Following guidance issued in the summer of 2023 on the ability of taxpayers and tax-exempt entities to monetize energy-related federal tax credits either through transfer of the credit or a direct payment from the government, the Internal Revenue Service, in October 2023, issued Rev. Proc. 2023-33, IRS Fact Sheet FS 2023-22, and proposed regulations addressing transfers of the new Clean Vehicle Credit and the Used Clean Vehicle Credit.
While the IRS is still working to decide if individuals should be able to be transferees of the business clean energy credits, this new guidance is directed at individuals, vehicle manufacturers, vehicle sellers, and vehicle dealers. It also adds a few clarifications of the commercial clean vehicle credit.
The proposed regulations are generally effective beginning in 2024. Form 8936 is available for claiming the Clean Vehicle Credit and the Used Clean Vehicle Credit. At the beginning of November 2023, the IRS opened its initial version of its online portal, the IRS Energy Credits Online Portal, for registering as a manufacturer or dealer and eventually for reporting transfer transactions.
Clean Vehicle Credit
The proposed regulations treat as a mathematical error the omission of the required correct vehicle identification number on a tax return or the insertion of an invalid VIN that does not match any VIN reported by a qualified manufacturer or if the VIN reported by the taxpayer and the dealer do not match. As a mathematical error, the IRS can make the change on the return and send the taxpayer the resulting adjustment in tax due. Treatment as a mathematical error also applies to the Clean Commercial Vehicle Credit.
In order to claim the Clean Vehicle Credit, the taxpayer must file an income tax return for the year the clean vehicle is placed in service, including Form 8936 with the return.
Guidance is provided with respect to the jurisdictions in which a dealer may make sales.
The proposed regulations address issues with the cancellation of the sale, the return of the vehicle, and the resale of a clean vehicle. The credit would not be available if the vehicle is returned within 30 days of being placed in service. A vehicle resold within 30 days of being placed in service is presumed to have been purchased for resale and it would not qualify for either the new or used vehicle credits, and any credit claimed that was transferred would be recaptured from the taxpayer, not the dealer. The IRS could also disallow a credit if, based upon a facts and circumstances analysis, the agency determines that the vehicle was acquired with the intention to resell or return it.
Used Clean Vehicle Credit
The proposed regulations address which used vehicles qualify for the Used Clean Vehicle Credit. A vehicle remains eligible for the credit even if the title indicates that the vehicle has been previously damaged. The credit may not be divided among multiple owners of a vehicle. A taxpayer may look to either the year the vehicle was placed in service or the prior year in determining whether the modified adjusted gross income limit is satisfied. These requirements are similar to those previously promulgated for the new Clean Vehicle Credit.
A first transfer rule requires that a qualified sale must be the first transfer of the used clean vehicle since Aug. 16, 2022. This could be verified by checking with the dealer’s vehicle history report or doing an independent examination.
A used vehicle’s sales price includes delivery charges and fees and charges imposed by the dealer. It does not include identified taxes and fees, separate financing, or extended warranty or maintenance service charges.
The transfer election
The proposed regulations put several rules in place with respect to an election to transfer a clean vehicle credit to a dealer. The transfer can exceed the electing taxpayer’s regular tax liability and would not be subject to recapture for that reason. The cash received from the transfer election is not included in taxable income and the dealer does not receive a deduction. The cash does reduce the taxpayer’s basis in the vehicle.
Both the electing taxpayer and the dealer make detailed disclosures to the other, including some disclosures on the IRS portal. The disclosures are to be made by the time of sale.
Registration and reporting
The IRS has now set up the IRS Energy Credits Online Portal for registration by manufacturers, sellers and dealers. If the IRS accepts the registration, it will issue a unique identification number. Taxpayers and sellers may rely on certifications by a qualified manufacturer that a vehicle is eligible for the credits.
Manufacturers and dealers may rely on the procedures described in Rev. Proc. 2022-42 for written reports to the IRS before Jan. 1, 2024. Starting in 2024, the written agreements must be entered on the online portal.
Sellers are required to file their reports to the IRS portal with a copy to the taxpayer within three calendar days of the sale. If the report is rejected by the IRS, the seller must notify the buyer within three calendar days.
Advance payments to dealers
The proposed regulations authorize advance payments to be made to registered dealers for the transferred credits, rather than waiting until the dealer’s tax return is filed. In order to receive advance payments, the dealer must be in tax compliance with the IRS for the most recent five-year period and in compliance with portal disclosure requirements.
The dealer is also required to retain documentation of the transfer for at least three years. The advance payments will only be made through electronic payments.
The transfer of credits may be a little slow to take off as dealers and sellers work to comply with the registration process. The IRS portal is now available, however, at least for the registration part of the process. The portal is expected to be able to accept transfer documentation before the end of 2023.
Comments on the proposed regulations must be received by Dec. 11, 2023.
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