Driving Towards a Greener Future: The Clean Vehicle Credit Incentive

Benefitting both auto dealerships and consumers, clean vehicle owners can transfer their clean or used vehicle credit to a registered car dealership beginning in 2024.  The transfer is worth up to $7,500 for new clean vehicles and up to $4,000 for previously owned clean vehicles.  Consumers can benefit from the transfer because it reduces their purchase price at the time of sale instead of waiting to claim the credit on their tax return in April of the following year.  This incentive is expected to draw more buyers to auto dealerships.  Here’s what buyers and dealers need to know.

Which Vehicles Qualify –

  • The credit is available to new and previously owned clean vehicles.
  • Examples of qualifying vehicles include battery electric, plug-in hybrid, and fuel cell vehicles.
  • See if a vehicle qualifies by visiting gov/newtaxcredit
  • The new or used clean vehicle must be placed in service on or after January 1, 2024.
  • The vehicle –
    1. Cannot be acquired for resale.
    2. Must be produced by a qualified manufacturer.
    3. Should fall within the motor vehicle category as defined in Title II of the Clean Air Act, designed primarily for use on public streets, roads, and highways, and equipped with a minimum of four wheels.
    4. Must possess a gross vehicle weight rating under 14,000 pounds.
    5. Must feature a significant electric motor propulsion system with a battery capacity of 7 kilowatt hours or more, capable of recharging from an external electricity source.
    6. Final assembly must occur in North America.

More Info For Buyers –

  • Beginning on January 1, 2024, buyers can transfer the new or used clean vehicle credit to registered dealerships.
  • Buyers can claim the benefit at the time of sale instead of waiting to file their tax returns.
  • Buyers are entitled to the full amount of the credit when the election is made to transfer it. Otherwise, because this is a non-refundable credit, the credit amount would be limited to the buyer’s tax liability, and any excess amount is lost.
  • In exchange, buyers will obtain a financial benefit in cash or in the form of a partial payment or down payment for purchasing the vehicle.
  • Individuals and business entities (e.g., a corporation or partnership) are eligible for the new clean vehicle credits. However, only individuals are eligible for the previously owned clean vehicle credit.
  • The buyer’s modified adjusted gross income must be below certain thresholds to receive the credit. As of the date of this article, the thresholds are –
    • Married filing jointly or filing as a qualifying survivor spouse or qualifying widow(er) – $300,000
    • Head of household – $225,000
    • All other taxpayers – $150,000

Your modified AGI is the amount from line 11 on your Form 1040 plus:

  • Any amount on line 45 or line 50 of From 2555, Foreign Earned Income
  • Any amount excluded from gross income because it was received from sources in Puerto Rico or American Samoa
  • If the buyer’s MAGI exceeds the threshold for the taxable year, the buyer must repay the amount received for transferring the tax credit as an addition to tax for the year the vehicle is placed in service.
  • If a partnership or S-corp purchases and uses the clean vehicle, the modified AGI thresholds apply to the partners or shareholders of such entities.
  • As of the date of this article, the manufacturer’s suggested retail price (MSRP) for new and used clean vehicles may not exceed –
    • Vans – $80,000
    • Sports Utility Vehicles – $80,000
    • Pickup Trucks – $80,000
    • Other – $55,000

If the MSRP exceeds the price limitation, the vehicle is not eligible for the clean vehicle credit.

The MSRP is based on the manufacturer’s suggested retail price, not the actual price paid for the vehicle.

  • There is also a sales price limitation of $25,000 for previously owned vehicles. The sales price of a previously owned vehicle means the total sale price agreed upon by the buyer and seller under a written contract at the time of sale. It includes delivery charges and a reduction for any incentive. Still, it excludes the value of any trade-in, separate financing, extended warranties, insurance, and separately stated taxes and fees required by State or local law.
  • Buyers work with their dealers to complete the transfer elections and provide information and attestations the dealership needs to complete the sales report submitted to the IRS.
  • At the time of sale, the dealers must provide the buyer with a copy of the sales report. The sales report is used to complete Form 8936, Schedule A, and is filed with the buyer’s annual tax return.
  • If the IRS rejects the seller report, the buyer cannot claim the clean vehicle credit. This is why buyers need to obtain confirmation of a successfully submitted seller report before finalizing a sale and placing the vehicle in service.   The dealership is required to provide this confirmation to the buyer.
  • A buyer can make up to two clean vehicle credit transfers each tax year.
  • The payment made by the dealer to the buyer in the form of cash or a reduced down payment is not included in the buyer’s gross income. Instead, the payment is treated as an advance payment of the credit to the buyer on behalf of the IRS. The amount of the credit reduces the basis of the vehicle.
  • The buyer must file an income tax return for the taxable year in which the vehicle transfer election is made and attach Form 8936, Clean Vehicle Credits.

More Info For Dealers –

  • Dealers must be licensed to sell vehicles. All dealers must register to submit seller reports through Energy Credits Online on gov.  Only licensed dealers can register for the advance payment program.
  • At the time of sale, the dealer completes an advance payment request as part of the time of sale report or seller report.  The report must be filed with the IRS within 3 days of the time of sale through IRS Energy Credits Online.
  • Dealers can use the IRS’ Energy Credits Online tool to get real-time confirmation about whether a submission is accepted.
  • Dealers will receive advance payments within 48-72 hours of successfully submitting the time of sale report online.
  • Dealers must provide the buyer with disclosures and are not required to verify the buyer’s income.
  • Dealers must provide the buyer with a time of sale report and confirmation of Energy Credits Online acceptance.
  • Advance payments received by the dealer are not treated as a tax credit and are not included in gross income. The payments are not deductible by the dealer.  Instead, the buyer treats the payments as repaid to the dealer as part of the vehicle’s purchase price and are therefore included in the total amount received from the sale transaction.

To gauge the impact of this incentive, we asked client Cathy Holtham, Owner and President of Glen Toyota her thoughts, and she said, “I think it will help buyers with the down payment. Money is tight with the economy right now, and getting the money upfront will help a lot of our customers get into a car right now.”

To see if you may qualify or have any additional questions, feel free to contact Senior Tax Manager Gina Perrone at [email protected].

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