The Internal Revenue Service (IRS) has released proposed regulations providing guidance on the qualified commercial clean vehicle credit under Section 45W of the Internal Revenue Code (IRC). This credit, enacted as part of the Inflation Reduction Act of 2022 (IRA), offers a significant tax benefit to businesses investing in clean transportation. These proposed regulations aim to clarify several aspects of the credit, including the definition of qualified vehicles, the calculation of the credit amount, and reporting requirements.

Authority and Background

The proposed regulations are issued under the authority granted by several sections of the IRC, including:

Section 25E(e): Relating to the credit for previously-owned clean vehicles.
Section 30D(d)(3) and (f)(5): Relating to the credit for new clean vehicles, particularly regarding qualified manufacturers and recapture rules.
Section 45W(c)(1), (d)(1), and (f): The core section for these regulations, providing the rules for the qualified commercial clean vehicle credit, and specifically delegating authority to the Secretary to issue regulations to carry out the purposes of this section, including those related to determining incremental costs.
Section 6417(h): Authorizing regulations for elective payments for certain tax-exempt entities.
Section 7805(a): Authorizing the Secretary to prescribe rules and regulations for the enforcement of the Code.

The Section 45W credit was added to the IRC by the Inflation Reduction Act of 2022. It is a general business credit under Section 38 of the Code and is effective for vehicles placed in service after December 31, 2022. This credit is one of three related clean vehicle credits, which also include Section 25E (previously-owned clean vehicles) and Section 30D (new clean vehicles).

Key Definitions

The proposed regulations introduce several important definitions that practitioners need to understand. These include:

Battery: A collection of one or more battery modules, each having two or more battery cells.
Battery Electric Vehicle (BEV): A vehicle powered by an electric motor that draws electricity from a battery, not using a gasoline or diesel internal combustion engine (ICE).
Fuel Cell Electric Vehicle (FCEV): A vehicle powered by an electric motor that draws electricity from a fuel cell system.
Gross Vehicle Weight Rating (GVWR): The maximum weight of the vehicle as specified by the manufacturer.
Manufacturer: Defined by reference to EPA regulations under the Clean Air Act (CAA), aligning with the definition in Section 30D(d)(3). For vehicles with multiple manufacturers, the reporting requirements must be met by the manufacturer who reports greenhouse gas emissions under the CAA.
Placed in Service: The date the taxpayer takes possession of the vehicle.
Plug-in Hybrid Electric Vehicle (PHEV): A vehicle that uses batteries that can be recharged from an external source of electricity to power an electric motor, and also has a gasoline or diesel ICE.
Plug-in Hybrid Fuel Cell Electric Vehicle (PHFCEV): A vehicle that uses batteries that can be recharged from an external source of electricity to power an electric motor and a hydrogen fuel source to power an electric motor through a fuel cell system.
Qualified Commercial Clean Vehicle: A vehicle that meets the requirements of Section 45W(c) and is made by a qualified manufacturer, who provides a periodic written report, with a vehicle identification number, certifying compliance with Section 45W(c).
Qualified Manufacturer: A manufacturer that meets the requirements described in Section 30D(d)(3) at the time it submits a periodic written report to the IRS, and has not had its status terminated by the IRS for fraud, intentional disregard, or gross negligence.
Secretary: Has the meaning provided in Section 7701(a)(11)(B) of the Code.
Section 45W Regulations: Refers to §§1.45W-1 through 1.45W-5.

Calculating the Credit Amount

The credit amount is determined by Section 45W(b)(1), which states that the amount is equal to the lesser of:

15% of the basis of the vehicle (or 30% if the vehicle is not powered by a gasoline or diesel ICE), or
The incremental cost of the vehicle.

There are also limitations based on the vehicle’s gross vehicle weight rating (GVWR):

Vehicles with a GVWR of less than 14,000 pounds: The maximum credit is $7,500.
Vehicles with a GVWR of 14,000 pounds or more: The maximum credit is $40,000.

Incremental Cost

The proposed regulations define incremental cost as the excess of the purchase price of the clean vehicle over the price of a “comparable vehicle”. A “comparable vehicle” is defined as a vehicle powered solely by a gasoline or diesel ICE that is comparable in size and use.

The proposed regulations would define “comparable in size and use” by considering factors such as the number of doors, cargo capacity, drivetrain type, and trim level. Furthermore, if the manufacturer of the clean vehicle also produces an equivalent ICE vehicle, then that ICE vehicle will be the basis of determining the incremental cost.

The proposed regulations also provide specific rules for determining the cost of the powertrain of different types of vehicles, including BEVs, PHEVs, FCEVs, and PHFCEVs. The cost of the powertrain is determined by using a Retail Price Equivalent (RPE). The RPE is the ratio of the manufacturer’s suggested retail price (MSRP) of the vehicle to the manufacturer’s cost to manufacture the vehicle. The MSRP includes the retail price and retail delivered price suggested by the manufacturer. The IRS intends to publish RPE safe harbors for different market segments.

In instances where the cost calculation results in a negative number (the clean vehicle powertrain cost is less than the ICE powertrain cost) or in which no comparable vehicle exists, the incremental cost is considered to be zero.

Reliance on Manufacturer Information

The proposed regulations allow taxpayers to rely on a qualified manufacturer’s calculation of a vehicle’s incremental cost, provided the manufacturer provides written documentation, and the taxpayer retains such documentation. Taxpayers may also use safe harbor amounts provided in IRS guidance.

Used Clean Vehicles

The incremental cost of a used qualified commercial clean vehicle is calculated by multiplying the incremental cost of the vehicle when new by a residual value factor determined by the age of the vehicle. The age of a vehicle is determined by subtracting the model year of the vehicle from the calendar year in which the taxpayer places the vehicle in service. The residual value factor will be based on the age of the vehicle and will be based on manufacturer’s information or safe harbor guidance.

Qualification Requirements

To be considered a qualified commercial clean vehicle, a vehicle must meet specific requirements outlined in Section 45W(c) and the proposed regulations.

Acquisition: The vehicle must be acquired for use or lease by the taxpayer, not for resale. Leasing must be a legitimate lease and not a sale disguised as a lease.
Vehicle Type: The vehicle must either be:
- A motor vehicle treated as such under the Clean Air Act (CAA), manufactured primarily for use on public streets, roads, and highways, or
- Mobile machinery, as defined in Section 4053(8) of the Code. Mobile machinery is machinery that performs a function such as off-road construction equipment, forestry equipment, utility vehicles, etc. and may not be designed to carry a load over the public highways.
Electric Motor and Battery: The vehicle must be propelled to a significant extent by an electric motor that draws electricity from a battery, which can be recharged from an external source of electricity. A regenerative braking system is not considered an external source. Thus, hybrid electric vehicles (HEVs) do not meet this qualification requirement.
Qualified Manufacturer: The vehicle must be made by a qualified manufacturer, who is required to provide periodic reports to the IRS.

Special Rules

The proposed regulations include several special rules that may impact a taxpayer’s ability to claim the credit.

No Double Benefit: A vehicle is only eligible for the Section 45W credit once, and a vehicle for which a credit was previously allowed under Section 30D is not eligible for the Section 45W credit. Furthermore, any deduction or other credit for which the vehicle is eligible must be reduced by the amount of the Section 45W credit.
Vehicles Previously Placed in Service: While not explicitly prohibited in the statute, the proposed regulations specify that a taxpayer claiming a Section 45W credit on a used vehicle must maintain sufficient evidence to demonstrate that no prior credit under Sections 30D or 45W has been claimed, and if there was a prior credit under Section 25E, the amount of such prior credit.
Cancelled Sales, Returns, and Resales: If a sale of a vehicle is cancelled before it is placed in service, the taxpayer may not claim the credit, though the vehicle remains eligible. If a vehicle is returned within 30 days of being placed in service, the taxpayer cannot claim the credit, and the vehicle is still eligible, however, subsequent buyers must use the residual value rules for used vehicles. A resale within 30 days is treated as a purchase for resale, rendering the taxpayer ineligible for the credit, with subsequent buyers also having to use the residual value rules.
Business Use Requirement: The vehicle must be used 100% for trade or business use (with limited exceptions for incidental personal use) for the full tax year in which the vehicle was placed in service. The business use requirement also applies to tax-exempt entities, which are required to use the vehicle in connection with an exempt purpose or an unrelated trade or business purpose.
Recapture: If a vehicle ceases to be used 100% for trade or business use within 18 months of being placed in service, the taxpayer may not claim the credit, or the credit will be recaptured, and subsequent buyers of the vehicle must use the used vehicle rules. These recapture rules apply similarly to tax-exempt entities.
Elective Payment Election: For tax-exempt entities, Section 6417 provides the ability to elect to treat the section 45W credit as a payment of tax (a “direct pay” option), resulting in a potential refund. The rules also provide that the credit continues to be determined without regard to section 50(b)(3) and (4)(A)(i) and any property is treated as used in a trade or business.
Leases: A vehicle is considered subject to a lease by a tax-exempt entity if it is leased within 30 days of being placed in service.

Reporting Requirements

Vehicle Identification Number (VIN): Taxpayers must include the VIN of the vehicle on their tax return to claim the credit. If an integrated vehicle identification system is implemented in the future, a unique identifier may be needed in place of a traditional VIN.
One Credit Per Vehicle: Generally, the credit can be claimed on only one tax return. This rule also applies to joint returns where the vehicle is titled to only one of the spouses. There is no allocation or proration of the credit allowed between taxpayers. For grantor trusts, partnerships, and S corporations, the credit is allocated to the grantor, partners, or shareholders, respectively.
Reliance on Manufacturer Certifications: Taxpayers may rely on the certifications and information in qualified manufacturers’ written reports to the IRS.

Areas for Further Consideration

The proposed regulations also raise certain issues that the Treasury Department and IRS continue to study, and for which they request public comments, most notably with respect to off-road vehicles.

Off-Road Vehicles and Mobile Machinery: The definition of “mobile machinery” under section 4053(8) is an area of complexity, especially in the context of off-road vehicles. The proposed regulations acknowledge a tension between the desire to expand the scope of the credit to include off-road vehicles, and the practical administrative challenges associated with a broad definition of mobile machinery. This also raises questions regarding the vehicle identification number requirement.
Integrated VIN System: The proposed rules suggest the possibility of an integrated system for assigning VINs, and solicit feedback from taxpayers regarding how the new system can be implemented most effectively.
Manufacturers of Only Off-Road Vehicles: Current regulations might exclude manufacturers that exclusively manufacture off-road vehicles from being considered qualified manufacturers.
Fuel Cell Vehicles: The proposed rules could exclude off-road vehicles powered by fuel cells.
DOT Safety Standards: The proposed regulations solicit comments on whether DOT safety regulations can be applied to off-road vehicles.
Math Error Authority: The proposed rules could broaden the definition of “vehicle identification number” to encompass off-road mobile machinery.

Applicability Dates

The proposed regulations are set to apply to taxable years ending after the date of publication of the final regulations in the Federal Register.

Conclusion

These proposed regulations provide extensive guidance on the Section 45W credit for qualified commercial clean vehicles. CPAs in tax practice must familiarize themselves with these rules, especially the definitions, calculation methods, and special rules. Understanding the complexities of incremental cost calculations, the requirements for vehicle qualification, and the reporting obligations, will be crucial to advising clients on maximizing their eligibility for this valuable credit. As the proposed rules are open for public comment, tax professionals should consider submitting their comments as well.

Prepared with assistance from Notebook LM.

The proposed regulations can be downloaded from: https://public-inspection.federalregister.gov/2025-00256.pdf