The impending budget reconciliation bill in Congress might be the vehicle for the repeal or revision of the Inflation Reduction Act’s clean vehicle credits, and even as Treasury and the IRS work to finalize its implementing regs, the commercial clean vehicle credit in section 45W may be particularly vulnerable.
The commercial clean vehicle credit could be in more danger than the section 30D clean vehicle credit because of its larger size. The current revenue estimate for the section 45W credit is $14.4 billion between 2024 and 2028, while the clean vehicle credit weighs in at $5.6 billion over the same period (JCX-48-24). The Joint Committee on Taxation noted in its May 2023 report on the factors it considered when estimating the revenue effects of the IRA’s energy provisions that “several regulatory decisions by Treasury will affect estimates of the clean vehicle credits.” One example the JCT cited is Notice 2023-9, 2023-3 IRB 402, which determined that commercial clean vehicles with a gross vehicle weight rating of less than 14,000 pounds could qualify for a $7,500 credit when leased to consumers because the incremental cost of those vehicles is generally greater than $7,500.
The JCT also wrote that “generally, the Joint Committee staff estimates of the clean vehicle credits modified and implemented by the IRA anticipated a narrower interpretation by Treasury.” Consequently, the JCT’s 2023 baseline estimates for these credits were larger than originally anticipated. That could be a problem for the credits as Congress searches for savings in the budget bill.
Congress Considers Its Options
The commercial clean vehicle credit also stands apart from section 30D in that it doesn’t include the critical minerals requirements and the foreign-entity-of-concern rules that are in the consumer electric vehicle credit. That might change if recently proposed legislation passes. The No Official Giveaways of Taxpayers’ Income to Oppressive Nations Act (H.R. 524), introduced in January, includes a proposal to add a provision that denies the credit under section 45W to a “disqualified company,” defined as any entity created or organized in, or controlled by, one or more countries of concern. Entities controlled by one or more entities of that description would also be disqualified companies. Countries of concern are China, Russia, Iran, and North Korea. The proposal has 25 Republican sponsors and two Democratic sponsors.
Proposals to repeal the commercial clean vehicle credit entirely have also been introduced and appear to have a roughly similar level of support, judging by the number of cosponsors. Fourteen House Republicans sponsored the Eliminate Lavish Incentives to Electric Vehicles Act (ELITE Act) (H.R. 1367), introduced in February, which aims to repeal sections 30D, 25E, 30C, and 45W. A companion bill in the Senate (S. 541) has 15 sponsors. And a similar proposal is included in the Restoring Vehicle Market Freedom Act of 2025 (H.R. 312). As Congress moves toward its anticipated Memorial Day deadline for a budget reconciliation bill, these proposals may garner greater support.
In the meantime, Treasury and the IRS have to finalize their proposed rules under section 45W (REG-123525-23). The comment letters put the reg drafters in something of an awkward spot. Their requests are generally reasonable, but adopting them would make the credit more expensive, which could in turn make it an even likelier target for repeal or revision.
Recapture
The proposed recapture rules state that if the vehicle ceases to be used by the taxpayer in their trade or business during the 18-month period beginning on the date the vehicle is placed in service, the credit is not allowed or is recaptured. The use must be 100 percent for the taxpayer’s trade or business, except for incidental personal use. This duration is probably based on the typical car lease length of two to three years and is intended to exclude those, but it also excludes rental car businesses. Treasury and the IRS said in the preamble to the proposed rules that they “took into consideration commercial vehicle leasing practices and sought to accommodate such practices.” The industry told them otherwise in the comment letters.
Car rental companies are predictably unhappy with the proposed rule that requires an 18-month lease because they usually sell their fleet vehicles after a year of renting them, which would render them ineligible for the credit. The American Car Rental Association said that shortening the holding period “will encourage the vehicle rental industry to continue its significant investment in new vehicles.” It added that the car rental industry is among the largest purchasers of vehicles in the United States. The Equipment Leasing and Finance Association’s (ELFA) letter noted that the one-year term of vehicle leases is often the result of state statutes or rules that distinguish a vehicle lease from a rental for sales tax purposes and set the minimum term for a lease at one year. The final regulations will have to reveal whether Treasury really meant to exclude rental businesses.
Casualty Losses
Casualty losses — from accidents, fires, or thefts, for example — could pose a problem for taxpayers because they’re unpredictable. ELFA pointed out that rules for EV credits historically haven’t included provisions for recapture when a disposition of the vehicle occurs because of an accident or other casualty. “Insurance payouts for a casualty loss of a vehicle would not cover the amount of the recaptured tax credit, and taxpayers should not be required to absorb the loss of the recaptured credit as a result of a casualty,” ELFA argued.
Off-Road Mobile Machinery
Mobile machinery is eligible for the commercial clean vehicle credit under section 45W(c)(2)(B), but determining what counts as mobile machinery is proving challenging. The statute says that mobile machinery has the same definition as the excise tax definition in section 4053(8), and it adds in a parenthetical that for purposes of section 45W, the definition also includes “vehicles that are not designed to perform a function of transporting a load over the public highways.” The section 4053(8) definition includes vehicles with permanently mounted machinery to perform construction, manufacturing, processing, farming, mining, drilling, timbering, or similar functions if the operation of the machinery or equipment is unrelated to transportation on or off the public highways; vehicles that are specially designed to serve only as mobile carriages and mounts for particular machinery or equipment; and vehicles that could not be used to transport any load other than the particular machinery or equipment without substantial structural modification. Section 4053(8) only applies to highway vehicles.
The proposed regulations don’t completely adopt the definition in section 4053(8). Treasury and the IRS wrote in the preamble that “the definition of mobile machinery provided in section 4053(8) presents significant challenges for taxpayers and the IRS in the context of section 45W.” That’s in part because there is so much overlap between the definitions of mobile machinery and on-road vehicles. The preamble also said that the government had concerns about the administrability of section 45W if the rules required a vehicle-by-vehicle analysis of off-road vehicles. The application of subsections (B) and (C) of section 4053(8) does not pertain to off-road vehicles, the government explained. Accordingly, the proposed regulations narrow the application of the definition in section 4053(b) by retaining only the requirement that the vehicle have a chassis with permanently mounted machinery or equipment. The two other subsections in section 4053(8) are deemed satisfied. The preamble explained that absent this adjustment, “particular vehicles would, on a vehicle-by-vehicle basis, be rendered ineligible for the section 45W credit for reasons irrelevant to the purpose of the credit.”
Sen. Chris Van Hollen, D-Md., and then-Senate Finance Committee Chair Ron Wyden, D-Ore., briefly discussed the issue in a colloquy on the Senate floor on August 6, 2022. “The new application of the mobile machinery definition will raise novel questions about which types of vehicles qualify as mobile machinery, in cases where the determination was not necessary in the context of the excise tax on heavy trucks,” Van Hollen said. He then asked if commercial lawn mowers would fit the criteria of mobile machinery. Wyden said they would if they met all the other criteria for the qualified commercial clean vehicle credit.
The debate over how best to interpret section 45W(c)(2)(B) continued in the comment letters. Oshkosh Corp. approved of adopting only section 4053(8)(A)’s definition for purposes of off-road mobile machinery. It also asked that the final rules include specific examples, such as the boom lifts, telehandlers, and scissor lifts used in construction and the utility vehicles used in airports, such as deicers, cargo tractors, aircraft tow, and pushback equipment.
But others are not on board. Many commentators want the parenthetical to be read as a new category for off-road mobile machinery, regardless of whether the vehicles meet the requirements in section 4053(8). Calstart argued that the interpretation in the preamble “effectively reads the parenthetical [in section 45W(c)(2)(B)] out of the statute, since all vehicles that constitute mobile machinery are highway vehicles, and no vehicle that constitutes mobile machinery performs a function of transporting a load.” Instead, Calstart wrote, the parenthetical is meant to expand the types of vehicles that are included beyond mobile machinery to include off-road transportation vehicles. Case New Holland similarly argued that the final rules should not limit which mobile machinery can qualify for the credit. The company noted that the proposed rule “relies heavily on definitions that would not include current product offerings in the off-road mobile machinery industry,” such as agricultural tractors, which do not have permanently mounted machinery or equipment. The result would be the disqualification of “almost every tractor on the market,” according to Case New Holland.
And what about the lawn mowers Van Hollen mentioned? The proposed rules exclude them because their permanently mounted machinery doesn’t perform an operation similar to those enumerated in section 4053(8)(A). The National Association of Landscape Professionals objected to that characterization.
Effective Date
Treasury and the IRS might be sympathetic to the argument that the effective date in the proposed regulations would cause some tax credits to be recaptured because of circumstances beyond taxpayers’ control. ELFA also requested that the effective date for the rules in prop. reg. section 1.45W-4(f) be revised to apply to vehicles placed in service in tax years beginning after the date of publication of the final regs. Retroactive application to transactions entered before the year the final regs are published would “cause significant and relatively arbitrary economic losses,” ELFA wrote. The proposed regulations would apply to years ending after the date of publication of the final regulations, so the 18-month recapture rule would apply to vehicles that were leased in January 2024 for a one-year term if the final rules were published in 2025. In that case, “the lessee or lessor would be subject to a commercially retroactive recapture despite engaging in a standard leasing transaction,” ELFA explained. The group also said that the year-of-publication date could result in a lack of notice for taxpayers in some circumstances, which could be avoided by applying the rules only to clean vehicles placed in service after the tax year of publication of final regulations.
Despite the disagreements over particular points, a number of aspects of the proposed regulations work fine, according to the industry commentators. The safe harbor guidance for the incremental cost of a vehicle is helpful and ought to be continued, the American Car Rental Association said. “The necessary information about the cost of the powertrain may not be available and, as acknowledged in the preamble, there may be certain cases where there is not a comparable gas-powered vehicle,” it wrote. If the safe harbors are not continued, there should be an alternative means for taxpayers to find the incremental cost, the association said.
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