The 45W Tax Credit for Commercial Clean Vehicles

The Commercial Clean Vehicle Credit, established by the Inflation Reduction Act of 2022, offers a tax incentive for businesses. This credit, formally known as the Section 45W credit, is designed to encourage the commercial sector to adopt cleaner energy technologies by reducing the cost of acquiring new electric or fuel cell vehicles. It applies to qualifying vehicles acquired and placed in service after December 31, 2022, and before January 1, 2033. The credit provides a direct, dollar-for-dollar reduction of a business’s federal tax liability.

Business Eligibility for the Credit

A primary requirement for a business to claim the credit is that the vehicle must be acquired for use in the taxpayer’s trade or business. This means the vehicle is intended for operations or for leasing to other entities, not for the purpose of resale. The original use of the vehicle must begin with the business claiming the credit.

The vehicle must also be subject to an allowance for depreciation, meaning it is treated as a depreciable asset on the company’s books. An exception to the depreciation rule exists for tax-exempt organizations, which can claim the credit as a direct payment. This elective pay option allows entities that do not typically pay federal income tax to receive the credit’s value as a direct refund from the IRS.

Certain entities are excluded from claiming the credit, most notably the original manufacturer of the vehicle. A business cannot produce a clean vehicle and then claim the credit for itself.

Qualified Vehicle Requirements

The vehicle must be a motor vehicle manufactured primarily for use on public streets, roads, and highways. This definition also includes certain types of mobile machinery as defined under the Internal Revenue Code.

The vehicle’s propulsion system is a central requirement. It must be powered to a significant extent by an electric motor that draws electricity from a battery. For vehicles with a Gross Vehicle Weight Rating (GVWR) of less than 14,000 pounds, the battery must have a capacity of at least 7 kilowatt-hours. For vehicles with a GVWR of 14,000 pounds or more, the minimum battery capacity increases to 15 kilowatt-hours. In both cases, the battery must be capable of being recharged from an external source of electricity.

Alternatively, a vehicle can qualify if it is a “qualified fuel cell motor vehicle.” This means it is propelled by power derived from one or more cells that convert chemical energy directly into electricity. These vehicles must also satisfy specific requirements outlined in the tax code to be eligible.

The vehicle must be produced by a “qualified manufacturer.” The IRS maintains an official and regularly updated list of these manufacturers and the specific vehicle models that are eligible for the credit. Businesses considering a purchase should consult the IRS or Department of Energy websites to confirm that both the manufacturer and the specific vehicle they intend to buy are on this list before finalizing the acquisition.

Calculating the Credit Amount

The final credit amount is determined by a three-part calculation, with the business claiming the lesser of the three resulting figures. This structure ensures the credit is proportional to the vehicle’s cost and the premium paid for its clean technology, while also being subject to a maximum cap. The credit is the lesser of:

• A percentage of the vehicle’s basis. For a vehicle powered exclusively by an electric motor or fuel cell, the credit is calculated at 30% of its basis. If the vehicle is a plug-in hybrid that also has a gasoline or diesel internal combustion engine, this percentage is reduced to 15%. The basis refers to the cost of acquiring the vehicle, including any taxes and fees paid at the time of purchase.
• The “incremental cost” of the vehicle. This is defined as the amount by which the purchase price of the clean vehicle exceeds the price of a comparable vehicle powered solely by a traditional gasoline or diesel internal combustion engine. The IRS provides guidance and safe harbor tables to help businesses determine this incremental cost.
• A fixed dollar limitation based on the vehicle’s Gross Vehicle Weight Rating (GVWR). For qualified vehicles with a GVWR of less than 14,000 pounds, the maximum credit is capped at $7,500. For all other qualified vehicles with a GVWR of 14,000 pounds or more, the maximum credit is $40,000.

For example, consider a business that purchases a fully electric delivery van with a GVWR under 14,000 pounds for a basis of $60,000. The first calculation is 30% of the basis, which is $18,000. If the incremental cost compared to a similar gas-powered van is determined to be $22,000, the business compares three figures: $18,000 (30% of basis), $22,000 (incremental cost), and $7,500 (the dollar limit). The credit is the lesser of these, so the business can claim a $7,500 credit.

Claiming the Commercial Clean Vehicle Credit

The process to claim the credit involves specific IRS forms that must be filed correctly with the business’s annual income tax return. The primary form for this purpose is Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit.

On Form 8936, the taxpayer must report key details about the vehicle, including its vehicle identification number (VIN), basis, and the final calculated credit amount. The VIN is included, as the IRS uses it to track that the credit is claimed only once per vehicle.

After completing Form 8936, the credit amount is then carried to Form 3800, General Business Credit. The Commercial Clean Vehicle Credit is one of many incentives that fall under the umbrella of the General Business Credit. Form 3800 consolidates these various credits, and it is filed alongside the business’s main income tax return, such as Form 1120 for corporations or Form 1065 for partnerships. Partnerships and S corporations file Form 8936, and the credit flows through to the partners or shareholders.

Businesses must be mindful of credit recapture rules. If the vehicle stops being used exclusively for business purposes within 18 months of being placed in service, a portion of the credit may need to be repaid to the IRS.