Close Close
ThinkAdvisor
Robert Bloink and William H. Byrnes

Financial Planning > Tax Planning

IRS Proposes Electric Car Tax Credits for Down Payments

By Robert Bloink By William H. Byrnes

X
Your article was successfully shared with the contacts you provided.

What You Need to Know

  • With the inflation Reduction Act, qualifying taxpayers will be eligible for substantial tax credits on clean energy vehicles starting in 2024.
  • The IRS has proposed allowing eligible taxpayers to transfer the credit to their car dealer at the time of sale.
  • The credit transfer system may make access to clean vehicles more attainable to taxpayers.

The Inflation Reduction Act of 2022 offers taxpayers a valuable tax incentive to choose clean energy vehicles when shopping for a new or previously owned car. Starting in 2024, qualifying taxpayers will be eligible for a tax credit of up to $7,500 for qualifying new clean vehicles and up to $4,000 for used clean vehicles.

Now, the Internal Revenue Service has released proposed regulations that would make the tax credit even more appealing. If finalized, eligible taxpayers would be able to transfer the credit to their car dealer at the time of sale, reducing the up-front cost of the vehicle. 

The IRS has released detailed rules that would govern these transfers of clean energy credits — and both prospective car buyers and dealers should pay close attention to the fine print.

Using EV Tax Credit to Buy a Car: The Basics

Beginning in 2024, proposed IRS regulations would allow buyers of eligible green energy vehicles to transfer their tax credits under IRC Sections 30D or 25E to the dealer in return for either (1) cash or (2) for use as a down payment on the vehicle. 

Taxpayers will be permitted to transfer up to two clean vehicle tax credits per year, either in the form of two clean vehicle credits or one clean vehicle credit and one previously owned clean vehicle credit. The buyer must also transfer the full amount of the credit.

The buyers will be able to transfer the credit (for both new and previously owned clean vehicles) regardless of their individual tax liability. However, if the taxpayer is later found to be ineligible for the credit because income totals exceed restrictions, the amounts received must be paid to the IRS when the buyer files a federal income tax return (buyers must file a return to claim or transfer their clean vehicle credits).

The amounts received by the buyer (whether in cash or in the form of a down payment) are not included in the buyer’s income; they are simply treated as an advance payment of the allowable tax credit. However, the basis of the vehicle must be reduced by the amount of the advance credit.

Buyers can transfer their clean energy credits if they attest that they believe they’re eligible, based on their income falling below the threshold levels in the prior year or their belief that their income will fall below the threshold in the year of purchase. The credit is unavailable for single taxpayers who earn more than $150,000 per year, joint filers who earn more than $300,000 per year and heads of households who earn $225,000 per year or more.

Dealer-Side Basics

According to a news release related to the proposed regulations, the IRS will issue advance payments to the recipient dealer for the transferred credit within 72 hours of the date of purchase if the dealer submits information about the sale to the IRS.

The advance payment is not included in income, but the dealer also cannot deduct the amount transferred to the buyer. The amounts are treated as though the buyer paid the amounts to the dealer as part of the purchase price of the vehicle, so will be realized by the dealer in the same way as any other method of purchase.

To allow these transfers, dealers will be required to register with the IRS Energy Credits Online Portal, through which they will submit required information to claim the advance credits. Dealers will not be able to claim these credits on their tax returns and must instead use the IRS’ advance payment procedures via the Energy Credits system.

At the time of sale, the dealer must submit a seller report containing the seller’s identifying information, taxpayer identification number and other valid identification information for the dealer. The dealer must also have submitted the vehicle identification number for the qualifying vehicle. These time-of-sale reports will be required regardless of whether the buyer decides to transfer the credit to the car dealer. Dealers must also provide copies of the report to the buyer, along with written confirmation that the vehicle qualifies for the credit.

To participate in the advance payment program, the dealer must also be in compliance with all federal tax laws and must have filed all required returns and paid all federal taxes, interest and penalties due at the time of sale.

Conclusion

The newly proposed credit transfer system may make access to clean vehicles much more attainable to taxpayers who might otherwise be unable to afford the green option. Taxpayers and their financial advisors should pay close attention for finalized regulations on the transfer system for next year.

  • Learn more with Tax Facts, the go-to resource that answers critical tax questions with the latest tax developments. Online subscribers get access to exclusive e-newsletters.
  • Discover more resources on finance and taxes on the NU Resource Center.
  • Follow Tax Facts on LinkedIn and join the conversation on financial planning and targeted tax topics.
  • Get 10% off any Tax Facts product just for being a ThinkAdvisor reader! Complete the free trial form or call 859-692-2205 to learn more or get started today.

Robert Bloink

William H. Byrnes

NOT FOR REPRINT

© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.