The U.S. Dept. of the Treasury and the Internal Revenue Service (IRS) released Oct. 6 guidance addressing how consumers will be able to use their EV tax credits at point-of-sale for new and previously-owned clean vehicles by transferring those credits to dealers beginning January 1, 2024.

The Inflation Reduction Act, which became law in 2022, established two sets of tax credits, totaling $7,500, for the purchase or lease of qualifying new or used electric, hybrid, plug-in hybrid, or other clean vehicles based on where the battery minerals are sourced and the batteries are manufactured. Under the law, consumers can file for the credits on their tax returns after the purchase or lease of a qualifying vehicle.

The law also allows consumers to choose to transfer their new clean vehicle credit of up to $7,500 and their previously owned clean vehicle credit of up to $4,000 to a car dealer starting January 1, 2024. This will effectively lower the vehicle’s purchase price by providing consumers with an upfront down payment on their clean vehicle at the point of sale, rather than having to wait to claim their credit on their tax return the next year. Only vehicles purchased under the consumer clean vehicle credits are eligible for this benefit.

 

The Oct. 6 guidance provides additional information on registration requirements and how the mechanics of this transfer will work for dealers. The guidance also provides Proposed Eligibility Rules for the previously owned clean vehicle credit that would give consumers more certainty regarding their ability to claim and to transfer the credit. The guidance would clarify that eligible consumers may transfer the full value of the new or previously owned vehicle credit regardless of their individual tax liability.

According to the Guidance, dealers later this month will be able to register via IRS Energy Credits Online, a new website. This registration is a requirement for dealers to offer consumers clean energy tax credits for qualifying electrified products. Starting in January, registered dealers will be able to submit clean vehicle sales information to the IRS and promptly receive payment for transferred credits. According to the Treasury Department, Energy Credits Online demonstrates the IRS’ commitment to delivering a world-class customer service experience and helping taxpayers receive the credits and deductions for which they are eligible.

 

For buyers to be eligible to claim or transfer a credit starting Jan. 1, 2024, the dealer they purchase their vehicle from must first register with Energy Credits Online. Dealers will also use Energy Credits Online to submit “time of sale” reports, which will confirm vehicles’ eligibility for a credit, whether or not the buyer chooses to transfer the credit to the dealer.

 

When a buyer chooses to transfer the credit, registered dealers will reduce the purchase price of the vehicle or provide cash to the buyer. The amount provided must equal the full amount of the credit available for the eligible vehicle. When completing the sale, the dealer will electronically submit information regarding the transfer, including a time of sale report, to receive an advance payment for the value of the credit. The IRS expects to issue advance payments within 72 hours.  

 

To provide clarity and certainty, the dealer will provide buyers with required disclosures as part of the credit transfer and electronic time-of-sale submission process and with written confirmation that the vehicle they’re buying is eligible for a credit and the credit amount.

 

The guidance also proposes rules regarding who is eligible to elect to transfer the credit to the dealer and under what circumstances these taxpayers may have to pay back some of the transferred credit.

Consumers may transfer the credit if they attest that they believe they are eligible, including that they fell below the applicable income thresholds in the prior year or expect to be below these thresholds in the year the vehicle is placed in service. Consumers will need to directly repay the full value of a transferred tax credit to the IRS when filing their taxes if they exceed the applicable modified adjusted gross income limitation.

 

The guidance also would include important safeguards to help prevent fraud or abuse. These measures would help ensure only verified, tax-compliant dealers will get the benefit of advance payments from the IRS and only eligible vehicles will get the benefit of the credit. These measures would collect and verify information received from the dealer during the IRS Energy Credits Online dealer registration process. A registration ID is provided to the dealer only once the IRS is confident in validity of the registration. Fact sheets, FAQs, checklists and other materials for consumers and dealers will be made available before the end of the year.

 

This guidance also provides clarity regarding the federal income tax treatment of the transferred credit and advance payment for the buyer and the dealer. Under the proposed rules, credit transfers and advance payments would generally not affect dealers’ tax liability. Payment of the value of the transferred credit by the dealer to the consumer would be treated as repaid by the consumer to the dealer as part of the purchase price of the vehicle, and therefore be treated as an amount realized by the dealer.

 

Advance payments received by the dealer would not be treated as a tax credit to the dealer and may exceed the dealer’s regular tax liability. Advance payments received by the dealer would not be includible in the gross income of the dealer. The payment made by the dealer to the consumer in exchange for the transferred credit would not be deductible by the dealer. The payment made by the dealer to the consumer (in the form of a cash payment, down payment, or partial down payment) would not be includible in the gross income of the consumer.

 

Treasury and the IRS have affirmed they will carefully consider public comments and feedback before issuing final rules.

For more information regarding Clean Vehicle Credits, visit the IRS Clean Vehicle and Energy Credits website HERE and NADA’s EV Incentives website.