§ 1.25E-3 Transfer of credit. ( a ) *In general.* This section provides rules related to the transfer and advance payment of the section 25E credit pursuant to section 25E(f) of the Internal Revenue Code (Code) by cross reference to section 30D(g) of the Code. Under the rules of section 30D(g) and this section, a taxpayer may elect to transfer a section 25E credit to an eligible entity, and the eligible entity may receive an advance payment for such credit, provided certain requirements are met. *See* paragraph (d) of this section for rules applicable to credit transfer elections. *See* paragraph (f) of this section for rules applicable to advance payments of transferred section 25E credits. Section 30D(g)(2) sets forth certain requirements that a dealer must satisfy to be an eligible entity for credit transfer and advance payment purposes. Section 30D(g)(2)(A) requires registration with the IRS. *See* paragraph (c) of this section for rules related to dealer registration. Section 30D(g)(2)(B) through (D) and paragraph (f)(2) of this section impose additional requirements that a registered dealer must satisfy in order to be an eligible entity for credit transfer and advance payment purposes.
( b ) *Definitions.* This paragraph (b) provides definitions that apply for purposes of section 25E(f) and this section. *See* § 1.25E-1(b) for definitions that are generally applicable to section 25E and the section 25E regulations. ( 1 ) *Advance payment program. Advance payment program* means the program described in paragraph (f)(1) of this section.
( 2 ) *Credit transfer election. Credit transfer election* has the meaning provided in sections 25E(f) and 30D(g), and paragraph (d) of this section.
( 3 ) *Dealer tax compliance. Dealer tax compliance* means that the dealer has filed all required Federal information and tax returns, including for Federal income and employment tax purposes, and the dealer has paid all Federal tax, penalties, and interest due as of the time of sale. A dealer that has entered into an installment agreement with the IRS for which a dealer is current on its obligations (including required filings) is treated as being in dealer tax compliance.
( 4 ) *Electing taxpayer. Electing taxpayer* means an individual who purchases and places in service a previously-owned clean vehicle and elects to transfer the section 25E credit that would otherwise be allowable to such individual to an eligible entity pursuant to section 25E(f) and paragraph (d) of this section. A taxpayer is an electing taxpayer only if the taxpayer makes certain attestations to the registered dealer, pursuant to procedures provided in guidance published in the *Internal Revenue Bulletin* (see § 601.601 of this chapter), including that the taxpayer does not anticipate exceeding the modified adjusted gross income limitation of section 25E(b)(1) and § 1.25E-1(b).
( 5 ) *Eligible entity. Eligible entity* has the meaning provided in section 30D(g)(2) and paragraph (f)(2) of this section.
( 6 ) *Registered dealer. Registered dealer* means a dealer that has completed registration with the IRS as provided in paragraph (c) of this section.
( 7 ) *Time of sale. Time of sale* means the date the previously-owned clean vehicle is placed in service, as defined in § 1.25E-1(b)(10).
( c ) *Dealer registration* — ( 1 ) *In general.* A dealer must register with the IRS in the manner set forth in guidance published in the *Internal Revenue Bulletin* (see § 601.601 of this chapter) for the dealer to receive credits transferred by an electing taxpayer pursuant to section 25E(f) and paragraph (d) of this section.
( 2 ) *Dealer tax compliance required.* A dealer must be in dealer tax compliance to complete and maintain its registration with the IRS. If the dealer is not in dealer tax compliance for any of the taxable periods during the last five taxable years, then the dealer may complete its initial registration with the IRS, but the dealer will not be eligible for the advance payment program (and, therefore, the dealer will not be eligible to receive transferred section 25E credits) until the compliance issue is resolved. The IRS will notify the dealer in writing that the dealer is not in dealer tax compliance, and the dealer will have the opportunity to address any failure through regular procedures. If the failure is corrected, the IRS will complete the dealer's registration, and, provided all other requirements of section 25E(f) and this section are met, the dealer will then be allowed to receive transferred section 25E credits and participate in the advance payment program. Additional procedural guidance regarding this paragraph is set forth in guidance published in the *Internal Revenue Bulletin* (see § 601.601 of this chapter).
( 3 ) *Suspension of registration.* A registered dealer's registration may be suspended pursuant to the procedures described in guidance published in the *Internal Revenue Bulletin* (see § 601.601 of this chapter). Any decision made by the IRS relating to the suspension of a registered dealer's registration is not subject to administrative appeal to the IRS Independent Office of Appeals unless the IRS and the IRS Independent Office of Appeals agree that such review is available and the IRS provides the time and manner for such review.
( 4 ) *Revocation of registration.* A registered dealer's registration may be revoked pursuant to the procedures described in guidance published in the *Internal Revenue Bulletin* (see § 601.601). Any decision made by the IRS relating to the revocation of a dealer's registration is not subject to administrative appeal to the IRS Independent Office of Appeals unless the IRS and the IRS Independent Office of Appeals agree that such review is available and the IRS provides the time and manner for such review.
( d ) *Clection by electing taxpayer.* For a previously-owned clean vehicle placed in service after December 31, 2023, an electing taxpayer may elect to apply the rules of section 25E(f) and this section to make a credit transfer election with respect to the vehicle so that the section 25E credit is allowed to the eligible entity specified in the credit transfer election (and not to the electing taxpayer) pursuant to the advance payment program described in paragraph (f) of this section. The electing taxpayer, as part of the credit transfer election, must transfer the entire amount of the credit that would otherwise be allowable to the electing taxpayer under section 25E with respect to the vehicle, and the eligible entity specified in the credit transfer election must pay the electing taxpayer an amount equal to the amount of the credit included in the credit transfer election. A credit transfer election must be made no later than the time of sale, and must be made in the manner set forth in guidance published in the *Internal Revenue Bulletin* (see § 601.601 of this chapter). Once made, a credit transfer election is irrevocable.
( e ) *Federal income tax consequences of credit transfer election* — ( 1 ) *Tax consequences for electing taxpayer.* In the case of a credit transfer election, the Federal income tax consequences for the electing taxpayer are as follows— ( i ) The amount of the section 25E credit that the electing taxpayer elects to transfer to the eligible entity under section 30D(g) (by reason of section 25E(f)) and paragraph (d) of this section may exceed the electing taxpayer's regular tax liability (as defined in section 26(b)(1) of the Code) for the taxable year in which the sale occurs, and the excess, if any, is not subject to recapture on the basis that it exceeded the electing taxpayer's regular tax liability;
( ii ) The payment made by an eligible entity to an electing taxpayer under section 30D(g)(2)(C) (by reason of 25E(f)) and paragraph (d) of this section to an electing taxpayer pursuant to a credit transfer election is not includible in the gross income of the electing taxpayer; and
( iii ) The payment made by an eligible entity under section 30D(g)(2)(C) (by reason of section 25E(f)) and paragraph (d) of this section is treated as repaid by the electing taxpayer to the eligible entity as partial payment of the sale price of the previously-owned clean vehicle. Thus, the repayment by the electing taxpayer is included in the electing taxpayer's basis in the previously-owned clean vehicle prior to the application of the basis reduction rule of section 30D(f)(1) that applies by reason of section 25E(e) and § 1.25E-2(a).
( 2 ) *Tax consequences for eligible entity.* In the case of a credit transfer election, the Federal income tax consequences for the eligible entity are as follows— ( i ) The eligible entity is allowed the section 25E credit with respect to the previously-owned clean vehicle and may receive an advance payment pursuant to section 30D(g)(7) (by reason of section 25E(f)) and paragraph (f) of this section;
( ii ) Advance payments received by the eligible entity are not treated as a tax credit in the hands of the eligible entity and may exceed the eligible entity's regular tax liability (as defined in section 26(b)(1)) for the taxable year in which the sale occurs;
( iii ) An advance payment received by the eligible entity is not included in the gross income of the eligible entity;
( iv ) The payment made by an eligible entity under section 30D(g)(2)(C) (by reason of section 25E(f)) and paragraph (d) of this section to an electing taxpayer is not deductible by the eligible entity;
( v ) The payment made by an eligible entity to the electing taxpayer under section 30D(g)(2)(C) (by reason of section 25E(f)) and paragraph (d) of this section is treated as paid by the electing taxpayer to the eligible entity as partial payment of the sale price of the previously-owned clean vehicle. Thus, the repayment by the electing taxpayer is treated as an amount realized by the eligible entity under section 1001 of the Code and the regulations under section 1001; and
( vi ) If the eligible entity is a partnership or an S corporation, then— ( A ) The IRS will make the advance payment to such partnership or S corporation equal to the amount of the section 25E credit allowed that is transferred to the eligible entity;
( B ) Such section 25E credit is reduced to zero and is, for any other purpose of the Code, deemed to have been allowed solely to such entity (and not allocated or otherwise allowed to its partners or shareholders) for such taxable year; and
( C ) The amount of the advance payment is not treated as tax exempt income to the partnership or S corporation for purposes of the Code.
( 3 ) *Form of payment from eligible entity to electing taxpayer.* The tax treatment of the payment made by the eligible entity to the electing taxpayer described in paragraphs (e)(1) and (2) of this section is the same regardless of whether the payment is made in cash, in the form of a partial payment or down payment for the purchase of the previously-owned clean vehicle, or as a reduction in sale price (without the payment of cash) of the previously-owned clean vehicle.
( 4 ) *Additional requirements.* In the case of a credit transfer election, the following additional rules apply: ( i ) The requirements of section 30D(f)(1) (regarding basis reduction) and 30D(f)(2) (regarding no double benefit), by reason of section 25E(e), apply to the electing taxpayer as if the credit transfer election were not made (so, for example, the electing taxpayer must reduce the electing taxpayer's basis in the vehicle by the amount of the section 25E credit, regardless of the credit transfer election).
( ii ) Section 30D(f)(6) (regarding the election not to take the credit), by reason of section 25E(e), will not apply (in other words, by electing to transfer the credit, the electing taxpayer is electing to take the credit).
( iii ) Section 30D(f)(9) (regarding the vehicle identification number requirement), by reason of section 25E(e), and section 25E(d) (regarding the vehicle identification number requirement) will be treated as satisfied if the eligible entity provides the vehicle identification number of such vehicle to the IRS in the form and manner set forth in guidance published in the *Internal Revenue Bulletin* (see § 601.601 of this chapter). The electing taxpayer must also provide the vehicle identification number with their Federal income tax return for the taxable year in which the vehicle is placed in service. *See* section 6213(g)(2)(U) of the Code and § 301.6213-2 of this chapter for rules relating to the omission of a correct vehicle identification number.
( 5 ) *Examples.* The following examples illustrate the rules of paragraph (e) of this section. ( i ) *Example 1: Electing taxpayer's regular tax liability less than amount of credit* — ( A ) *Facts.* T, an individual, purchases a previously-owned clean vehicle from a dealer, D, which is a C corporation. T satisfies the requirements to be an electing taxpayer and elects to transfer the section 25E credit to D. D is a registered dealer and satisfies the requirements to be an eligible entity. The sale price of the vehicle is $24,000. The section 25E credit otherwise allowable to T is $4,000. D makes the payment required to be made to T in the form of a cash payment of $4,000. T uses the $4,000 as a partial payment for the vehicle. T pays D an additional $20,000 from other funds. T's regular tax liability for the year is less than $4,000.
( B ) *Analysis.* Under paragraph (e)(1)(i) of this section, T may transfer the credit to D, even though T's regular tax liability is less than $4,000, and no amount of the credit will be recaptured from T on the basis that the allowable credit exceeded T's regular tax liability. D's $4,000 payment to T is not included in T's gross income, and the sale price of the vehicle is $24,000 (including both the $4,000 payment and the additional $20,000 paid by T from other funds), prior to the application of the basis reduction rule of section 30D(f)(1) (by reason of section 25E(e)). After application of the basis reduction rule, T's basis in the vehicle is $20,000. D is eligible to receive an advance payment of $4,000 for the transferred section 25E credit as provided in section 30D(g)(7) (by reason of section 25E(e)) and paragraph (f) of this section. Under paragraph (e)(2) of this section, D may receive the advance payment regardless of whether D's regular tax liability is less than $4,000. The advance payment is not treated as a credit toward D's tax liability (if any), nor is it included in D's gross income. Further, D's $4,000 payment to T is not deductible, and D's amount realized is $24,000 upon the sale of the vehicle (including both the $4,000 payment from D to T that T uses as a partial payment, and the additional $20,000 paid by T from other funds).
( ii ) *Example 2: Non-cash payment by eligible entity to electing taxpayer* — ( A ) *Facts.* The facts are the same as in paragraph (e)(5)(i)(A) of this section (facts of *Example 1*), except that D makes the payment to T in the form of a reduction in the sale price of the vehicle (rather than as a cash payment).
( B ) *Analysis.* Paragraph (e)(3) of this section provides that the application of paragraphs (e)(1) and (2) of this section is not dependent on the form of payment from an eligible entity to an electing taxpayer (for example, a payment in cash or a payment in the form of a reduction in sale price). Thus, the analysis is the same as in paragraph (e)(5)(i)(B) of this section (analysis of *Example 1*).
( iii ) *Example 3: Eligible entity is a partnership* — ( A ) *Facts.* The facts are the same as in paragraph (e)(5)(i)(A) of this section (facts of *Example 1*), except that D is a partnership.
( B ) *Analysis.* The analysis as to T is the same as in paragraph (e)(5)(i)(B) of this section (analysis of *Example 1*). Because D is a partnership, paragraph (e)(2)(vi) of this section applies. Thus, the advance payment is made to the partnership, the credit is reduced to zero and is, for any other purpose of the Code, deemed to have been allowed solely to the partnership (and not allocated or otherwise allowed to its partners) for such taxable year. The amount of the advance payment is not treated as tax exempt income to the partnership for purposes of the Code.
( f ) *Advance payments received by eligible entities* — ( 1 ) *In general.* An eligible entity may receive advance payments from the IRS (corresponding to the amount of the section 25E credit for which a credit transfer election was made by an electing taxpayer to transfer the credit to the eligible entity pursuant to section 30D(g) (by reason of section 25E(f)) and paragraph (d) of this section) before the eligible entity files its Federal income tax return or information return, as appropriate, for the taxable year with respect to which the credit transfer election corresponds. This advance payment program is the exclusive mechanism for an eligible entity to receive the section 25E credit transferred pursuant to section 25E(f) and paragraph (d) of this section. An eligible entity receiving a transferred section 25E credit may not claim the credit on a tax return.
( 2 ) *Requirements for a registered dealer to become an eligible entity.* A registered dealer qualifies as an eligible entity, and may therefore receive an advance payment in connection with a credit transfer election, if it meets the following requirements: ( i ) The registered dealer submits all required registration information and is in dealer tax compliance;
( ii ) The registered dealer retains information regarding the credit transfer election for three calendar years beginning with the year immediately after the year in which the vehicle is placed in service, as described in guidance published in the *Internal Revenue Bulletin* (see § 601.601 of this chapter);
( iii ) The registered dealer meets any other requirements set forth in guidance published in the *Internal Revenue Bulletin* (see § 601.601 of this chapter) or in forms and instructions; and
( iv ) The registered dealer meets any other requirements of section 25E(f) by reference to section 30D(g), including those in section 30D(g)(2)(B) through (E).
( g ) *Increase in tax* — ( 1 ) *Recapture if electing taxpayer exceeds modified adjusted gross income limitation.* If an electing taxpayer has modified adjusted gross income that exceeds the limitation in section 25E(b) and § 1.25E-1(b), then the income tax imposed on such taxpayer under chapter 1 of the Code (chapter 1) for the taxable year in which the vehicle was placed in service is increased by the amount of the payment received by the taxpayer. The electing taxpayer must recapture such amounts on the Federal income tax return described in paragraph (h) of this section.
( 2 ) *Excessive payments* — ( i ) *In general.* This paragraph provides rules under section 25E(f) by reference to section 30D(g)(7)(B), which provides that rules similar to the rules of section 6417(d)(6) of the Code apply to the advance payment program. In the case of any advance payment to an eligible entity that the IRS determines constitutes an excessive payment, the tax imposed on the eligible entity under chapter 1, regardless of whether such entity would otherwise be subject to tax under chapter 1, for the taxable year in which such determination is made will be increased by the sum of the following amounts— ( A ) The amount of the excessive payment; plus
( B ) An amount equal to 20 percent of such excessive payment.
( ii ) *Reasonable cause.* The amount described in paragraph (g)(2)(i)(B) of this section will not apply to an eligible entity if the eligible entity demonstrates to the satisfaction of the IRS that the excessive payment resulted from reasonable cause. In the case of a previously-owned clean vehicle (with respect to which a credit transfer election was made by the electing taxpayer) that is returned to the eligible entity within 30 days of being placed in service, the eligible entity will be treated as having demonstrated that the excessive payment resulted from reasonable cause.
( iii ) *Excessive payment defined.* Excessive payment means an advance payment made— ( A ) To a registered dealer that fails to meet the requirements to be an eligible entity provided in paragraph (f)(2) of this section; or
( B ) Except as provided in paragraph (g)(2)(iv) of this section, to an eligible entity with respect to a previously-owned clean vehicle to the extent the payment exceeds the amount of the credit that, without application of section 25E(f) and this section, would be otherwise allowable to the electing taxpayer with respect to the vehicle for such tax year.
( iv ) *Special rule for cases in which electing taxpayer's modified adjusted gross income exceeds the limitation.* Any excess described in paragraph (g)(2)(iii)(B) of this section that arises due to the electing taxpayer exceeding the limitation based on modified adjusted gross income in section 25E(b) and § 1.25E-1(b) is not an excessive payment. Instead, the amount of the advance payment is recaptured from the taxpayer under section 25E(e) and paragraph (g)(1) of this section.
( 3 ) *Examples.* The following examples illustrate the excessive payment rules in paragraph (g)(2) of this section. ( i ) *Example 1: Registered dealer is not an eligible entity* — ( A ) *Facts.* In 2024, D, a registered dealer, receives an advance payment of $4,000 with respect to a credit transferred pursuant to section 25E(f) and paragraph (d) of this section for a previously-owned clean vehicle, vehicle V. In 2025, the IRS determines that D was not an eligible entity with respect to vehicle V at the time it received the advance payment in 2024 because D failed to satisfy one of the requirements of section 30D(g)(2) (applicable by reason of section 25E(e)) and paragraph (f)(2) of this section. D is unable to show reasonable cause for the failure.
( B ) *Analysis.* Under paragraph (g)(2)(i) of this section, the tax imposed on D is increased by the amount of the excessive payment if the advance payment received by D constitutes an excessive payment. Under paragraph (g)(2)(iii) of this section, the entire amount of the $4,000 advance payment received by D is an excessive payment because D did not meet the requirements to be an eligible entity under section 30D(g)(2) (applicable by reason of section 25E(f) and paragraph (f)(2) of this section). Additionally, because D cannot show reasonable cause for its failure to meet these requirements, the tax imposed under chapter 1 on D is increased by $4,800 in 2025 (the taxable year of the IRS determination). This is comprised of the $4,000 excessive payment plus the $800 penalty, calculated as 20% of the $4,000 excessive payment (20% × $4,000 = $800). This treatment applies regardless of whether D is otherwise subject to tax under chapter 1 (for example, if D is a partnership).
( ii ) *Example 2: Incorrect manufacturer certifications* — ( A ) *Facts.* In 2024, T, a taxpayer, makes an election to transfer a $4,000 credit pursuant to section 25E(f) and paragraph (d) of this section to registered dealer, E, with respect to vehicle V. M, the manufacturer of vehicle V, certified to the IRS that vehicle V has a battery with a capacity of not less than 7 kilowatt hours (kwh). T and vehicle V otherwise meet the eligibility requirements for the section 25E credit. T, in reliance on the manufacturer's certification to the IRS regarding vehicle V's battery capacity, transfers the section 25E credit to E. Subsequent to T's purchase of vehicle V and election to transfer the $4,000 credit to E, M reports to the IRS that vehicle V has a battery capacity of less than 7 kwh.
( B ) *Analysis.* Section 1.25E-2(g) provides that T may rely on the information and certifications provided in M's written report to the IRS for purposes of determining whether vehicle V is a previously-owned clean vehicle, as defined in section 25E(c)(1) and § 1.25E-1(b)(11). Because T relied on M's certification to the IRS regarding vehicle V's battery capacity and T and vehicle V otherwise meet the eligibility requirements for the section 25E credit, vehicle V is deemed to meet the requirements of section 30D(d)(1)(F) (as cross-referenced in section 25E(c)(1)(D)(i)). Under paragraph (g)(2)(iii)(B) of this section, an advance payment to an eligible entity with respect to a vehicle is an excessive payment to the extent the payment exceeds the amount of the credit that, without a credit transfer election, would be otherwise allowable to the electing taxpayer with respect to the vehicle for such taxable year. Because the amount of the credit that would be allowable to T for 2024 is $4,000, and T transferred the $4,000 credit to E, there is no excessive payment with respect to E.
( h ) *Return requirement.* An electing taxpayer that makes a credit transfer election must file a Federal income tax return for the taxable year in which the credit transfer election is made and indicate such election on the return in accordance with the instructions to the form on which the return is made. The electing taxpayer must attach to such return a completed Form 8936, *Clean Vehicle Credits,* or successor form, that includes all information required by the form and instructions. The electing taxpayer must also attach a completed Schedule A (Form 8936), *Clean Vehicle Credit Amount,* or successor form or schedule, that includes all information required by the schedule and instructions, such as the vehicle identification number of the previously-owned clean vehicle.
( i ) *Two credit transfer elections per year.* A taxpayer may make no more than two credit transfer elections per taxable year, consisting of either two elections to transfer section 30D credits, or one section 30D credit and one election to transfer a section 25E credit. In the case of taxpayers who file a joint return, each individual taxpayer may make no more than two credit transfer elections per taxable year.
( j ) *Severability.* The provisions of this section are separate and severable from one another. If any provision of this section is stayed or determined to be invalid, it is the agencies' intention that the remaining provisions will continue in effect.
( k ) *Applicability date.* This section applies to previously-owned vehicles placed in service after December 31, 2023, in taxable years ending after December 31, 2023.
[T.D. 9995, 89 FR 37747, May 6, 2024]