Section 45W was created in the Inflation Reduction Act and is available for qualified vehicles acquired and placed into service between 2023 and 2032. This is a general business income tax credit. 

The credit is 15% of the cost but increases to 30% for a vehicle not powered by a gasoline or diesel combustion engine.

The credit cannot exceed the vehicle’s incremental cost, which is the difference between the vehicle’s cost and the cost of an equivalent vehicle solely powered by a gasoline or diesel combustion engine, and $7,500 for vehicles with gross vehicle weight (GVW) less than 14,000 lbs., or $40,000 for heavier vehicles over 14,000 GVW.

Determining a vehicle’s incremental cost will be set forth by IRS guidance yet to come. The law provides that this is required so I expect this to happen in the near future. 

A qualified vehicle is a fuel cell vehicle or propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity not less than 15 kilowatt hours (or 7 kilowatt hours in the case of a vehicle that has a gross vehicle weight rating of less than 14,000 pounds) and is capable of being recharged from an external source of electricity. 

Like most tax credits, the vehicle’s cost basis is reduced by the credit claimed and thus reduces depreciation. 

This credit has fewer restrictions than the Clean Vehicle Credit I discussed here. There is no limit on the cost of the vehicle, no critical mineral and battery requirements, and no North American assembly requirement. 

This credit can apply to higher income taxpayers since there are no income limits. 

The real bang for the buck seems to be with large vehicles over 14,000 GVW. I will await the guidance on the "incremental cost" issue before I get too excited. 

As a reminder on business vehicles, a sole proprietor’s depreciable basis will usually be the cost less any credits multiplied by the business use percentage. If business use drops below 50% in any year, there could be income recapture. For corporations, the personal use should be imputed non-cash income on a W-2.