The Commercial Clean Vehicle Credit and How Your Construction Company can Benefit from Using Electric Vehicles (EVs)

The Inflation Reduction Act of 2022 introduced the Commercial Clean Vehicle Credit. The legislation aimed to create an economic incentive for businesses to purchase electric vehicles. This is separate from the more well-known electric vehicle (“EV”) credit for purchasing personal energy-efficient cars. The new credit is available for on and off-road vehicles purchased starting in 2023 through the end of 2032. This credit may be advantageous to contractors, as they typically utilize a large volume of vehicles on construction sites.

To qualify for the credit, the vehicle must meet five tests:

1. The vehicle must be acquired for use or lease by the taxpayer and not for resale.
2. The vehicle must be manufactured by a qualified manufacturer. Qualified manufacturers are those that enter into a written agreement with the IRS to provide information and certification related to the vehicles they produce.
3. The vehicle must be depreciable. This applies to any vehicle placed into service and used in the taxpayer’s trade or business.
4. The vehicle must be either a “new clean vehicle” or “mobile machinery.” To qualify as a new clean vehicle, its final assembly must occur in North America, and it must be treated as a motor vehicle for purposes of Title II of the Clean Air Act (so it must have at least four wheels and be manufactured primarily for use on public streets, roads, and highways). Mobile machinery is a vehicle with permanently mounted machinery or equipment to perform construction, manufacturing, processing, farming, mining, drilling, timbering, or similar operations. It also includes vehicles that are not designed to perform the function of transporting a load over public highways.
5. The vehicle must either be powered by a rechargeable electric motor that draws electricity from a battery, or be a new qualified cell fuel vehicle (which converts chemical energy directly into electricity by combining oxygen with hydrogen fuel).

The commercial clean vehicle credit is the lesser of:

1. 15% of the cost for a hybrid electric vehicle;
2. 30% of a fully electric or fuel cell vehicle; or
3. the vehicle’s incremental cost.

The incremental cost is the excess of the EV’s purchase price over the price of a comparable non-EV vehicle. The IRS issued Notice 2023-9, which provides safe harbors in connection with incremental cost. Vehicles that are not compact vehicles with a gross vehicle weight rating (GVWR) of less than 14,000 pounds may use $7,500 as the incremental cost. For compact vehicles and larger cars or trucks with a GVWR in excess of 14,000 pounds, taxpayers may use the incremental costs published in the Department of Energy (“DOE”) analysis for the appropriate class of street vehicle.

The credit is limited to $7,500 for a vehicle with a GVWR of less than 14,000 pounds and $40,000 for other vehicles. The credit is non-refundable and can be carried forward as a general business credit for 20 years. Since the credit is limited to the incremental cost of the EV over the traditional vehicle, there is really no net cash savings in purchasing the EV. The financial incentive lies in the savings on fuel costs. Additionally, for eco-friendly companies, they can achieve their environmental objectives without an additional cash outlay.

There may be some practical challenges in finding certain types of electric-powered construction vehicles. Service, fuel, water trucks as well as trucks used to shuttle equipment between sites would be good matches for EVs. However, electric would not be an appropriate solution for dump trucks, mixers and other types of specialized vehicles. Another challenge is to store the vehicles in a place where there are sufficient charging stations. Typically, construction vehicles have large batteries which require a substantial amount of time to charge.

In conclusion, if you own a business that aims to be environmentally friendly on a budget, you may want to consider letting Uncle Sam subsidize the conversion of your vehicle fleet to EVs.

For more information, please reach out to Martin Arking, Phillip Ross or your Anchin Relationship Partner.