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1 [1] (January 16, 2024)

handle is hein.crs/govenzr0001 and id is 1 raw text is: Congressional Research Service informing the legislative debate since 1914 0 January 16, 2024 Clean Vehicle Tax Credit Transfers to Car Dealers On October 6, 2023, the Internal Revenue Service (IRS) issued proposed regulations for transfers of clean vehicle tax credits from consumers to car dealers. The proposed regulations apply to the clean vehicle credit (CVC) and the used clean vehicle credit (UCVC), both of which were enacted under the Inflation Reduction Act of 2022 (P.L. 117-169, IRA). The proposed regulations detail how transferred credits-unlike credits claimed when tax returns are filed-may exceed total income tax liabilities. The Clean Vehicle Credit Taxpayers acquiring new electric vehicles and fuel cell vehicles may qualify for a clean vehicle credit. The CVC is described in Section 30D of the Internal Revenue Code (IRC). The Joint Committee on Taxation (JCT) projects that the credit would reduce federal revenues by $19 billion between FY2023 and FY2027. Eligible vehicles must have been acquired before 2033 and have undergone final assembly in North America. Individuals and businesses may claim the credit for at most one vehicle per year. The credit amount is $3,750 for vehicles meeting the critical minerals requirement plus $3,750 for vehicles meeting the battery components requirement, for a maximum total credit of $7,500. To meet the former requirement, a car's battery must meet or exceed a certain threshold percentage of critical minerals that were extracted or processed in the United States or a country with which the United States has a free trade agreement, or must have been recycled in North America. The threshold percentage starts at 40% in 2023 and rises gradually to 80% in 2027 and subsequent years. To meet the battery components requirement, at least a certain share of a battery's component parts must be manufactured or assembled in North America. The share starts at 50% in 2023 and rises to 100% in 2029 and later years. In addition, vehicles acquired after 2023 cannot use battery components manufactured or assembled by a foreign entity of concern (FEOC); for vehicles acquired after 2024, no applicable critical minerals in the vehicle's battery may come from a FEOC. Under preliminary regulations from the IRS, FEOCs would include companies operating in or significantly influenced by the governments of China, Russia, North Korea, or Iran. To receive the credit, a taxpayer's modified adjusted gross income (MAGI) for either the current or previous year must be at or below $300,000 for married couples, $225,000 for heads of household, and $150,000 for single filers and others. For purposes of the clean vehicle tax credits, MAGI is equivalent to adjusted gross income excluding deductions for expatriates and residents of American territories. When claimed on a taxpayer's income tax return, the credit is nonrefundable, meaning that credit amounts in excess of tax liability are not refunded to the taxpayer. The Used Clean Vehicle Credit The used clean vehicle credit, described in IRC Section 25E, provides a tax credit for purchases of used electric or fuel cell vehicles. In 2022, the JCT projected that the credit would reduce federal revenues by $0.4 billion between FY2022 and FY2026. To qualify for the UCVC, a vehicle must be purchased from a licensed dealer for $25,000 or less. The vehicle must be acquired no later than December 31, 2032, and the vehicle's model year must be at least two years before the year of purchase. The credit can be claimed once per vehicle. The credit equals 30% of the vehicle's sales price up to a maximum of $4,000 (when the price exceeds $13,333). Because the UCVC cannot be claimed for vehicles costing more than $25,000, the value of the credit falls from $4,000 to $0 when a car's price rises from $25,000 to $25,001. Individuals and couples are eligible for the credit; business entities are not. The taxpayer must purchase the vehicle for personal use, not for resale, and cannot have claimed another UCVC in the previous three years. The taxpayer's MAGI for either the current or previous year must be at or below $150,000 for married couples, $112,500 for heads of household, and $75,000 for single filers and others. When claimed on taxpayers' income tax returns, credit amounts in excess of tax liabilities cannot be received as refunds. Cred it Transfers to Car Dealers and the Increased Value of Transferred Cred its Starting January 1, 2024, taxpayers may claim the CVC and the UCVC as rebates when purchasing their vehicles. To claim the credits as rebates, taxpayers must transfer the credit to the car dealer, who then receives the credit from the government. Car dealers in turn must compensate taxpayers with either a cash payment or a reduced price on the car; the value of the cash payment or price reduction must equal the value of the applicable credit. Buyers cannot transfer partial credits, and credits transferred to eligible dealers are increased by 6.0445%. A 2022 survey finds that prospective car buyers prefer such point-of-sale rebates to traditional tax credits, with the immediacy of the rebates being an important factor for most consumers. The preference for rebates is strongest among low-income buyers, used car buyers, and buyers of low-priced vehicles. Taxpayers who transfer a credit must still file Form 8936 with their income tax return and indicate that they claimed the CVC or the UCVC earlier in the year. Dealers must inform taxpayers of the relevant MAGI limits, and