The qualified commercial clean vehicle credit at IRC §45W added by the Inflation Reduction Act of 2022 that takes effect beginning in 2023 requires taxpayers to reference the incremental cost of their qualified vehicle as one of the factors that can limit the credit. However, in no case can the credit exceed $7,500 for a vehicle with a gross vehicle weight of less than 14,000 pounds, so if the incremental cost is more than $7,500 then it would not serve to limit the amount of the credit.

In Notice 2023-9,[1] the IRS has issued guidance for determining the incremental cost of vehicles for purposes of the credit under IRC §45W, providing for safe harbor values taxpayers may use based on the Department of Energy’s (DOE) 2022 Incremental Purchase Cost Methodology and Results for Clean Vehicles.[2]

DOE Results

The Notice summarizes the results of the DOE’s analysis:

The Department of the Treasury (Treasury Department) has reviewed an incremental cost analysis of current costs by the Department of Energy (DOE) across classes of street vehicles (DOE Analysis). The DOE Analysis modeled the costs of representative commercial clean vehicles and comparable internal combustion engine vehicles. Results of the DOE Analysis show that the modeled incremental cost of all street vehicles, other than compact car PHEVs, that have a gross vehicle weight rating of less than 14,000 pounds will be greater than $7,500 in calendar year 2023.[3]

A compact car PHEV is defined as follows:

Compact cars are defined as those with an interior volume index of less than 110 cubic feet, and for the purpose of the DOE analysis also include minicompact cars, subcompact cars, and compact cars as described in 40 CFR 600.315-08(a)(1)(ii), (iii), and (iv). PHEVs are defined as commercial clean vehicles that use a gasoline or diesel internal combustion engine and are propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of not less than 7 kilowatt hours (15 kilowatt hours in the case of a vehicle with a gross vehicle weight rating of 14,000 pounds or more) and are capable of being recharged from an external source of electricity. See § 45W(b)(1) and (c).[4]

Safe Harbor for Vehicles with a Gross Vehicle Weight of Less than 14,000 Pounds Other Than Compact PHEVs

For cars other than compact car PHEVs, the IRS will accept the taxpayer’s use of an incremental cost of $7,500 for the vehicle:

For all street vehicles (other than compact car PHEVs) with a gross vehicle weight rating of less than 14,000 pounds, the DOE Analysis provides that incremental cost will not limit the available § 45W credit amount for vehicles placed in service in calendar year 2023. Accordingly, the Treasury Department and IRS 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 § 45W credit amount for vehicles placed in service during calendar year 2023.[5]

Safe Harbor for Compact PHEVs

For compact car PHEVs the Notice provides the following safe harbor for computing the vehicle’s incremental cost:

The DOE Analysis calculated the incremental cost for compact car PHEVs, which include minicompact and subcompact cars, to be less than $7,500. The Treasury Department and the Internal Revenue Service (IRS) will accept a taxpayer’s use of the incremental cost published in the DOE Analysis to calculate the § 45W credit amount for compact car PHEVs placed in service during calendar year 2023.

Safe Harbor for Vehicles with a Gross Vehicle Weight of More than 14,000 Pounds

The Notice also provides a safe harbor to use for qualified street vehicles with a gross vehicle weight of more than 14,000 pounds.

In addition, the DOE Analysis provides an incremental cost analysis of current costs for several representative classes of street vehicles with a gross vehicle weight rating of 14,000 pounds or more in calendar year 2023. The Treasury Department and the IRS will accept a taxpayer’s use of the incremental cost published in the DOE Analysis for the appropriate class of street vehicle to calculate the § 45W credit amount for vehicles placed in service during calendar year 2023.

Table of Incremental Costs

The Department’s table of incremental costs[6] is provided below:

BEV stands for “battery electric vehicle,” PHEV stands for “plug-in hybrid electric vehicle” and FCEV stands for “fuel cell electric vehicle.”

The gross vehicle weight rating for the various classes of vehicles are found in Table 1[7] of the Department of Energy’s document.

[1] Notice 2023-9, December 29, 2022, https://www.irs.gov/pub/irs-drop/n-23-09.pdf (retrieved December 29, 2022)

[2] 2022 Incremental Purchase Cost Methodology and Results for Clean Vehicles, Department of Energy, December 23, 2022, https://www.energy.gov/sites/default/files/2022-12/2022.12.23%202022%20Incremental%20Purchase%20Cost%20Methodology%20and%20Results%20for%20Clean%20Vehicles.pdf (Retrieved December 29, 2022)

[3] Notice 2023-9, December 29, 2022, Section 2

[4] Notice 2023-9, December 29, 2022, Section 2, Footnote 3

[5] Notice 2023-9, December 29, 2022, Section 3

[6] 2022 Incremental Purchase Cost Methodology and Results for Clean Vehicles, Department of Energy, December 23, 2022, Table 5

[7] 2022 Incremental Purchase Cost Methodology and Results for Clean Vehicles, Department of Energy, December 23, 2022, Table 1