The Inflation Reduction Act change the credits available for taxpayers who purchase electric vehicles. Taxpayers may claim a credit up to $7,500 for a new clean vehicle and a credit up to $2,500 for a previously owned clean vehicle.
The other big change is that starting in calendar year 2024, the Act allows eligible buyers to transfer these credits to registered dealers. IRS news release IR-2023-186 introduces guidance on the transfer. This means that if the dealer is authorized, the credit could be used for your down payment on the new vehicle. But as all things government, there are a bunch of rules to take advantage of it.
How the clean vehicle credit transfer election works
The transfer election allows a taxpayer to transfer the allowable new clean vehicle credit or previously owned clean vehicle credit to a dealer who is an eligible entity in exchange for a financial benefit. The transfer serves to reduce the final cost of the vehicle and may be in the form of cash or a partial or down payment toward the purchase. Thus, the taxpayer receives an immediate financial benefit at the point of sale instead of waiting to file a tax return to claim the credit for the purchase of the qualifying vehicle.
A taxpayer may make up to two transfer elections in a year. The election may be for two new clean vehicles or one new clean vehicle and one previously owned clean vehicle. (An election cannot be made for two previously owned clean vehicles as this election is only available to taxpayers once in three years.) The election may be made only for a purchase from a dealer that is an eligible entity.
An eligible entity for this purpose is a dealer that registers with the IRS through Energy Credits Online to:
- Submit seller reports to the IRS when selling eligible vehicles, and
- Receive advance payments.
Eligible entities are also referred to as registered dealers. Taxpayers may not claim clean energy credits if a dealer is not registered with the IRS to submit seller reports. A seller report details information about each qualifying vehicle such as its make, model, VIN, credit amount, MSRP, etc. The dealer must also provide the buyer with a copy of the report and confirmation that the IRS has accepted the report.
Dealers who also register for the advance payment program request an advance payment when submitting the seller report. The electing taxpayer then receives a reduced purchase price, as explained earlier. Dealers are not required to register for the advance payment program but must do so in order for buyers to transfer credits. Registered dealers cannot require a buyer to transfer the credit.
So, what does the taxpayer do to have the credit transferred?
The taxpayer must meet all of the same eligibility requirements that apply to the new clean vehicle credit or the previously-owned clean vehicle credit as applicable. The taxpayer must provide the registered dealer with the date of the election, the taxpayer’s SSN or other TIN, a photocopy of the taxpayer’s government-issued identification document (such as a state-issued driver’s license), and all of the following information. The taxpayer:
- Is making the election voluntarily.
- Expects current or prior year MAGI not to exceed applicable MAGI limitations.
- Will use the vehicle predominantly for personal use (for new clean vehicles).
- Is a qualified buyer (for previously owned clean vehicles).
- Will file an income tax return for the year the vehicle is placed in service and recapture the transferred amount if the MAGI requirement is not met. (As discussed below).
- Is making the election prior to placing the vehicle in service and the election is the first or second election for the year.
What you need to do when you file your taxes.
An electing taxpayer must file an income tax return for the tax year in which the election is made and complete Form 8936, Clean Vehicle Credits, which will be modified to accommodate the election. Form 8936 (or successor form, if applicable) will include the vehicle’s make, model, VIN, etc. In other words, the taxpayer will provide the same information that would be needed if the taxpayer were claiming the credit on the tax return.
If the taxpayer’s MAGI (Modified Adjusted Gross Income) exceeds the applicable limitation, the taxpayer must recapture (repay) the transferred tax credit as an addition to tax on the return. The taxpayer does not repay the dealer.
However, if the taxpayer transfers a credit to the dealer that would otherwise exceed their tax liability, the taxpayer does not have to recapture the credit. Therefore, the election may be especially helpful to taxpayers who cannot utilize the full credit on their tax returns. The dealer is not subject to recapture either.
Note: a taxpayer cannot make a partial election. For each qualifying vehicle, the taxpayer either makes a transfer election or claims the clean vehicle credit on the tax return.