The Section 45W Commercial Clean Vehicle Credit
Leverage the Section 45W credit to reduce the acquisition cost of clean commercial vehicles. This guide explains the key tax implications for your business.
The Section 45W tax credit, established by the Inflation Reduction Act of 2022, offers a financial incentive for businesses acquiring qualified commercial clean vehicles. This provision encourages the adoption of clean energy technology in the commercial transportation sector. The credit applies to new electric or fuel cell vehicles purchased for business operations. For entities that do not pay federal income tax, such as state governments and tax-exempt organizations, the credit can be received as a direct cash payment from the IRS.
Business and Vehicle Eligibility Requirements
To qualify for the credit, a business must acquire a vehicle for use in its trade or for lease, not for the primary purpose of resale. The vehicle must be placed in service after December 31, 2022, and before January 1, 2033. A requirement is that the vehicle must be subject to an allowance for depreciation, confirming its status as a business asset.
A vehicle must be produced by a manufacturer that has a written agreement with the IRS, and taxpayers can rely on the list of qualified manufacturers published by the agency. The vehicle’s power source is a determining factor. Vehicles not powered by a gasoline or diesel engine, such as fully electric or fuel cell models, have a straightforward path to eligibility.
For plug-in hybrids, the battery capacity requirement depends on the vehicle’s weight. Vehicles with a Gross Vehicle Weight Rating (GVWR) of less than 14,000 pounds must have a battery capacity of at least 7 kilowatt-hours, while those with a GVWR of 14,000 pounds or more must have a battery capacity of at least 15 kilowatt-hours. The rules also extend to “mobile machinery,” which includes vehicles with permanently mounted equipment designed for functions like construction, mining, or farming.
Calculating the Credit Amount
The calculation for the Section 45W credit is based on the lesser of three distinct figures. The first is a percentage of the vehicle’s basis, set at 15% for most qualified vehicles or 30% for vehicles not powered by a gasoline or diesel engine. The second is the “incremental cost” of the vehicle. The third is the maximum credit amount, which is capped at $7,500 for vehicles with a GVWR under 14,000 pounds and $40,000 for vehicles with a GVWR of 14,000 pounds or more.
The incremental cost is defined as the amount by which the purchase price of the clean vehicle exceeds the price of a comparable vehicle powered by a traditional gasoline or diesel engine. The IRS allows taxpayers to use information provided by the manufacturer or other specified safe harbors to determine this incremental cost, simplifying what could otherwise be a complex analysis.
A financial consequence of claiming the credit is the basis reduction rule. A taxpayer must reduce the depreciable basis of the vehicle by the amount of the Section 45W credit claimed. This action impacts the amount of depreciation expense the business can claim over the life of the vehicle. The reduction ensures that the business does not receive a double tax benefit from both the credit and full depreciation on the entire cost of the vehicle.
Information Required to Claim the Credit
To claim the credit, the vehicle seller must provide the buyer with a report at the time of sale. The seller is also required to submit this report to the IRS. This document is a prerequisite for the buyer to claim the credit and must contain specific information:
- Names and taxpayer identification numbers (TINs) of the seller and buyer
- Vehicle identification number (VIN)
- Vehicle’s battery capacity
- Date of the sale
- Maximum credit allowable for the vehicle
This seller report provides the foundational data needed to complete the necessary tax forms. The primary form for this purpose is IRS Form 8936, Qualified Commercial Clean Vehicles Credit. This is the official document used to calculate the credit amount and formally report it to the IRS.
When preparing Form 8936, the taxpayer will transfer the VIN, vehicle basis, and the date the vehicle was placed in service from their records and the seller report onto the form. The form guides the taxpayer through the calculation steps. Proper completion of this form is dependent on having the accurate and complete seller report in hand.
How to Claim the Credit
Once Form 8936 is prepared, it must be filed as part of the business’s annual income tax return for the tax year in which the vehicle was placed in service. The specific tax return to which Form 8936 is attached depends on the business’s structure. For example, a corporation would attach it to its Form 1120, while a partnership would include it with its Form 1065 filing. A sole proprietor would file it with their Schedule C (Form 1040).
The Section 45W credit is a general business credit. The final credit amount calculated on Form 8936 is then reported on Form 3800, General Business Credit. Form 3800 is used to summarize various business credits and apply them against the taxpayer’s tax liability.