Newly-released temporary guidance indicates how provisions in the IRA will allow state, local, and tribal governments, non-profits, U.S. territories, and rural Energy Co-ops to access clean energy and EV tax credits.Dory Larsen | August 22, 2023
The Department of Treasury just concluded a comment period on the credits, so there may be revisions. This blog post focuses on electric vehicle (EV) and charging infrastructure credits and will be updated as new information is released.
- Renewable Energy: Clean Energy Tax Credits are now accessible by entities with no tax liability using Elective Pay (aka Direct Pay).
- Electric Vehicles: Commercial Clean Vehicle Credit, which can now be accessed by tax-exempt entities, applies to more models and EV classes (light, medium and heavy duty).
- EV Charging Infrastructure: Alternative Fuel Vehicle Refueling Property Credit, which can now be accessed by tax-exempt entities, can offset some of the cost of installing EV charging stations within qualifying census tracts.
New Temporary Guidance from the Department of Treasury
The Inflation Reduction Act (IRA) includes several new and revised tax credits to support EV and charging infrastructure investments. Prior to passage of the IRA, many entities were ineligible for tax credits because they lack tax liability. Now, tax-exempt entities like local governments will be able to receive a direct, elective payment of tax credits for making qualifying investments. This new credit delivery mechanism is called “Elective Pay”(aka “Direct Pay”), and it will allow many local governments to speed up the deployment of EV fleets and charging infrastructure. New proposed rules from the U.S. Department of Treasury and Internal Revenue Service (IRS) clarify how the credits work, who is eligible to receive the credits, and how to access them.
What is Elective (aka Direct) Pay?
Elective pay allows applicable entities (see below) that do not owe federal income tax to benefit from EV and charging infrastructure tax credits nonetheless. This works by treating the amount of the credit as an overpayment of taxes; resulting in a refund allowable for the amount of the credit.
After a local government purchases an EV or installs a charging station, they would complete a pre-filing registration with the IRS through an online process. The IRS would then provide them with a registration number for each applicable credit. Later, the local government files an annual tax return with the IRS to elect payment for the value of the tax credit by providing the registration number. The IRS would then make a refund payment to the local government for the full value of the credit.
Say, for example, a local government purchases an electric F150 for $50,000. They would complete the pre-filing registration, then file a tax return for the value of the tax credit ($7,500 for a vehicle under 14,000 pounds). The IRS would treat the $7,500 as an “overpayment of taxes” and refund the local government the $7,500, effectively making the purchase price of the vehicle $42,500.
Under the proposed rules, applicable entities for elective pay would include:
- States and political subdivisions such as local governments,
- Indian tribal governments,
- U.S. territory governments and political subdivisions,
- Agencies and instrumentalities of state, local, tribal, and territorial governments,
- Tax-exempt organizations under § 501(a), including § 501(c) and § 501 (d) organizations,
- Alaska Native Corporations,
- The Tennessee Valley Authority, and
- Rural electric co-operatives.
However, entities that are eligible for elective pay may not use another new credit delivery mechanism called transferability.
New Commercial EV Tax Credit Increases Eligibility & EV Selection
Consumers are generally familiar with the Clean Vehicle Credit for Individuals. The IRA has now expanded EV credits to include two additional credits: the Clean Vehicle Credit for Used Vehicles, and the Commercial Clean Vehicles Credit (§ 45W), or the CCVC. The new CCVC has some notable distinctions compared to the other credit mechanisms:
- Tax-exempt entities are eligible to use elective pay to purchase electric vehicles with the CCVC.
- Vehicle requirements are less stringent for the CCVC, meaning they apply to a significantly wider selection of EVs including light-, medium-, and heavy-duty EVs.
CCVC-eligible vehicles are not subject to critical mineral and battery component requirements, North American assembly requirements, MSRP or income limits. Instead, they must be made by a qualified manufacturer. Essentially, if a vehicle manufacturer is on the IRS list of qualified manufactures, the credit applies. For more information about qualifications, see here.
The CVVC credit is worth up to:
- $7,500 for qualified vehicles with gross vehicle weight ratings of under 14,000 lbs
- $40,000 for all other vehicles.
It equals the lesser of:
- 30% of your basis in the vehicle (total cost after taxes and registration)
- The incremental cost of the vehicle (excess of purchase price versus a comparable ICE vehicle)
The Expanded AFVRC: Increased Eligibility, Energy Justice, and Maximum Amount
The Alternative Fuel Vehicle Refueling Property Credit (§ 30C), or AFVRC, is now available to tax-exempt entities that want to install EV charging equipment on their property using elective pay. The IRA increased the amount of the allowable credit for installing EV charging equipment. In prior versions of the credit, the maximum credit amount for an entire site was $30,000. The credit is now per charging unit with a maximum of $100,000. Of note, in order to qualify for the AFVRPC, charging equipment must be placed in service in a qualifying property. To qualify, a property must be within non-urban census tracts or low-income communities (the poverty rate is at least 20 percent, or the median family income does not exceed 80 percent of statewide median family income). This qualifier offers a mechanism to close the equity gap where private capital on charging infrastructure has not been readily spent, and is in line with the Justice40 Initiative that 40 percent of the overall benefits of certain Federal investments flow to communities that have been historically underfunded and overburdened by pollution. In order to receive the maximum credit, there are prevailing wage and apprenticeship requirements. See the IRS AFVRC page for other qualifications and details.
To calculate the value of AFVRPC:
- The credit for qualified refueling property subject to depreciation equals 6% with a maximum credit of $100,000 for each single item of property
- If prevailing wage and apprenticeship requirements are met it may increase to 30% credit with the same $100,000 limits
Stacking Credits with Grants
The tax credits for both vehicles and charging infrastructure may be combined with tax-exempt grants and forgivable loans because of a special rule. However, the total amount (stacked amount) of the tax credit plus the tax-exempt grant cannot exceed the cost of a vehicle or charging station.
- Clean Energy Tax Incentives: Elective Pay Eligible Tax Credits
- Elective Pay Overview (IRS)
- Elective Pay and Transferability FAQs (IRS)
- Elective Pay: State and Local Governments
- Commercial Clean Vehicle Credit (IRS)
- Alternative Fuel Vehicle Refueling Property Credit (§ 30C) (IRS)
- IRA Guidebook
The information contained in this blog is subject to the proposed and temporary elective pay and transferability regulations. The author of this blog is not a tax professional. You should consult with a tax professional before making decisions regarding the contents of this blog.
The Southern Alliance for Clean Energy’s Electrify the South program leverages research, advocacy, and outreach to accelerate the equitable transition to electric transportation across the Southeast. Visit ElectrifytheSouth.org to learn more and connect with us.