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Tom Talks Taxes - September 23, 2022
An overview of the new §45W qualified commercial clean vehicle credit
In prior editions, I reviewed the revised §30D clean vehicle credit and the new §25E previously-owned clean vehicle credit; this week, I’m doing an overview of the brand new §45W credit for qualified commercial clean vehicles.
The §45W credit is available for qualified commercial clean vehicles placed into service after December 31, 2022, and before January 1, 2033. It is part of the §38 general business credit.
The §45W credit amount is 15% of the vehicle’s basis but increases to 30% for a vehicle not powered by a gasoline or diesel internal combustion engine.
The vehicle credit amount cannot exceed:
The vehicle’s incremental cost, which is the difference between the clean vehicle’s cost and the cost of an equivalent vehicle solely powered by a gasoline or diesel internal combustion engine, and
$40,000 (reduced to $7,500 for vehicles with a gross vehicle weight rating of less than 14,000 pounds).
Determining a vehicle's incremental cost could be daunting; however, the statute states the IRS should issue guidance on this specific issue.
A qualified commercial clean vehicle is one made by a §30D(d)(1)(C) manufacturer that is acquired for use or lease by the taxpayer (but not for resale) and of a character subject to depreciation. In addition, it must meet both vehicle type and clean energy requirements.
For the vehicle type requirement, the vehicle must be either:
A §30D(d)(1)(D) Clean Air Act vehicle manufactured primarily for use on public streets, roads, and highways (not including a vehicle operated exclusively on a rail or rails), or
§4053(8) mobile machinery (including vehicles not designed to transport a load over the public highways).
For the clean energy requirement, the vehicle must be either:
A fuel cell vehicle meeting §30B(b)(3)(A), (B) requirements, or
Propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of not less than 15 kilowatt hours (or 7 kilowatt hours in the case of a vehicle that has a gross vehicle weight rating of less than 14,000 pounds) and is capable of being recharged from an external source of electricity.
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The following rules apply to the §45W credit:
The credit amount reduces the vehicle basis.
Any other deduction or credit allowed for a vehicle is reduced by the §45W credit amount.
A vehicle used predominantly outside the United States is ineligible.
The IRS can recapture the credit for a vehicle that ceases to be eligible.
A taxpayer can elect not to claim the §45W credit.
The vehicle must meet certain air quality and safety standards.
Only one §45W credit is allowed per vehicle, based on the vehicle identification number (VIN), and the VIN must be provided on the taxpayer’s return. In addition, a taxpayer cannot claim a §45W credit for a vehicle for which the taxpayer received a §30D credit.
Here are planning considerations for business vehicles:
A business can claim either a §30D or a §45W credit for a clean vehicle.
§45W has fewer restrictions: no cost limit, no requirements for critical minerals and battery components, and no North America final assembly requirement.
Higher-income taxpayers may only be able to claim a §45W tax credit since there is no income limitation on this credit.
Since the §45W credit reduces vehicle basis, it reduces total depreciation deductions with respect to the vehicle.
For a sole proprietor, the eligible amount for the §45W credit would generally be the depreciable basis, which depends on the taxpayer’s business use percentage for the vehicle.
For a corporation, the entire cost basis is generally eligible for the §45W credit; however, any personal use of the vehicle by a business owner would be imputed income to that owner.
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