Time to clean up the fleet? Sec. 45W might help

Editor: Alexander Semerano, CPA

In September 2023, Tesla made waves when it cut the prices of its flagship models again to their lowest levels ever despite the lingering effects of inflation. Specifically, Tesla cut the price of its flagship sedan, the Model S, to a base price of $74,990, and its flagship SUV, the Model X, to a base price of $79,990. The company has reduced prices multiple times this year, leaving some consumers with buyer’s remorse for overpaying and many Tesla lessees underwater.

The Model X now qualifies for clean vehicle tax credits under Sec. 30D, which was the focus of much of the media coverage following the price cuts. The falling prices in the electric car segment, paired with the promised electric commercial trucks already being produced by Freightliner, Lion Electric, Volvo, and other qualified manufacturers, should catch the attention of businesses looking to acquire new clean commercial fleets. The trucks, too, can come with significant tax savings.

Part of the Inflation Reduction Act of 2022, P.L. 117-169, Sec. 45W was enacted to provide a similar tax incentive to those of Secs. 30D and 25E to shift businesses’ attention to clean vehicles for commercial use. While Sec. 30D is often the most well-publicized clean vehicle tax break, Sec. 45W offers a broader credit to businesses purchasing clean commercial vehicles.

Sec. 45W gives businesses a tax credit for “qualified commercial clean vehicles” acquired between Jan. 1, 2023, and Dec. 31, 2032 (Sec. 45W(g)). Importantly, the credit is provided on a per-vehicle basis, meaning that a business can take multiple credits if it purchases multiple vehicles. Sec. 45W defines a “qualified commercial clean vehicle” more broadly than a “new clean vehicle” under Sec. 30D (Sec. 45W(c)). To clarify confusion surrounding the definition of a “qualified manufacturer,” the IRS issued Rev. Proc. 2022-42, indicating that businesses may use the manufacturer’s certification of its qualified status or its written reports rather than putting the burden of proof on the taxpayer. A full list of qualified manufacturers is available here.

In addition to being manufactured by a qualified manufacturer, the vehicle must be primarily either a street vehicle or “mobile machinery” (Sec. 45W(c) (2)). The vehicle must also be propelled significantly by either an electric motor or hydrogen fuel cell (Sec. 45W(c)(3)), though it need not be propelled only by these sources. Finally, the vehicle must be depreciable to be qualified (Sec. 45W(c) (4)).

The amount of the credit is the lesser of (1) 15% of the cost of the qualified commercial clean vehicle (30% in the case of a vehicle without a gasoline or diesel internal combustion engine) or (2) the vehicle’s “incremental cost” (Sec. 45W(b)(1)). The vehicle’s incremental cost is the excess cost over a similar gas or diesel engine–powered vehicle. The IRS provided details as to the specific calculation in Notice 2023-9, which deferred to methodology used by the U.S. Department of Energy.

The maximum credit that can be taken per vehicle is $7,500 for a vehicle with a gross vehicle weight rating (GVWR) of under 14,000 pounds and up to $40,000 for vehicles with GVWRs of 14,000 pounds or more (Sec. 45W(b) (4)). The basis of the qualified commercial clean vehicle must be reduced by any tax credit claimed (Notice 2022-56), and businesses may not claim double benefits (i.e., a business could not claim both a Sec. 30D and Sec. 45W credit on the same vehicle) (Sec. 45W(d)(3)).

The Sec. 45W credit comes with a few other noteworthy rules. First, Sec. 45W(d)(1) states that the Sec. 45W credit will generally follow the special rules outlined in Sec. 30D(f) relating to matters such as property used outside the United States and recapture. Next, Sec. 45W(d)(2) provides that the credit will apply to nondepreciable property for taxexempt organizations, and Sec. 45W(e) requires that taxpayers must provide a vehicle identification number on their tax return, as is also true for Sec. 30D. The form to claim the Sec. 45W credit is not yet available as of this writing.

Sec. 45W provides a powerful incentive for companies to offset the cost of going green with their vehicle fleets. As the prices of clean vehicles continue to decline with technologies rapidly advancing, the incremental-cost method provides a way that business could potentially cover the entire additional cost of clean vehicles with the Sec. 45W tax credit. Businesses should continue to monitor both Sec. 45W developments from the IRS and the markets for qualifying commercial clean vehicles.

Editor Notes

Alexander Semerano, CPA, is a partner with Pease Bell CPAs in Cleveland.

For additional information about these items, contact Alexander Semerano at taxclinic@cpamerica.org.

Unless otherwise noted, contributors are members of or associated with CPA America.