum credit of $7,500 for each qualifying new clean vehicle: $3,750 for meeting critical mineral requirements and an additional $3,750 for meeting battery component requirements. Vehicles must have their final assembly occur in North America and must not exceed certain manufacturer's recommended retail price thresholds. Further, the purchaser's modified adjusted gross income must not exceed $300,000 for taxpayers married filing jointly, $225,000 for taxpayers filing head of household, and $150,000 for others. The battery component and critical mineral sourcing requirements are detailed in the proposed regulations published in April 2023 and our previous alert.

Section 30D(g) applies to vehicles placed in service after December 31, 2023, and provides a mechanism by which vehicle purchasers can make an election to have the credit be available to an "eligible entity," which is the dealer who sells the vehicle to the taxpayer and meets certain requirements. The provision sets forth several rules relating to the requirements of being an eligible entity, the timing of the transfer, the tax treatment of payments, advance payments to dealers, and recapture. Thus, section 30D(g) allows a qualifying dealer to claim the credit rather the purchaser-taxpayer. Under section 30D(g)(7), the IRS is to establish a program to make "advanced payments to any eligible entity [i.e., a qualifying dealer] in an amount equal to the cumulative amount of credits" for which a transfer election is made.

Section 25E allows a credit for a qualifying buyer who places in service a previously owned clean vehicle equal to the lesser of $4,000 or 30 percent of the vehicle sales price. Section 25E(f) states that rules similar to the rules of section 30D(g) apply with respect to the transfer of the credit.

Taxpayer Election and Advanced Payment Program

Under the Proposed Regulations, "electing taxpayer" means an individual that purchases and places in service a clean vehicle and elects to transfer a credit associated with that vehicle. The taxpayer must make certain attestations regarding meeting the modified adjusted gross income limitation for the section 30D or 25E credit or using the vehicle predominantly for personal use for the section 30D credit. Additionally, the taxpayer must not have been allowed a section 25E credit in the prior three years. The transfer election must be made by the taxpayer no later than at the time of sale (i.e., the date the taxpayer takes possession of the vehicle) and is irrevocable. The taxpayer must transfer the entire amount of the credit. The eligible entity is allowed the credit and in exchange must pay the taxpayer an amount equal to the transferred credit either in cash or in the form of a partial or down payment. The taxpayer is limited to two transfer elections per taxable year either for two section 30D credits or for one section 30D credit and one section 25E credit.

Tax Returns and Consequences

The section 25E and 30D credits are non-refundable credits, but this limitation effectively does not apply in cases where the taxpayer makes an election to transfer the credit to the dealer. In such cases, the credit amount for transfer may exceed the taxpayer's regular tax liability for the taxable year the sale occurs, and the excess is not subject to recapture except where the vehicle ceases to be the property eligible for the credit under section 30D(f)(5) or the taxpayer exceeds the modified adjusted gross income limitation under 30D(f)(10).

The payment made by the eligible entity to the taxpayer is not includible in the taxpayer's gross income and is treated as repaid by the taxpayer to the eligible entity as part of the vehicle purchase price with respect to the basis reduction rule in section 30D(f)(1). In the case of a credit not allowable because the purchaser of the vehicle exceeds the modified adjusted gross income threshold set out in section 30D(g)(10), the tax imposed on the taxpayer is increased by the amount of the payment received by the taxpayer pursuant to the transfer election.

For an eligible entity, an advance payment is not includible in the eligible entity's gross income for the taxable year the payment is received, consistent with section 30D(g)(5). The payment may exceed the eligible entity's regular tax liability.

The eligible entity may not deduct the payment made to the taxpayer. The taxpayer is treated as paying the eligible entity the amount of the transferred credit as part of the vehicle purchase price and this payment amount is treated as part of the amount realized by the eligible entity under section 1001 from the sale of the vehicle.

In the case of any advance payment that the IRS determines "excessive," the tax imposed on the eligible entity for the taxable year the determination is made will be increased by the amount of the excessive payment, plus an amount equal to 20 percent of such excessive payment. For this purpose, "excessive payment" means an advance payment made to a registered dealer that fails to meet the requirements to be an eligible entity or made to an eligible entity with respect to a vehicle to the extent the payment exceeds the amount of the credit allowable. This additional payment will not apply if the eligible entity demonstrates to the IRS that the excessive payment was due to reasonable cause and has a vehicle returned within thirty days of placing it in service.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.