Key Provisions of the Inflation Reduction Act Impacting Auto Dealerships

The passage of the Inflation Reduction Act (IRA) has created a momentous opportunity for companies to advance clean energy commitments while potentially reducing tax burdens. The IRA is the largest climate investment legislation in history, allocating $369 billion to clean energy programs over the next 10 years — including many new clean energy credits and incentives for businesses. The act’s most significant provisions for the auto dealership industry include:

• Reinstating and modifying the alternative fuel vehicle refueling property credit
• Adding a credit transfer option
• Introducing a credit for qualified commercial clean vehicles

While the new and expanded credits can be lucrative, each has specific requirements dealers must consider to maximize benefits.

Alternative Fuel Vehicle Refueling Property Credit

The Section 30C credit is intended to subsidize investment in refueling property for vehicles that use alternative fuels, such as electric vehicle charging stations.

The credit expired December 31, 2021. The IRA extended the original credit through December 31, 2022, and modified it for property placed in service between January 1, 2023, and December 31, 2032. The modified credit has a base rate of 6% and a maximum rate of 30% if the prevailing wage and apprenticeship requirements are met (capped at $100,000 credit per charging station).

The table illustrates the impact of the prevailing wage and apprenticeship requirements on the tax credit.

Prevailing Wage and Apprenticeship Requirements

The prevailing wage and apprenticeship requirements apply to projects for which construction or the installation of qualified refueling property begins on or after January 29, 2023.

Prevailing Wage Requirements

To meet the prevailing wage requirements for any qualified refueling property, a taxpayer must ensure that any laborers and mechanics it employs or any contractor or subcontractor involved in the project are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of similar property in the locality as determined by the Secretary of Labor.

Apprenticeship Requirements

Taxpayers also need to comply with the apprenticeship requirements to benefit from the 30% credit rate:

• Apprenticeship Labor Hours: For facilities that begin construction in 2023, at least 12.5% of total labor hours for construction, alteration, or repair work on the charging station must be performed by qualified apprentices. A qualified apprentice is someone participating in a registered apprenticeship program registered under the National Apprenticeship Act and employed by the taxpayer, contractor, or subcontractor.
• Apprenticeship Ratio: The labor hour requirement is subject to any applicable requirements for apprentice-to-journey worker ratios of the Department of Labor or the applicable state apprenticeship agency.
• Apprenticeship Participation: Each taxpayer, contractor, or subcontractor who employs at least four individuals to perform construction, alteration, or repair work for the construction of a qualified facility must employ at least one qualified apprentice.

A good faith exception may waive the apprenticeship requirements if taxpayers can document outreach to a registered apprenticeship program that either could not provide qualified apprentices or did not respond within five days.

Why Is That Important?

If an IRS audit occurs, the taxpayer claiming the credit will be responsible for providing documentation to verify that the prevailing wage and apprenticeship requirements have been met. However, there may be situations in which contractors and subcontractors are hesitant to share information that would support the claim, because it would reveal their actual labor costs. If a contractor refuses to share documentation, an impartial third party could gather the necessary information and confirm that the requirements have been met while keeping the information confidential.

Failure to Comply with the Requirements

A taxpayer that has failed to comply with the prevailing wage requirements can become compliant by:

• Paying the worker who was not paid the prevailing wage the difference between the prevailing wage and the amount the worker was paid plus interest; and
• Paying the Secretary of Treasury a penalty of $5,000 per affected worker.

If the noncompliance is found to be purposeful, the amount paid to the employee is increased threefold and the penalty per worker is increased to $10,000.

The apprenticeship requirement will be satisfied if the taxpayer pays the Secretary of Treasury a penalty of $50 ($500 in the case of intentional disregard of the requirement) multiplied by the total labor hours for which the requirement was not satisfied.

Transferability of Vehicle Credits

One important IRA feature gives purchasers of clean vehicles the ability to transfer their vehicle credits to eligible dealers. It applies to vehicles placed in service after December 31, 2023.

The Section 30D credit is for the purchase of a new electric vehicle, capped at $7,500, and is available through December 31, 2032. The Section 25E credit is for the purchase of a previously owned vehicle, capped at $4,000, and is also available through December 31, 2032.

A taxpayer that places a vehicle in service after December 31, 2023, may elect to transfer the credit to an eligible entity, which may then claim the credit rather than the taxpayer. The purchaser must make the election at the time of purchase.

Several requirements must be met to effectuate the transfer:

• The eligible entity must be the dealer that sells the vehicle to the taxpayer.
• Before or at the time of sale, the dealer must pay the taxpayer an amount equal to the credit that would be allowed to the taxpayer. This payment may be in cash or in the form of a partial payment or down payment for the purchase. It is not includable in the taxpayer’s gross income or deductible by the dealer.
• Before the election and by the time of the sale, the dealer must disclose to the taxpayer the manufacturer’s suggested retail price for new vehicles and the sales price for used vehicles, the value of the credit and any other incentives for vehicle purchases, and the amount of the dealer’s payment to the taxpayer.
• The dealer must ensure that the taxpayer’s ability to make the election does not limit the availability or use of any other purchase incentive such as a rebate or discount provided by the dealer or manufacturer and that the election does not limit the value or use of any other incentive.
• The dealer must register with the IRS.

The IRS recently opened the energy credits portal to allow registered dealers to submit seller reports to claim eligible clean vehicle credits transferred by taxpayers at the time of sale. The IRS will process the information and issue corresponding credit amounts directly to dealers.

The IRS is urging dealerships to register on the portal immediately to enable them to receive advance payments beginning January 1, 2024.

Important: Sellers and taxpayers may rely on information and certifications from qualified manufacturers regarding vehicle eligibility. Also, taxpayers must furnish information and make attestations supporting their personal eligibility under penalty of perjury. A taxpayer determined to be personally ineligible must repay any credit amounts subject to recapture.

Credit for Qualified Commercial Clean Vehicles

Business use vehicles acquired after December 31, 2022, and through December 31, 2032, are eligible for a Section 45W credit equal to the lesser of 30% of the cost of a vehicle not powered by a gasoline or diesel internal combustion engine or the vehicle’s incremental cost.

The maximum credit is $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for all other vehicles. It is available only for depreciable property acquired from qualified manufacturers, and the vehicle must be acquired for business use or lease and not for resale.

Unlike the Section 30D credit, vehicles do not need to meet the critical mineral and battery component requirements or be assembled in North America to qualify for the Section 45W credit; instead, manufacturers must simply be registered with the IRS as qualified manufacturers. Those rules greatly expand the list of eligible vehicles.

Leased Vehicles

If a vehicle is subject to a lease, it is critical to examine the lease agreement to see if the lease will be respected as a lease or treated as a sale for federal income tax purposes. Terms that would increase the possibility that the transaction will be treated as a sale include:

• Lease terms that cover more than 80% to 90% of the economic useful life of the vehicle;
• Bargain purchase options at the end of the lease term or other lease provisions that economically compel the lessee to acquire the vehicle at the end of the lease; and
• Terms that result in the lessor transferring ownership risk to the lessee.

If the lease agreement is not considered a sale for federal income tax purposes, the lessor is eligible to claim the credit as the vehicle’s legal owner. If the lease agreement is considered a sale, the lessee would be eligible to claim the credit on the vehicle if all other requirements under Section 45W or 30D are met.

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