New Section 45W Credit for Qualified Commercial Clean Vehicles
Is now the time to replace gas powered vehicles for electric vehicles? For vehicles acquired after 2022, the Inflation Reduction Act (IRA) provides a new business credit for qualified commercial clean vehicles, in an amount equal to the lesser of 15% (or 30% for a vehicle not powered by a gas or diesel internal combustion engine) of basis, or the incremental cost of the vehicle (excess of purchase price of such vehicle over purchase price of a comparable vehicle). The credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds, and $40,000 for all other qualified vehicles.
A qualified commercial clean vehicle must be acquired for use or lease by the taxpayer from a qualified manufacturer. In general, the vehicle must be subject to the allowance of depreciation, treated as a motor vehicle for purposes of title II of the Clean Air Act, and be manufactured primarily for use on public streets, roads and highways or determined to be mobile machinery. The vehicle must be propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 15 kilowatt hours (or, in the case of a vehicle which has a gross vehicle weight rating of less than 14,000 pounds, 7 kilowatt hours) and is capable of being recharged from an external source of electricity.
Applicable entities, including tax exempt entities, state or local governments, and Indian tribal governments can make a direct pay election for this credit to effectively treat the tax credits as taxes paid on a filed return. The transferability election under §6418 is not available for the Clean Commercial Vehicle Credit.
Modified Section 30C Alternative Fuel Vehicle Refueling Property Credit
If a company does increase the number of electric vehicles, they also may need to evaluate the installation of electric vehicle charging stations as well. Is there a credit for that too? Possibly, but the location of the refueling station will need to be closely reviewed.
In order for property to be deemed qualified alternative fuel vehicle refueling property, the IRA requires that the property be placed in an eligible census tract. An eligible census tract for this credit includes low-income communities as defined under §45D(e). A low-income community means any population census tract if the poverty rate for such tract is at least 20%, or in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80% of statewide median family income, or in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80% of the greater of statewide median family income or the metropolitan area median family income.
Provided that the refueling stations are considered qualified property, the credit amount will be up to 30% of the cost of the qualified property but can be as low as 6% if not all requirements are met. The basis still includes not only the purchase price of the property but also any costs for acquisition or construction. The basis must be reduced by any amount expensed under §179.
The IRA is more advantageous because it allows the credit to be determined based on a single item of property instead of calculating the credit based on all qualified property placed in service by a taxpayer during the taxable year. In addition, the maximum credit allowed in previous years was limited to $30,000, but the IRA increased the maximum credit amount to $100,000 per item.
For example, let’s assume a business installs ten qualified alternative refueling stations for a cost of $15,000 each. The total cost of the stations would be $150,000. Under the previous law, a credit of $45,000 would be calculated, but only $30,000 would be allowed due to the limitation. Alternatively, under the new law, a credit of $4,500 would be calculated per charging station, with no limitation on each unit, for a total credit of $45,000.
Under the IRA, the initial credit for qualified property starts at 6% and increases to 30%, provided the wages and apprenticeship requirements are met. The wage requirement will be met if the taxpayers ensure that any laborers and mechanics employed or any contractor or subcontractor utilized in the construction of the qualified alternative vehicle refueling property is paid wages at rates not less than the prevailing rates for construction in the locality the project is located. In addition, qualified apprentices must be utilized for a certain number of labor hours when constructing the alternative fuel vehicle refueling property.
Applicable entities, including tax exempt entities, state or local governments, and Indian tribal governments can make a direct pay election for this credit to effectively treat the tax credits as taxes paid on a filed return. The transferability election under §6418, allowing taxpayers to transfer all or a portion of the credit to an unrelated party for a one-time transfer of cash, is also available for the alternative fuel vehicle refueling property credit.
For more information on this topic, please contact a member of Withum’s Business Tax Services Team.