The Inflation Reduction Act of 2022 offers taxpayers a valuable tax incentive to choose clean energy vehicles when shopping for a new or previously owned car. Starting in 2024, qualifying taxpayers will be eligible for a tax credit of up to $7,500 for qualifying new clean vehicles and up to $4,000 for used clean vehicles.
Now, the Internal Revenue Service has released proposed regulations that would make the tax credit even more appealing. If finalized, eligible taxpayers would be able to transfer the credit to their car dealer at the time of sale, reducing the up-front cost of the vehicle.
The IRS has released detailed rules that would govern these transfers of clean energy credits — and both prospective car buyers and dealers should pay close attention to the fine print.
Using EV Tax Credit to Buy a Car: The Basics
Beginning in 2024, proposed IRS regulations would allow buyers of eligible green energy vehicles to transfer their tax credits under IRC Sections 30D or 25E to the dealer in return for either (1) cash or (2) for use as a down payment on the vehicle.
Taxpayers will be permitted to transfer up to two clean vehicle tax credits per year, either in the form of two clean vehicle credits or one clean vehicle credit and one previously owned clean vehicle credit. The buyer must also transfer the full amount of the credit.
The buyers will be able to transfer the credit (for both new and previously owned clean vehicles) regardless of their individual tax liability. However, if the taxpayer is later found to be ineligible for the credit because income totals exceed restrictions, the amounts received must be paid to the IRS when the buyer files a federal income tax return (buyers must file a return to claim or transfer their clean vehicle credits).
The amounts received by the buyer (whether in cash or in the form of a down payment) are not included in the buyer's income; they are simply treated as an advance payment of the allowable tax credit. However, the basis of the vehicle must be reduced by the amount of the advance credit.
