IRS Updates Incremental Cost Safe Harbor for Clean Vehicle Credit

Notice 2025-9 provides updated safe harbors for calculating the incremental cost and retail price equivalent (RPE) of qualified commercial clean vehicles for the purposes of the section 45W credit. It builds upon previous guidance, specifically:

  • Incremental Cost: For vehicles placed in service on or after January 1, 2025, the notice allows taxpayers to use the modeled incremental cost published in the Department of Energy’s (DOE) January 2025 Report to determine the incremental cost of a qualified commercial clean vehicle. This report updates the analysis of component and vehicle manufacturing costs and expands the medium- and heavy-duty vehicle classes previously analyzed. The incremental cost is used to determine the lesser of (1) 15% of the taxpayer’s basis in the vehicle (or 30% if the vehicle is not powered by a gasoline or diesel internal combustion engine) or (2) the incremental cost of the vehicle which is used to calculate the credit up to its maximum amount for the vehicle. Under IRC §45W(b)(4), the maximum credit allowed is $7,500 for a qualified commercial clean vehicle that has a gross vehicle weight rating (GVWR) of less than 14,000 pounds (Class 3 and below), and $40,000 for all other vehicles.

  • Used Vehicles: The notice clarifies the application of prior guidance (Notices 2023-9 and 2024-5) to vehicles that were previously placed in service by another person or entity. For these vehicles, taxpayers can use the modeled incremental cost of the vehicle when it was new, based on the IRS safe harbor guidance that corresponds to the model year of the vehicle, and then apply the rules found in proposed §1.45W-2(f) of the proposed regulations to establish the incremental cost. This involves multiplying the original incremental cost by a residual value factor that corresponds to the age of the vehicle. This safe harbor can be applied to any qualified commercial clean vehicle placed in service after December 31, 2022.

  • Retail Price Equivalent (RPE): The DOE’s January 2025 Report also identifies the RPEs used in its analysis. Taxpayers who don’t use a modeled incremental cost safe harbor can use the RPEs published in table 4 of the DOE’s January 2025 Report to calculate the incremental cost of qualified commercial clean vehicles. This applies to vehicles placed in service after December 31, 2022.

  • Prior Notices: Notice 2025-9 amplifies and clarifies previous notices (2023-9 and 2024-5). It specifically clarifies how to determine incremental costs for previously owned vehicles and provides the option to use the RPEs published in the DOE’s January 2025 report.

New Vehicle Incremental Purchase Cost - BEV

The 2025 incremental purchase costs for Battery Electric Vehicles (BEV) compared to Internal Combustion Engine (ICE) vehicles, as detailed in the Department of Energy’s (DOE) January 2025 report, are as follows:

  • Compact Car: $7,900
  • Midsize Car: $9,600
  • Midsize SUV: $11,000
  • Pickup Truck: $18,800
  • Class 3: $15,800
  • Class 4: $30,000
  • Class 5: $40,000
  • Class 6: $40,000
  • Class 7 Bus: $40,000
  • Class 7 Tractor: $81,000
  • Class 8 Transit: $107,000
  • Class 8 Regional: $112,000
  • Class 8 Longhaul: $243,000

These incremental costs represent the difference in purchase price between a BEV and a comparable ICE vehicle, focusing on powertrain-related elements.

New Vehicle Incremental Purchase Cost - PHEV

The 2025 incremental purchase costs for Plug-in Hybrid Electric Vehicles (PHEV) compared to Internal Combustion Engine (ICE) vehicles, as detailed in the Department of Energy’s (DOE) January 2025 report, are as follows:

  • Compact Car: $7,100
  • Midsize Car: $7,200
  • Midsize SUV: $8,000
  • Pickup Truck: $9,300
  • Class 3: $29,500
  • Class 4: $44,000
  • Class 5: $32,000
  • Class 6: $54,000
  • Class 7 Bus: $50,000
  • Class 7 Tractor: $95,000
  • Class 8 Transit: $102,000
  • Class 8 Regional: $131,000
  • Class 8 Longhaul: $237,000

These incremental costs represent the difference in purchase price between a PHEV and a comparable ICE vehicle, focusing on powertrain-related elements.

Used Vehicles Incremental Cost

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. This calculation is based on the tables provided in proposed §1.45W-2(f)(3).

Here’s a breakdown of the process:

  • Determine the vehicle’s age: The age of a used vehicle is calculated by subtracting the model year of the vehicle from the calendar year in which the taxpayer places the vehicle in service. If the result is zero or negative (which can occur if a vehicle is sold more than once before the calendar year corresponding to its model year), it is treated as zero. For example, if a model year 2025 vehicle is placed in service in calendar year 2025, the vehicle’s age is zero.
  • Identify the vehicle class: The appropriate residual value factor table is determined by the vehicle’s Gross Vehicle Weight Rating (GVWR). There are two tables provided, one for Class 1-3 vehicles (Table 1), and one for Class 1-8 vehicles (Table 2). Table 1 is for light-duty vehicles, including passenger cars and light trucks, and Table 2 is for all classes, including medium and heavy duty vehicles.
  • Find the residual value factor: Once the vehicle’s age and class are determined, the corresponding residual value factor can be found in the appropriate table. The residual value factor is a percentage that represents the remaining value of the vehicle based on its age.
  • Calculate the incremental cost: Multiply the incremental cost of the vehicle when new by the residual value factor to determine the incremental cost of the used vehicle. This is the incremental cost that is used when determining the section 45W credit. The incremental cost of the vehicle when new can be the actual calculated cost, or, the safe harbor incremental cost of the vehicle from IRS guidance that corresponds to the model year of the vehicle.

Example: A model year 2025 battery electric car (BEV car) with a GVWR of 3,900 pounds and an original incremental cost of $15,000 is sold to a new owner in December 2025.

  • The vehicle’s age is 0 years (2025 - 2025 = 0).
  • The vehicle is a Class 1 passenger car, so the appropriate table is Table 2.
  • The residual value factor for a Class 1 passenger car that is 0 years old is 70%.
  • The incremental cost of the used vehicle is $10,500 ($15,000 * 0.70).

This calculated incremental cost for the used vehicle is then compared to 30% of the taxpayer’s basis in the vehicle to determine the appropriate section 45W credit amount.

The residual value factors in the tables reflect an analysis conducted by the DOE with respect to the decline in the value of vehicles with ICE powertrains over time.

Prepared with the assistance of of NotebookLM

Download Notice 2025-9 at this link: https://www.irs.gov/pub/irs-drop/n-25-09.pdf

Download 2025 Incremental Purchase Cost Methodology and Results for Clean Vehicles at this link: https://www.energy.gov/sites/default/files/2025-01/2025.01.13_DOE_Incremental_Cost_Report_for_publication.pdf