Treasury, IRS Release Proposed Regulations and Procedures for Clean Vehicle Credit Transfers

The U.S. Department of the Treasury and IRS on Oct. 6, 2023, released proposed regulations on the transfer of clean vehicle credits under Internal Revenue Code Section 25E (for previously owned clean vehicles) and Section 30D (for new clean vehicles), along with Revenue Procedure 2023-33, which provides procedures for the transfer of these credits from the taxpayer who elects to transfer such credit to an eligible entity for credits transferred beginning in 2024. The IRS also updated its series of frequently asked questions regarding the new, previously owned and qualified commercial clean vehicle credits. Highlights of the proposed regulations and revenue procedure are below.

Making the Transfer Election

The transfer election allows a taxpayer purchasing a new clean vehicle or previously owned clean vehicle after 2023 to transfer the credit to a registered dealer in exchange for a financial benefit equal to the amount of the credit. The financial benefit may be in cash, in the form of a partial payment or as a down payment for the purchase of such a vehicle. The transfer is entirely voluntary, but if a taxpayer choses to transfer the credit, the entire amount of the credit must be transferred.

A taxpayer can make up to two elections to transfer a clean vehicle credit each tax year. A taxpayer could elect to transfer either A) two clean vehicle credits or B) one clean vehicle credit and one previously owned clean vehicle credit. A taxpayer cannot transfer two previously owned clean vehicle credits. Spouses can each transfer no more than two clean vehicle credits each tax year.

An electing taxpayer must file an income tax return for the taxable year in which the vehicle transfer election took place and must attach a completed Form 8936, Clean Vehicle Credits, to taxpayer Form 1040. If a taxpayer is ineligible for a credit that has been transferred (for example, the taxpayers modified adjusted gross income exceeds the limit to be eligible for the tax credit), the taxpayer must pay the amount received to the IRS. Certain information must be exchanged between the registered dealer and taxpayer prior to the transfer.

Treatment of the Tax Credit Transfer

The payment made by the registered dealer to the taxpayer in the form of cash, down payment or partial down payment is not included in the gross income of the taxpayer. Instead, the payment is treated as an advance payment of the credit to the taxpayer on behalf of the Treasury Department. The basis of the purchased vehicle must be reduced by the amount of such credit.

Advance payments received by the registered dealer are not included in the gross income of the dealer, and the payment made by the registered dealer to the buyer in exchange for the transferred credit is not deductible. Instead, the payment is treated as paid by the taxpayer to the registered dealer as part of the purchase price of the vehicle.

Registration for Dealers

For vehicles purchased after 2023, a taxpayer will be able to claim credits (and, electively, transfer such credits) only if the dealer has registered with the IRS and submits a seller report through IRS Energy Credits Online. The seller report must be done at the time of sale, and a copy must be provided to the taxpayer. The taxpayer must provide the seller identifying information, taxpayer identification number and valid identification for the dealer to submit the seller report. For the seller report to be accepted, the vehicle manufacturer must have submitted the vehicle identification number (VIN) to the IRS as an eligible vehicle.

Advanced Payment to Dealers

Dealers can claim the transferred tax credits only through the advance payment program on IRS Energy Credits Online. A dealer registration option is coming soon, and updates will be posted to the IRS Clean Vehicle Tax Credits web page. Dealers will not be able to claim these tax credits on their tax returns.

A separate registration is required for the advance payment program. To be eligible for advanced payments, the dealer must be in compliance with federal tax laws – meaning, all required federal information and tax returns of the dealer have been filed, including for federal income and employment tax purposes, and that all federal tax, penalties and interest due of the dealer as of the time of sale have been paid. The IRS anticipates deposits will typically occur within 48 to 72 hours of a successfully submitted time of sale report and advance payment request.

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