Last updated on January 17th, 2025 at 10:33 pm
Title 26—Internal Revenue–Volume 1
CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
SUBCHAPTER A—INCOME TAX
PART 1—INCOME TAXES
Section 1.1(h)-1 also issued under 26 U.S.C. 1(h);
Section 1.21-1 also issued under 26 U.S.C. 21(f);
Section 1.21-2 also issued under 26 U.S.C. 21(f);
Section 1.21-3 also issued under 26 U.S.C. 21(f);
Section 1.21-4 also issued under 26 U.S.C. 21(f);
Section 1.25-1T also issued under 26 U.S.C. 25;
Section 1.25-2T also issued under 26 U.S.C. 25;
Section 1.25-3 also issued under 26 U.S.C. 25;
Section 1.25-3T also issued under 26 U.S.C. 25;
Section 1.25-4T also issued under 26 U.S.C. 25;
Section 1.25-5T also issued under 26 U.S.C. 25;
Section 1.25-6T also issued under 26 U.S.C. 25;
Section 1.25-7T also issued under 26 U.S.C. 25;
Section 1.25-8T also issued under 26 U.S.C. 25;
Section 1.25A-1 also issued under section 26 U.S.C. 25A(i);
Section 1.25A-2 also issued under section 26 U.S.C. 25A(i);
Section 1.25A-3 also issued under section 26 U.S.C. 25A(i);
Section 1.25A-4 also issued under section 26 U.S.C. 25A(i);
Section 1.25A-5 also issued under section 26 U.S.C. 25A(i);
Section 1.25E-1 also issued under 26 U.S.C. 25E.
Section 1.25E-2 also issued under 26 U.S.C. 25E.
Section 1.25E-3 also issued under 26 U.S.C. 25E, 26 U.S.C. 30D(g)(1) and (g)(10), and 26 U.S.C. 6011.
Section 1.28-0 also issued under 26 U.S.C. 28(d)(5);
Section 1.28-1 also issued under 26 U.S.C. 28(d)(5);
Section 1.30-1 also issued under 26 U.S.C. 30(d)(2);
Section 1.30C-3 also issued under 26 U.S.C. 30;
Section 1.30D-1 also issued under 26 U.S.C. 30D.
Section 1.30D-2 also issued under 26 U.S.C. 30D.
Section 1.30D-3 also issued under 26 U.S.C. 30D.
Section 1.30D-4 also issued under 26 U.S.C. 30D and 26 U.S.C. 45W(d)(3).
Section 1.30D-5 also issued under 26 U.S.C. 30D and 26 U.S.C. 6011.
Section 1.30D-6 also issued under 26 U.S.C. 30D.
Section 1.36B-1 also issued under 26 U.S.C. 36B(h).
Section 1.36B-2 also issued under 26 U.S.C. 36B(h).
Section 1.36B-3 also issued under 26 U.S.C. 36B(h).
Section 1.36B-4 also issued under 26 U.S.C. 36B(h).
Section 1.36B-5 also issued under 26 U.S.C. 36B(h).
Section 1.36B-6 also issued under 26 U.S.C. 36B(h).
Section 1.41-4 also issued under 26 U.S.C. 41(d)(4)(E).
Section 1.41-6 also issued under 26 U.S.C. 41(f)(1) and 1502;
Section 1.41-8 also issued under 26 U.S.C. 41(c)(4)(B);
Section 1.41-8T also issued under 26 U.S.C. 41(c)(4)(B);
Section 1.41-9 also issued under 26 U.S.C. 41(c)(5)(C);
Section 1.41-9T also issued under 26 U.S.C. 41(c)(5)(C);
Section 1.42-1 also issued under 26 U.S.C. 42(n);
Section 1.42-1T also issued under 26 U.S.C. 42(n);
Section 1.42-3 also issued under 26 U.S.C. 42(n);
Section 1.42-4 also issued under 26 U.S.C. 42(n);
Section 1.42-5 also issued under 26 U.S.C. 42(n);
Sections 1.42-6, 1.42-8, 1.42-9, 1.42-10, 1.42-11, and 1.42-12, also issued under 26 U.S.C. 42(n);
Section 1.42-13 also issued under 26 U.S.C. 42(n);
Section 1.42-14 also issued under 26 U.S.C. 42(n);
Section 1.42-15 also issued under 26 U.S.C. 42(n);
Section 1.42-16 also issued under 26 U.S.C. 42(n);
Section 1.42-17 also issued under 26 U.S.C. 42(n);
Section 1.42-18 also issued under 26 U.S.C. 42(h)(6)(F) and 42(h)(6)(K);
Section 1.42-19 also issued under 26 U.S.C. 42(n);
Section 1.42-19T also issued under 26 U.S.C. 42(n);
Sections 1.43-0—1.43-7 also issued under section 26 U.S.C. 43;
Section 1.45-6 also issued under 26 U.S.C. 45.
Section 1.45-7 also issued under 26 U.S.C. 45.
Section 1.45-8 also issued under 26 U.S.C. 45.
Section 1.45-12 also issued under 26 U.S.C. 45.
Section 1.45D-1 also issued under 26 U.S.C. 45D(e)(2) and (i);
Section 1.45G-1 also issued under 26 U.S.C. 45G(e)(2);
Section 1.45L-3 also issued under 26 U.S.C. 45L.
Sections 1.45Q-1, 1.45Q-2, 1.45Q-3, 1.45Q-4, and 1.45Q-5 also issued under 26 U.S.C. 45Q(h).
Section 1.45Q-3 also issued under 26 U.S.C. 45Q(f)(2).
Section 1.45Q-4 also issued under 26 U.S.C. 45Q(f)(5).
Section 1.45Q-5 also issued under 26 U.S.C. 45Q(f)(4).
Section 1.45Q-6 also issued under 26 U.S.C. 45Q.
Section 1.45U-3 also issued under 26 U.S.C. 45U.
Section 1.45V-1 also issued under 26 U.S.C. 45V(c)(1)(B) and 45V(f).
Section 1.45V-2 also issued under 26 U.S.C. 45V(c)(1)(B) and 45V(f).
Section 1.45V-3 also issued under 26 U.S.C. 45V.
Section 1.45V-4 also issued under 26 U.S.C. 45V(c)(1)(B) and 45V(f).
Section 1.45V-5 also issued under 26 U.S.C. 45V(c)(1)(B) and 45V(f).
Section 1.45V-6 also issued under 26 U.S.C. 45V(c)(1)(B) and 45V(f).
Section 1.45X-1 also issued under 26 U.S.C. 45X, 6001, 6417(h) and 6418(h).
Section 1.45X-2 also issued under 26 U.S.C. 45X and 1502.
Section 1.45X-3 also issued under 26 U.S.C. 6001.
Section 1.45X-4 also issued under 26 U.S.C. 6001.
Section 1.45Y-1 also issued under 26 U.S.C. 45Y(f).
Section 1.45Y-2 also issued under 26 U.S.C. 45Y(f).
Section 1.45Y-3 also issued under 26 U.S.C. 45Y(f).
Section 1.45Y-4 also issued under 26 U.S.C. 45Y(f).
Section 1.45Y-5 also issued under 26 U.S.C. 45Y(b) and (f).
Section 1.45Z-3 also issued under 26 U.S.C. 45Z.
Section 1.46-5 also issued under 26 U.S.C. 46(d)(6) and 26 U.S.C. 47(a)(3)(C);
Section 1.46-6 also issued under 26 U.S.C. 46(f)(7);
Section 1.47-1 also issued under 26 U.S.C. 47(a);
Section 1.48-9 also issued under 26 U.S.C. 48(a)(3)(D)(i) and (16).
Section 1.48-13 also issued under 26 U.S.C. 48(a)(10)(C) and (16).
Section 1.48-14 also issued under 26 U.S.C. 48(a)(16).
Section 1.48-15 also issued under 26 U.S.C. 48(a)(15)
Section 1.48D-6 also issued under 26 U.S.C. 48D(d)(6);
Section 1.48D-6T also issued under 26 U.S.C. 48D(d)(2)(E) and (6);
Section 1.48(e)-1 issued under 26 U.S.C. 48.
Section 1.48E-1 also issued under 26 U.S.C. 48E(i).
Section 1.48E-2 also issued under 26 U.S.C. 48E(i).
Section 1.48E-3 also issued under 26 U.S.C. 48E(i).
Section 1.48E-4 also issued under 26 U.S.C. 48E(i).
Section 1.48E-5 also issued under 26 U.S.C. 48E(i).
Section 1.48E(h)-1 also issued under 26 U.S.C. 48E(i).
Section 1.50-2 also issued under 26 U.S.C. 50(a)(3)(C), and 50(a)(6).
Sections 1.50A—1.50B also issued under 85 Stat. 553 (26 U.S.C. 40(b));
Section 1.52-1 also issued under 26 U.S.C. 52(b);
Section 1.56(g)-1 also issued under section 7611(g)(3) of the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239, 103 Stat. 2373).
Section 1.59A-0 also issued under 26 U.S.C. 59A(i).
Section 1.59A-1 also issued under 26 U.S.C. 59A(i).
Section 1.59A-2 also issued under 26 U.S.C. 59A(i).
Section 1.59A-3 also issued under 26 U.S.C. 59A(i).
Section 1.59A-4 also issued under 26 U.S.C. 59A(i).
Section 1.59A-5 also issued under 26 U.S.C. 59A(i).
Section 1.59A-6 also issued under 26 U.S.C. 59A(i).
Section 1.59A-7 also issued under 26 U.S.C. 59A(i).
Section 1.59A-8 also issued under 26 U.S.C. 59A(i).
Section 1.59A-9 also issued under 26 U.S.C. 59A(i).
Section 1.59A-10 also issued under 26 U.S.C. 59A(i).
§ 1.0-1 Internal Revenue Code of 1954 and regulations.
(a) Enactment of law. The Internal Revenue Code of 1954 which became law upon enactment of Public Law 591, 83d Congress, approved August 16, 1954, provides in part as follows:
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That
(a) Citation. (1) The provisions of this Act set forth under the heading “Internal Revenue Title” may be cited as the “Internal Revenue Code of 1954”
(2) The Internal Revenue Code enacted on February 10, 1939, as amended, may be cited as the “Internal Revenue Code of 1939”.
(b) Publication. This Act shall be published as volume 68A of the United States Statutes at Large, with a comprehensive table of contents and an appendix; but without an index or marginal references. The date of enactment, bill number, public law number, and chapter number, shall be printed as a headnote.
(c) Cross reference. For saving provisions, effective date provisions, and other related provisions, see chapter 80 (sec. 7801 and following) of the Internal Revenue Code of 1954.
(d) Enactment of Internal Revenue Title into law. The Internal Revenue Title referred to in subsection (a)(1) is as follows:
(b) Scope of regulations. The regulations in this part deal with (1) the income taxes imposed under subtitle A of the Internal Revenue Code of 1954, and (2) certain administrative provisions contained in subtitle F of such Code relating to such taxes. In general, the applicability of such regulations is commensurate with the applicability of the respective provisions of the Internal Revenue Code of 1954 except that with respect to the provisions of the Internal Revenue Code of 1954 which are deemed to be included in the Internal Revenue Code of 1939, the regulations relating to such provisions are applicable to certain fiscal years and short taxable years which are subject to the Internal Revenue Code of 1939. Those provisions of the regulations which are applicable to taxable years subject to the Internal Revenue Code of 1939 and the specific taxable years to which such provisions are so applicable are identified in each instance. The regulations in 26 CFR (1939) part 39 (Regulations 118) are continued in effect until superseded by the regulations in this part. See Treasury Decision 6091, approved August 16, 1954 (19 FR 5167, C.B. 1954-2, 47).
Normal Taxes and Surtaxes
§ 1.1-1 Income tax on individuals.
(a) General rule. (1) Section 1 of the Code imposes an income tax on the income of every individual who is a citizen or resident of the United States and, to the extent provided by section 871(b) or 877(b), on the income of a nonresident alien individual. For optional tax in the case of taxpayers with adjusted gross income of less than $10,000 (less than $5,000 for taxable years beginning before January 1, 1970) see section 3. The tax imposed is upon taxable income (determined by subtracting the allowable deductions from gross income). The tax is determined in accordance with the table contained in section 1. See subparagraph (2) of this paragraph for reference guides to the appropriate table for taxable years beginning on or after January 1, 1964, and before January 1, 1965, taxable years beginning after December 31, 1964, and before January 1, 1971, and taxable years beginning after December 31, 1970. In certain cases credits are allowed against the amount of the tax. See part IV (section 31 and following), subchapter A, chapter 1 of the Code. In general, the tax is payable upon the basis of returns rendered by persons liable therefor (subchapter A (sections 6001 and following), chapter 61 of the Code) or at the source of the income by withholding. For the computation of tax in the case of a joint return of a husband and wife, or a return of a surviving spouse, for taxable years beginning before January 1, 1971, see section 2. The computation of tax in such a case for taxable years beginning after December 31, 1970, is determined in accordance with the table contained in section 1(a) as amended by the Tax Reform Act of 1969. For other rates of tax on individuals, see section 5(a). For the imposition of an additional tax for the calendar years 1968, 1969, and 1970, see section 51(a).
(2)(i) For taxable years beginning on or after January 1, 1964, the tax imposed upon a single individual, a head of a household, a married individual filing a separate return, and estates and trusts is the tax imposed by section 1 determined in accordance with the appropriate table contained in the following subsection of section 1:
Taxable years beginning in 1964 | Taxable years beginning after 1964 but before 1971 | Taxable years beginning after Dec. 31, 1970 (references in this column are to the Code as amended by the Tax Reform Act of 1969) | |
---|---|---|---|
Single individual | Sec. 1(a)(1) | Sec. 1(a)(2) | Sec. 1(c). |
Head of a household | Sec. 1(b)(1) | Sec. 1(b)(2) | Sec. 1(b). |
Married individual filing a separate return | Sec. 1(a)(1) | Sec. 1(a)(2) | Sec. 1(d). |
Estates and trusts | Sec. 1(a)(1) | Sec. 1(a)(2) | Sec. 1(d). |
(ii) For taxable years beginning after December 31, 1970, the tax imposed by section 1(d), as amended by the Tax Reform Act of 1969, shall apply to the income effectively connected with the conduct of a trade or business in the United States by a married alien individual who is a nonresident of the United States for all or part of the taxable year or by a foreign estate or trust. For such years the tax imposed by section 1(c), as amended by such Act, shall apply to the income effectively connected with the conduct of a trade or business in the United States by an unmarried alien individual (other than a surviving spouse) who is a nonresident of the United States for all or part of the taxable year. See paragraph (b)(2) of § 1.871-8.
(3) The income tax imposed by section 1 upon any amount of taxable income is computed by adding to the income tax for the bracket in which that amount falls in the appropriate table in section 1 the income tax upon the excess of that amount over the bottom of the bracket at the rate indicated in such table.
(4) The provisions of section 1 of the Code, as amended by the Tax Reform Act of 1969, and of this paragraph may be illustrated by the following examples:
Tax on $14,000 (from table) | $3,790.00 |
Tax on $1,750 (at 41 percent as determined from the table) | 717.50 |
Total tax on $15,750 | 4,507.50 |
Tax on $14,000 (from table) | $3,550.00 |
Tax on $1,750 (at 39 percent as determined from the table) | 682.50 |
Total tax on $15,750 | 4,232.50 |
Tax on $14,000 (from table) | $3,210.00 |
Tax on $1,750 (at 31 percent as determined from the table) | 542.50 |
Total tax on $15,750 | 3,752.50 |
(b) Citizens or residents of the United States liable to tax. In general, all citizens of the United States, wherever resident, and all resident alien individuals are liable to the income taxes imposed by the Code whether the income is received from sources within or without the United States. Pursuant to section 876, a nonresident alien individual who is a bona fide resident of a section 931 possession (as defined in § 1.931-1(c)(1) of this chapter) or Puerto Rico during the entire taxable year is, except as provided in section 931 or 933 with respect to income from sources within such possessions, subject to taxation in the same manner as a resident alien individual. As to tax on nonresident alien individuals, see sections 871 and 877.
(c) Who is a citizen. Every person born or naturalized in the United States and subject to its jurisdiction is a citizen. For other rules governing the acquisition of citizenship, see chapters 1 and 2 of title III of the Immigration and Nationality Act (8 U.S.C. 1401-1459). For rules governing loss of citizenship, see sections 349 to 357, inclusive, of such Act (8 U.S.C. 1481-1489), Schneider v. Rusk, (1964) 377 U.S. 163, and Rev. Rul. 70-506, C.B. 1970-2, 1. For rules pertaining to persons who are nationals but not citizens at birth, e.g., a person born in American Samoa, see section 308 of such Act (8 U.S.C. 1408). For special rules applicable to certain expatriates who have lost citizenship with a principal purpose of avoiding certain taxes, see section 877. A foreigner who has filed his declaration of intention of becoming a citizen but who has not yet been admitted to citizenship by a final order of a naturalization court is an alien.
(d) Effective/applicability date. The second sentence of paragraph (b) of this section applies to taxable years ending after April 9, 2008.
§ 1.1-2 Limitation on tax.
(a) Taxable years ending before January 1, 1971. For taxable years ending before January 1, 1971, the tax imposed by section 1 (whether by subsection (a) or subsection (b) thereof) shall not exceed 87 percent of the taxable income for the taxable year. For purposes of determining this limitation the tax under section 1 (a) or (b) and the tax at the 87-percent rate shall each be computed before the allowance of any credits against the tax. Where the alternative tax on capital gains is imposed under section 1201(b), the 87-percent limitation shall apply only to the partial tax computed on the taxable income reduced by 50 percent of the excess of net long-term capital gains over net short-term capital losses. Where, for purposes of computations under the income averaging provisions, section 1201(b) is treated as imposing the alternative tax on capital gains computed under section 1304(e)(2), the 87-percent limitation shall apply only to the tax equal to the tax imposed by section 1, reduced by the amount of the tax imposed by section 1 which is attributable to capital gain net income for the computation year.
(b) Taxable years beginning after December 31, 1970. If, for any taxable year beginning after December 31, 1970, an individual has earned taxable income which exceeds his taxable income as defined by section 1348, the tax imposed by section 1, as amended by the Tax Reform Act of 1969, shall not exceed the sum computed under the provisions of section 1348. For imposition of minimum tax for tax preferences see sections 56 through 58.
§ 1.1-3 Change in rates applicable to taxable year.
For computation of the tax for a taxable year during which a change in the tax rates occurs, see section 21 and the regulations thereunder.
§ 1.1(h)-1 Capital gains look-through rule for sales or exchanges of interests in a partnership, S corporation, or trust.
(a) In general. When an interest in a partnership held for more than one year is sold or exchanged, the transferor may recognize ordinary income (e.g., under section 751(a)), collectibles gain, section 1250 capital gain, and residual long-term capital gain or loss. When stock in an S corporation held for more than one year is sold or exchanged, the transferor may recognize ordinary income (e.g., under sections 304, 306, 341, 1254), collectibles gain, and residual long-term capital gain or loss. When an interest in a trust held for more than one year is sold or exchanged, a transferor who is not treated as the owner of the portion of the trust attributable to the interest sold or exchanged (sections 673 through 679) (a non-grantor transferor) may recognize collectibles gain and residual long-term capital gain or loss.
(b) Look-through capital gain—(1) In general. Look-through capital gain is the share of collectibles gain allocable to an interest in a partnership, S corporation, or trust, plus the share of section 1250 capital gain allocable to an interest in a partnership, determined under paragraphs (b)(2) and (3) of this section.
(2) Collectibles gain—(i) Definition. For purposes of this section, collectibles gain shall be treated as gain from the sale or exchange of a collectible (as defined in section 408(m) without regard to section 408(m)(3)) that is a capital asset held for more than 1 year.
(ii) Share of collectibles gain allocable to an interest in a partnership, S corporation, or a trust. When an interest in a partnership, S corporation, or trust held for more than one year is sold or exchanged in a transaction in which all realized gain is recognized, the transferor shall recognize as collectibles gain the amount of net gain (but not net loss) that would be allocated to that partner (taking into account any remedial allocation under § 1.704-3(d)), shareholder, or beneficiary (to the extent attributable to the portion of the partnership interest, S corporation stock, or trust interest transferred that was held for more than one year) if the partnership, S corporation, or trust transferred all of its collectibles for cash equal to the fair market value of the assets in a fully taxable transaction immediately before the transfer of the interest in the partnership, S corporation, or trust. If less than all of the realized gain is recognized upon the sale or exchange of an interest in a partnership, S corporation, or trust, the same methodology shall apply to determine the collectibles gain recognized by the transferor, except that the partnership, S corporation, or trust shall be treated as transferring only a proportionate amount of each of its collectibles determined as a fraction that is the amount of gain recognized in the sale or exchange over the amount of gain realized in the sale or exchange. With respect to the transfer of an interest in a trust, this paragraph (b)(2) applies only to transfers by non-grantor transferors (as defined in paragraph (a) of this section). This paragraph (b)(2) does not apply to a transaction that is treated, for Federal income tax purposes, as a redemption of an interest in a partnership, S corporation, or trust.
(3) Section 1250 capital gain—(i) Definition. For purposes of this section, section 1250 capital gain means the capital gain (not otherwise treated as ordinary income) that would be treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent.
(ii) Share of section 1250 capital gain allocable to interest in partnership. When an interest in a partnership held for more than one year is sold or exchanged in a transaction in which all realized gain is recognized, there shall be taken into account under section 1(h)(7)(A)(i) in determining the partner’s unrecaptured section 1250 gain the amount of section 1250 capital gain that would be allocated (taking into account any remedial allocation under § 1.704-3(d)) to that partner (to the extent attributable to the portion of the partnership interest transferred that was held for more than one year) if the partnership transferred all of its section 1250 property in a fully taxable transaction for cash equal to the fair market value of the assets immediately before the transfer of the interest in the partnership. If less than all of the realized gain is recognized upon the sale or exchange of an interest in a partnership, the same methodology shall apply to determine the section 1250 capital gain recognized by the transferor, except that the partnership shall be treated as transferring only a proportionate amount of each section 1250 property determined as a fraction that is the amount of gain recognized in the sale or exchange over the amount of gain realized in the sale or exchange. This paragraph (b)(3) does not apply to a transaction that is treated, for Federal income tax purposes, as a redemption of a partnership interest.
(iii) Limitation with respect to net section 1231 gain. In determining a transferor partner’s net section 1231 gain (as defined in section 1231(c)(3)) for purposes of section 1(h)(7)(B), the transferor partner’s allocable share of section 1250 capital gain in partnership property shall not be treated as section 1231 gain, regardless of whether the partnership property is used in the trade or business (as defined in section 1231(b)).
(c) Residual long-term capital gain or loss. The amount of residual long-term capital gain or loss recognized by a partner, shareholder of an S corporation, or beneficiary of a trust on account of the sale or exchange of an interest in a partnership, S corporation, or trust shall equal the amount of long-term capital gain or loss that the partner would recognize under section 741, that the shareholder would recognize upon the sale or exchange of stock of an S corporation, or that the beneficiary would recognize upon the sale or exchange of an interest in a trust (pre-look-through long-term capital gain or loss) minus the amount of look-through capital gain determined under paragraph (b) of this section.
(d) Special rule for tiered entities. In determining whether a partnership, S corporation, or trust has gain from collectibles, such partnership, S corporation, or trust shall be treated as owning its proportionate share of the collectibles of any partnership, S corporation, or trust in which it owns an interest either directly or indirectly through a chain of such entities. In determining whether a partnership has section 1250 capital gain, such partnership shall be treated as owning its proportionate share of the section 1250 property of any partnership in which it owns an interest, either directly or indirectly through a chain of partnerships.
(e) Notification requirements. Reporting rules similar to those that apply to the partners and the partnership under section 751(a) shall apply in the case of sales or exchanges of interests in a partnership, S corporation, or trust that cause holders of such interests to recognize collectibles gain and in the case of sales or exchanges of interests in a partnership that cause holders of such interests to recognize section 1250 capital gain. See § 1.751-1(a)(3).
(f) Examples. The following examples illustrate the requirements of this section:
ASSETS | ||
---|---|---|
Adjusted basis | Market value | |
Cash | $3,000 | $3,000 |
Loans Owed to Partnership | 10,000 | 10,000 |
Collectibles | 1,000 | 3,000 |
Other Capital Assets | 6,000 | 2,000 |
Capital Assets | 7,000 | 5,000 |
Unrealized Receivables | 0 | 14,000 |
Total | 20,000 | 32,000 |
LIABILITIES AND CAPITAL | ||
---|---|---|
Adjusted basis | Market value | |
Liabilities | 2,000 | 2,000 |
Capital: | ||
A | 9,000 | 15,000 |
B | 9,000 | 15,000 |
Total | 20,000 | 32,000 |
(iii) If PRS were to sell all of its section 751 property in a fully taxable transaction for cash equal to the fair market value of the assets immediately prior to the transfer of B’s partnership interest to T, B would be allocated $7,000 of ordinary income from the sale of PRS‘s unrealized receivables. Therefore, B will recognize $7,000 of ordinary income with respect to the unrealized receivables. The difference between the amount of capital gain or loss that the partner would realize in the absence of section 751 ($6,000) and the amount of ordinary income or loss determined under § 1.751-1(a)(2) ($7,000) is the partner’s capital gain or loss on the sale of the partnership interest under section 741. In this case, the transferor has a $1,000 pre-look-through long-term capital loss.
(iv) If PRS were to sell all of its collectibles in a fully taxable transaction for cash equal to the fair market value of the assets immediately prior to the transfer of B’s partnership interest to T, B would be allocated $1,000 of gain from the sale of the collectibles. Therefore, B will recognize $1,000 of collectibles gain on account of the collectibles held by PRS.
(v) The difference between the transferor’s pre-look-through long-term capital gain or loss (−$1,000) and the look-through capital gain determined under this section ($1,000) is the transferor’s residual long-term capital gain or loss on the sale of the partnership interest. Under these facts, B will recognize a $2,000 residual long-term capital loss on account of the sale or exchange of the interest in PRS.
(ii) If X were to sell its antiques in a fully taxable transaction for cash equal to the fair market value of the assets immediately before the transfer to T, A would be allocated $100 of gain on account of the sale. Therefore, A will recognize $100 of collectibles gain (look-through capital gain) on account of the collectibles held by X.
(iii) The difference between the transferor’s pre-look-through long-term capital gain or loss ($50) and the look-through capital gain determined under this section ($100) is the transferor’s residual long-term capital gain or loss on the sale of the S corporation stock. Under these facts, A will recognize $100 of collectibles gain and a $50 residual long-term capital loss on account of the sale of A‘s interest in X.
ASSETS | ||
---|---|---|
Adjusted basis | Market value | |
Cash | $22,000 | $22,000 |
Unrealized Receivables | 0 | 6,000 |
Capital Asset | 2,000 | 5,000 |
Collectible | 3,000 | 9,000 |
Capital Assets | 5,000 | 14,000 |
Total | 27,000 | 42,000 |
(iii) If PRS were to sell all of its section 751 property in a fully taxable transaction immediately before A‘s transfer of the partnership interest, A would be allocated $2,000 of ordinary income. Accordingly, A will recognize $2,000 ordinary income and $5,000 ($7,000-$2,000) of capital gain on account of the transfer to T of A‘s interest in PRS. Fifty percent ($2,500) of that gain is long-term capital gain and 50 percent ($2,500) is short-term capital gain. See § 1.1223-3(c)(1).
(iv) If the collectible were sold or exchanged in a fully taxable transaction immediately before A‘s transfer of the partnership interest, A would be allocated $2,000 of gain attributable to the collectible. The gain attributable to the collectible that is allocable to the portion of the transferred interest in PRS with a long-term holding period is $1,000 (50 percent of $2,000). Accordingly, A will recognize $1,000 of collectibles gain on account of the transfer of A‘s interest in PRS.
(v) The difference between the amount of pre-look-through long-term capital gain or loss ($2,500) and the look-through capital gain ($1,000) is the amount of residual long-term capital gain or loss that A will recognize on account of the transfer of A‘s interest in PRS. Under these facts, A will recognize a residual long-term capital gain of $1,500 and a short-term capital gain of $2,500.
(g) Effective date. This section applies to transfers of interests in partnerships, S corporations, and trusts that occur on or after September 21, 2000.
§ 1.1(i)-1T Questions and answers relating to the tax on unearned income certain minor children (Temporary).
Q-1. To whom does section 1(i) apply?
A-1. Section 1(i) applies to any child who is under 14 years of age at the close of the taxable year, who has at least one living parent at the close of the taxable year, and who recognizes over $1,000 of unearned income during the taxable year.
Q-2. What is the effective date of section 1(i)?
A-2. Section 1(i) applies to taxable years of the child beginning after December 31, 1986.
Q-3. What is the amount of tax imposed by section 1 on a child to whom section 1(i) applies?
A-3. In the case of a child to whom section 1(i) applies, the amount of tax imposed by section 1 equals the greater of (A) the tax imposed by section 1 without regard to section 1(i) or (B) the sum of the tax that would be imposed by section 1 if the child’s taxable income was reduced by the child’s net unearned income, plus the child’s share of the allocable parental tax.
Q-4. What is the allocable parental tax?
A-4. The allocable parental tax is the excess of (A) the tax that would be imposed by section 1 on the sum of the parent’s taxable income plus the net unearned income of all children of such parent to whom section 1(i) applies, over (B) the tax imposed by section 1 on the parent’s taxable income. Thus, the allocable parental tax is not computed with reference to unearned income of a child over 14 or a child under 14 with less than $1,000 of unearned income. See A-10 through A-13 for rules regarding the determination of the parent(s) whose taxable income is taken into account under section 1(i). See A-14 for rules regarding the determination of children of the parent whose net unearned income is taken into account under section 1(i).
Q-5. What is the child’s share of the allocable parental tax?
A-5. The child’s share of the allocable parental tax is an amount that bears the same ratio to the total allocable parental tax as the child’s net unearned income bears to the total net unearned income of all children of such parent to whom section 1(i) applies. See A-14.
Q-6. What is net unearned income?
A-6. Net unearned income is the excess of the portion of adjusted gross income for the taxable year that is not “earned income” as defined in section 911(d)(2) (income that is not attributable to wages, salaries, or other amounts received as compensation for personal services), over the sum of the standard deduction amount provided for under section 63 (c)(5)(A) ($500 for 1987 and 1988; adjusted for inflation thereafter), plus the greater of (A) $500 (adjusted for inflation after 1988) or (B) the amount of allowable itemized deductions that are directly connected with the production of unearned income. A child’s net unearned income for any taxable year shall not exceed the child’s taxable income for such year.
Q-7. Will a child be subject to tax under section 1(i) on net unearned income (as defined in section 1(i) (4) and A-6 of this section) that is attributable to property transferred to the child prior to 1987?
A-7. Yes. The tax imposed by section 1(i) on a child’s net unearned income applies to any net unearned income of the child for taxable years beginning after December 31, 1986, regardless of when the underlying assets were transferred to the child.
Q-8. Will a child be subject to tax under section 1(i) on net unearned income that is attributable to gifts from persons other than the child’s parents or attributable to assets resulting from the child’s earned income?
A-8. Yes. The tax imposed by section 1(i) applies to all net unearned income of the child, regardless of the source of the assets that produced such income. Thus, the rules of section 1(i) apply to income attributable to gifts not only from the parents but also from any other source, such as the child’s grandparents. Section 1(i) also applies to unearned income derived with respect to assets resulting from earned income of the child, such as interest earned on bank deposits.
Q-9. For purposes of section 1(i), does income which is not earned income (as defined in section 911(d)(2)) include social security benefits or pension benefits that are paid to the child?
A-9. Yes. For purposes of section 1(i), earned income (as defined in section 911(d)(2)) does not include any social security or pension benefits paid to the child. Thus, such amounts are included in unearned income to the extent they are includible in the child’s gross income.
Q-10. If a child’s parents file a joint return, what is the taxable income that must be taken into account by the child in determining tax liability under section 1(i)?
A-10. In the case of parents who file a joint return, the parental taxable income to be taken into account in determining the tax liability of a child is the total taxable income shown on the joint return.
Q-11. If a child’s parents are married and file separate tax returns, which parent’s taxable income must be taken into account by the child in determining tax liability under section 1(i)?
A-11. For purposes of determining the tax liability of a child under section 1(i), where such child’s parents are married and file separate tax returns, the parent whose taxable income is the greater of the two for the taxable year shall be taken into account.
Q-12. If the parents of a child are divorced, legally separated, or treated as not married under section 7703(b), which parent’s taxable income is taken into account in computing the child’s tax liability?
A-12. If the child’s parents are divorced, legally separated, or treated as not married under section 7703(b), the taxable income of the custodial parent (within the meaning of section 152(e)) of the child is taken into account under section 1(i) in determining the child’s tax liability.
Q-13. If a parent whose taxable income must be taken into account in determining a child’s tax liability under section 1(i) files a joint return with a spouse who is not a parent of the child, what taxable income must the child take into account?
A-13. The amount of a parent’s taxable income that a child must take into account for purposes of section 1(i) where the parent files a joint return with a spouse who is not a parent of the child is the total taxable income shown on such joint return.
Q-14. In determining a child’s share of the allocable parental tax, is the net unearned income of legally adopted children, children related to such child by half-blood, or children from a prior marriage of the spouse of such child’s parent taken into account in addition to the natural children of such child’s parent?
A-14. Yes. In determining a child’s share of the allocable parental tax, the net unearned income of all children subject to tax under section 1(i) and who use the same parent’s taxable income as such child to determine their tax liability under section 1(i) must be taken into account. Such children are taken into account regardless of whether they are adopted by the parent, related to such child by half-blood, or are children from a prior marriage of the spouse of such child’s parent.
Q-15. Will the unearned income of a child who is subject to section 1(i) that is attributable to gifts given to the child under the Uniform Gift to Minors Act (UGMA) be subject to tax under section 1(i)?
A-15. Yes. A gift under the UGMA vests legal title to the property in the child although an adult custodian is given certain rights to deal with the property until the child attains majority. Any unearned income attributable to such a gift is the child’s unearned income and is subject to tax under section 1(i), whether distributed to the child or not.
Q-16. Will a child who is a beneficiary of a trust be required to take into account the income of a trust in determining the child’s tax liability under section 1(i)?
A-16. The income of a trust must be taken into account for purposes of determining the tax liability of a beneficiary who is subject to section 1(i) only to the extent it is included in the child’s gross income for the taxable year under sections 652(a) or 662(a). Thus, income from a trust for the fiscal taxable year of a trust ending during 1987, that is included in the gross income of a child who is subject to section 1(i) and who has a calendar taxable year, will be subject to tax under section 1(i) for the child’s 1987 taxable year.
Q-17. What effect will a subsequent adjustment to a parent’s taxable income have on the child’s tax liability if such parent’s taxable income was used to determine the child’s tax liability under section 1(i) for the same taxable year?
A-17. If the parent’s taxable income is adjusted and if, for the same taxable year as the adjustment, the child paid tax determined under section 1(i) with reference to that parent’s taxable income, then the child’s tax liability under section 1(i) must be recomputed using the parent’s taxable income as adjusted.
Q-18. In the case where more than one child who is subject to section 1(i) uses the same parent’s taxable income to determine their allocable parental tax, what effect will a subsequent adjustment to the net unearned income of one child have on the other child’s share of the allocable parental tax?
A-18. If, for the same taxable year, more than one child uses the same parent’s taxable income to determine their share of the allocable parental tax and a subsequent adjustment is made to one or more of such children’s net unearned income, each child’s share of the allocable parental tax must be recomputed using the combined net unearned income of all such children as adjusted.
Q-19. If a recomputation of a child’s tax under section 1(i), as a result of an adjustment to the taxable income of the child’s parents or another child’s net unearned income, results in additional tax being imposed by section 1(i) on the child, is the child subject to interest and penalties on such additional tax?
A-19. Any additional tax resulting from an adjustment to the taxable income of the child’s parents or the net unearned income of another child shall be treated as an underpayment of tax and interest shall be imposed on such underpayment as provided in section 6601. However, the child shall not be liable for any penalties on the underpayment resulting from additional tax being imposed under section 1(i) due to such an adjustment.
Q-20. Does the phase-out of the parent’s 15 percent rate bracket and personal exemptions under section 1(g), if applicable, have any effect on the calculation of the allocable parental tax imposed on a child’s net unearned income under section 1(i)?
A-20. Yes. Any phase-out of the parent’s 15 percent rate bracket or personal exemptions under section 1(g) is given full effect in determining the tax that would be imposed on the sum of the parent’s taxable income and the total net unearned income of all children of the parent. Thus, any additional tax on a child’s net unearned income resulting from the phase-out of the 15 percent rate bracket and the personal exemptions is reflected in the tax liability of the child.
Q-21. For purposes of calculating a parent’s tax liability or the allocable parental tax imposed on a child, are other phase-outs, limitations, or floors on deductions or credits, such as the phase-out of the $25,000 passive loss allowance for rental real estate activities under section 469(i)(3) or the 2 percent of AGI floor on miscellaneous itemized deductions under section 67, affected by the addition of a child’s net unearned income to the parent’s taxable income?
A-21. No. A child’s net unearned income is not taken into account in computing any deduction or credit for purposes of determining the parent’s tax liability or the child’s allocable parental tax. Thus, for example, although the amounts allowable to the parent as a charitable contribution deduction, medical expense deduction, section 212 deduction, or a miscellaneous itemized deduction are affected by the amount of the parent’s adjusted gross income, the amount of these deductions that is allowed does not change as a result of the application of section 1(i) because the amount of the parent’s adjusted gross income does not include the child’s net unearned income. Similarly, the amount of itemized deductions that is allowed to a child does not change as a result of section 1(i) because section 1(i) only affects the amount of tax liability and not the child’s adjusted gross income.
Q-22. If a child is unable to obtain information concerning the tax return of the child’s parents directly from such parents, how may the child obtain information from the parent’s tax return which is necessary to determine the child’s tax liability under section 1(i)?
A-22. Under section 6103(e)(1)(A)(iv), a return of a parent shall, upon written request, be open to inspection or disclosure to a child of that individual (or the child’s legal representative) to the extent necessary to comply with section 1(i). Thus, a child may request the Internal Revenue Service to disclose sufficient tax information about the parent to the child so that the child can properly file his or her return.
§ 1.2-1 Tax in case of joint return of husband and wife or the return of a surviving spouse.
(a) Taxable year ending before January 1, 1971. (1) For taxable years ending before January 1, 1971, in the case of a joint return of husband and wife, or the return of a surviving spouse as defined in section 2(b), the tax imposed by section 1 shall be twice the tax that would be imposed if the taxable income were reduced by one-half. For rules relating to the filing of joint returns of husband and wife, see section 6013 and the regulations thereunder.
(2) The method of computing, under section 2(a), the tax of husband and wife in the case of a joint return, or the tax of a surviving spouse, is as follows:
(i) First, the taxable income is reduced by one-half. Second, the tax is determined as provided by section 1 by using the taxable income so reduced. Third, the tax so determined, which is the tax that would be determined if the taxable income were reduced by one-half, is then multiplied by two to produce the tax imposed in the case of the joint return or the return of a surviving spouse, subject, however, to the allowance of any credits against the tax under the provisions of sections 31 through 38 and the regulations thereunder.
(ii) The limitation under section 1(c) of the tax to an amount not in excess of a specified percent of the taxable income for the taxable year is to be applied before the third step above, that is, the limitation to be applied upon the tax is determined as the applicable specified percent of one-half of the taxable income for the taxable year (such one-half of the taxable income being the actual aggregate taxable income of the spouses, or the total taxable income of the surviving spouse, as the case may be, reduced by one-half). For the percent applicable in determining the limitation of the tax under section 1(c), see § 1.1-2(a). After such limitation is applied, then the tax so limited is multiplied by two as provided in section 2(a) (the third step above).
(iii) The following computation illustrates the method of application of section 2(a) in the determination of the tax of a husband and wife filing a joint return for the calendar year 1965. If the combined gross income is $8,200, and the only deductions are the two exemptions of the taxpayers under section 151(b) and the standard deduction under section 141, the tax on the joint return for 1965, without regard to any credits against the tax, is $1,034.20 determined as follows:
1. Gross income | $8,200.00 | |
2. Less: | ||
Standard deduction, section 141 | $820 | |
Deduction for personal exemption, section 151 | 1,200 | 2,020.00 |
3. Taxable income | 6,180.00 | |
4. Taxable income reduced by one-half | 3,090.00 | |
5. Tax computed by the tax table provided under section 1(a)(2) ($310 plus 19 percent of excess over $2,000) | 517.10 | |
6. Twice the tax in item 5 | 1,034.20 |
(b) Taxable years beginning after December 31, 1970. (1) For taxable years beginning after December 31, 1970, in the case of a joint return of husband and wife, or the return of a surviving spouse as defined in section 2(a) of the Code as amended by the Tax Reform Act of 1969, the tax shall be determined in accordance with the table contained in section 1(a) of the Code as so amended. For rules relating to the filing of joint returns of husband and wife see section 6013 as amended and the regulations thereunder.
(2) The following computation illustrates the method of computing the tax of a husband and wife filing a joint return for calendar year 1971. If the combined gross income is $8,200, and the only deductions are the two exemptions of the taxpayers under section 151(b), as amended, and the standard deduction under section 141, as amended, the tax on the joint return for 1971, without regard to any credits against the tax, is $968.46, determined as follows:
1. Gross income | $8,200.00 | |
2. Less: | ||
Standard deduction, section 141 | $1,066.00 | |
Deduction for personal exemption, section 151 | 1,300.00 | 2,366.00 |
3. Taxable income | 5,834.00 | |
4. Tax computed by the tax table provided under section 1(a) ($620 plus 19 percent of excess over $4,000) | 968.46 |
(3) The limitation under section 1348 with respect to the maximum rate of tax on earned income shall apply to a married individual only if such individual and his spouse file a joint return for the taxable year.
(c) Death of a spouse. If a joint return of a husband and wife is filed under the provisions of section 6013 and if the husband and wife have different taxable years solely because of the death of either spouse, the taxable year of the deceased spouse covered by the joint return shall, for the purpose of the computation of the tax in respect of such joint return, be deemed to have ended on the date of the closing of the surviving spouse’s taxable year.
(d) Computation of optional tax. For computation of optional tax in the case of a joint return or the return of a surviving spouse, see section 3 and the regulations thereunder.
(e) Change in rates. For treatment of taxable years during which a change in the tax rates occurs see section 21 and the regulations thereunder.
§ 1.2-2 Definitions and special rules.
(a) Surviving spouse. (1) If a taxpayer is eligible to file a joint return under the Internal Revenue Code of 1954 without regard to section 6013(a) (3) thereof for the taxable year in which his spouse dies, his return for each of the next 2 taxable years following the year of the death of the spouse shall be treated as a joint return for all purposes if all three of the following requirements are satisfied:
(i) He has not remarried before the close of the taxable year the return for which is sought to be treated as a joint return, and
(ii) He maintains as his home a household which constitutes for the taxable year the principal place of abode as a member of such household of a person who is (whether by blood or adoption) a son, stepson, daughter, or stepdaughter of the taxpayer, and
(iii) He is entitled for the taxable year to a deduction under section 151 (relating to deductions for dependents) with respect to such son, stepson, daughter, or stepdaughter.
(2) See paragraphs (c)(1) and (d) of this section for rules for the determination of when the taxpayer maintains as his home a household which constitutes for the taxable year the principal place of abode, as a member of such household, of another person.
(3) If the taxpayer does not qualify as a surviving spouse he may nevertheless qualify as a head of a household if he meets the requirements of § 1.2-2(b).
(4) The following example illustrates the provisions relating to a surviving spouse:
(b) Head of household. (1) A taxpayer shall be considered the head of a household if, and only if, he is not married at the close of his taxable year, is not a surviving spouse (as defined in paragraph (a) of this section, and (i) maintains as his home a household which constitutes for such taxable year the principal place of abode, as a member of such household, of at least one of the individuals described in subparagraph (3), or (ii) maintains (whether or not as his home) a household which constitutes for such taxable year the principal place of abode of one of the individuals described in subparagraph (4).
(2) Under no circumstances shall the same person be used to qualify more than one taxpayer as the head of a household for the same taxable year.
(3) Any of the following persons may qualify the taxpayer as a head of a household:
(i) A son, stepson, daughter, or stepdaughter of the taxpayer, or a descendant of a son or daughter of the taxpayer. For the purpose of determining whether any of the stated relationships exist, a legally adopted child of a person is considered a child of such person by blood. If any such person is not married at the close of the taxable year of the taxpayer, the taxpayer may qualify as the head of a household by reason of such person even though the taxpayer may not claim a deduction for such person under section 151, for example, because the taxpayer does not furnish more than half of the support of such person. However, if any such person is married at the close of the taxable year of the taxpayer, the taxpayer may qualify as the head of a household by reason of such person only if the taxpayer is entitled to a deduction for such person under section 151 and the regulations thereunder. In applying the preceding sentence there shall be disregarded any such person for whom a deduction is allowed under section 151 only by reason of section 152(c) (relating to persons covered by a multiple support agreement).
(ii) Any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such person under section 151 and paragraphs (3) through (8) of section 152(a) and the regulations thereunder. Under section 151 the taxpayer may be entitled to a deduction for any of the following persons:
(a) His brother, sister, stepbrother, or stepsister;
(b) His father or mother, or an ancestor of either;
(c) His stepfather or stepmother;
(d) A son or a daughter of his brother or sister;
(e) A brother or sister of his father or mother; or
(f) His son-in-law, daughter-in-law, father-in-law, mother-in-law, brother- in-law, or sister-in-law;
(4) The father or mother of the taxpayer may qualify the taxpayer as a head of a household, but only if the taxpayer is entitled to a deduction for the taxable year for such father or mother under section 151 (determined without regard to section 152(c)). For example, an unmarried taxpayer who maintains a home for his widowed mother may not qualify as the head of a household by reason of his maintenance of a home for his mother if his mother has gross income equal to or in excess of the amount determined pursuant to § 1.151-2 applicable to the calendar year in which the taxable year of the taxpayer begins, or if he does not furnish more than one-half of the support of his mother for such calendar year. For this purpose, a person who legally adopted the taxpayer is considered the father or mother of the taxpayer.
(5) For the purpose of this paragraph, the status of the taxpayer shall be determined as of the close of the taxpayer’s taxable year. A taxpayer shall be considered as not married if at the close of his taxable year he is legally separated from his spouse under a decree of divorce or separate maintenance, or if at any time during the taxable year the spouse to whom the taxpayer is married at the close of his taxable year was a nonresident alien. A taxpayer shall be considered married at the close of his taxable year if his spouse (other than a spouse who is a nonresident alien) dies during such year.
(6) If the taxpayer is a nonresident alien during any part of the taxable year he may not qualify as a head of a household even though he may comply with the other provisions of this paragraph. See the regulations prescribed under section 871 for a definition of nonresident alien.
(c) Household. (1) In order for a taxpayer to be considered as maintaining a household by reason of any individual described in paragraph (a)(1) or (b)(3) of this section, the household must actually constitute the home of the taxpayer for his taxable year. A physical change in the location of such home will not prevent a taxpayer from qualifying as a head of a household. Such home must also constitute the principal place of abode of at least one of the persons specified in such paragraph (a)(1) or (b)(3) of this section. It is not sufficient that the taxpayer maintain the household without being its occupant. The taxpayer and such other person must occupy the household for the entire taxable year of the taxpayer. However, the fact that such other person is born or dies within the taxable year will not prevent the taxpayer from qualifying as a head of household if the household constitutes the principal place of abode of such other person for the remaining or preceding part of such taxable year. The taxpayer and such other person will be considered as occupying the household for such entire taxable year notwithstanding temporary absences from the household due to special circumstances. A nonpermanent failure to occupy the common abode by reason of illness, education, business, vacation, military service, or a custody agreement under which a child or stepchild is absent for less than 6 months in the taxable year of the taxpayer, shall be considered temporary absence due to special circumstances. Such absence will not prevent the taxpayer from being considered as maintaining a household if (i) it is reasonable to assume that the taxpayer or such other person will return to the household, and (ii) the taxpayer continues to maintain such household or a substantially equivalent household in anticipation of such return.
(2) In order for a taxpayer to be considered as maintaining a household by reason of any individual described in paragraph (b)(4) of this section, the household must actually constitute the principal place of abode of the taxpayer’s dependent father or mother, or both of them. It is not, however, necessary for the purposes of such subparagraph for the taxpayer also to reside in such place of abode. A physical change in the location of such home will not prevent a taxpayer from qualifying as a head of a household. The father or mother of the taxpayer, however, must occupy the household for the entire taxable year of the taxpayer. They will be considered as occupying the household for such entire year notwithstanding temporary absences from the household due to special circumstances. For example, a nonpermanent failure to occupy the household by reason of illness or vacation shall be considered temporary absence due to special circumstances. Such absence will not prevent the taxpayer from qualifying as the head of a household if (i) it is reasonable to assume that such person will return to the household, and (ii) the taxpayer continues to maintain such household or a substantially equivalent household in anticipation of such return. However, the fact that the father or mother of the taxpayer dies within the year will not prevent the taxpayer from qualifying as a head of a household if the household constitutes the principal place of abode of the father or mother for the preceding part of such taxable year.
(d) Cost of maintaining a household. A taxpayer shall be considered as maintaining a household only if he pays more than one-half the cost thereof for his taxable year. The cost of maintaining a household shall be the expenses incurred for the mutual benefit of the occupants thereof by reason of its operation as the principal place of abode of such occupants for such taxable year. The cost of maintaining a household shall not include expenses otherwise incurred. The expenses of maintaining a household include property taxes, mortgage interest, rent, utility charges, upkeep and repairs, property insurance, and food consumed on the premises. Such expenses do not include the cost of clothing, education, medical treatment, vacations, life insurance, and transportation. In addition, the cost of maintaining a household shall not include any amount which represents the value of services rendered in the household by the taxpayer or by a person qualifying the taxpayer as a head of a household or as a surviving spouse.
(e) Certain married individuals living apart. For taxable years beginning after December 31, 1969, an individual who is considered as not married under section 143(b) shall be considered as not married for purposes of determining whether he or she qualifies as a single individual, a married individual, a head of household or a surviving spouse under sections 1 and 2 of the Code.
§ 1.3-1 Application of optional tax.
(a) General rules. (1) For taxable years ending before January 1, 1970, an individual whose adjusted gross income is less than $5,000 (or a husband and wife filing a joint return whose combined adjusted gross income is less than $5,000) may elect to pay the tax imposed by section 3 in place of the tax imposed by section 1 (a) or (b). For taxable years beginning after December 31, 1969 and before January 1, 1971 an individual whose adjusted gross income is less than $10,000 (or a husband and wife filing a joint return whose combined adjusted gross income is less than $10,000) may elect to pay the tax imposed by section 3 as amended by the Tax Reform Act of 1969 in place of the tax imposed by section 1 (a) or (b). For taxable years beginning after December 31, 1970 an individual whose adjusted gross income is less than $10,000 (or a husband and wife filing a joint return whose combined adjusted gross income is less than $10,000) may elect to pay the tax imposed by section 3 as amended in place of the tax imposed by section 1 as amended. See § 1.4-2 for the manner of making such election. A taxpayer may make such election regardless of the sources from which his income is derived and regardless of whether his income is computed by the cash method or the accrual method. See section 62 and the regulations thereunder for the determination of adjusted gross income. For the purpose of determining whether a taxpayer may elect to pay the tax under section 3, the amount of the adjusted gross income is controlling, without reference to the number of exemptions to which the taxpayer may be entitled. See section 4 and the regulations thereunder for additional rules applicable to section 3.
(2) The following examples illustrate the rule that section 3 applies only if the adjusted gross income is less than $10,000 ($5,000 for taxable years ending before January 1, 1970).
(b) Surviving spouse. The return of a surviving spouse is treated as a joint return for purposes of section 3. See section 2, and the regulations thereunder, with respect to the qualifications of a taxpayer as a surviving spouse. Accordingly, if the taxpayer qualifies as a surviving spouse and elects to pay the optional tax, he shall use the column in the tax table, appropriate to his number of exemptions, provided for cases in which a joint return is filed.
(c) Use of tax table. (1) To determine the amount of the tax, the individual ascertains the amount of his adjusted gross income, refers to the appropriate table set forth in section 3 or the regulations thereunder, ascertains the income bracket into which such income falls, and, using the number of exemptions applicable to his case, finds the tax in the vertical column having at the top thereof a number corresponding to the number of exemptions to which the taxpayer is entitled.
(2) Section 3(b) (relating to taxable years beginning after Dec. 31, 1964 and ending before Jan. 1, 1970) contains 5 tables for use in computing the tax. Table I is to be used by a single person who is not a head of household. Table II is to be used by a head of household. Table III is to be used by married persons filing joint returns and by a surviving spouse. Table IV is to be used by married persons filing separate returns using the 10 percent standard deduction. Table V is to be used by married persons filing separate returns using the minimum standard deduction. For an explanation of the standard deduction see section 141 and the regulations thereunder.
(3) 30 tables are provided for use in computing the tax under the Tax Reform Act of 1969. Tables I through XV apply for taxable years beginning after December 31, 1969 and ending before January 1, 1971. Tables XVI through XXX apply for taxable years beginning after December 31, 1970. The standard deduction for Tables I through XV, applicable to taxable years beginning in 1970, is 10 percent. The standard deduction for Tables XVI through XXX, applicable to taxable years beginning in 1971, is 13 percent. For an explanation of the standard deduction and the low income allowance see section 141 as amended by the Tax Reform Act of 1969.
(4) In the case of married persons filing separate returns who qualify to use the optional tax imposed by section 3, such persons shall use the tax imposed by the table for the applicable year in accordance with the rules prescribed by sections 4(c) and 141 and the regulations thereunder governing the use and application of the standard deduction and the low income allowance.
(5) The tax shown in the tax tables set forth in section 3 or the regulations thereunder reflects full income splitting in the case of a joint return (including the return of a surviving spouse) and lesser income splitting in the case of a head of household. Therefore, it is possible for the tax shown in the tables relating to joint returns, or relating to a return of a head of a household, to be lower than that shown in the table for separate returns even though the amounts of adjusted gross income and the number of exemptions are the same.
§ 1.4-1 Number of exemptions.
(a) For the purpose of determining the optional tax imposed under section 3, the taxpayer shall use the number of exemptions allowable to him as deductions under section 151. See sections 151, 152, and 153, and the regulations thereunder. In general, one exemption is allowed for the taxpayer; one exemption for his spouse if a joint return is made, or if a separate return is made by the taxpayer and his spouse has no gross income for the calendar year in which the taxable year of the taxpayer begins and is not the dependent of another taxpayer for such calendar year; and one exemption for each dependent whose gross income for the calendar year in which the taxable year of the taxpayer begins is less than the applicable amount determined pursuant to § 1.151-2. No exemption is allowed for any dependent who has made a joint return with his spouse for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins. The taxpayer may, in certain cases, be allowed an exemption for a dependent child of the taxpayer notwithstanding the fact that such child has gross income equal to or in excess of the amount determined pursuant to § 1.151-2 applicable to the calendar year in which the taxable year of the taxpayer begins. The requirements for the allowance of such an exemption are set forth in paragraph (c) of § 1.152-1. See paragraphs (c) and (d) of § 1.151-1 with respect to additional exemptions for a taxpayer or spouse who has attained the age 65 years and for a blind taxpayer or blind spouse
(b) The application of this section may be illustrated by the following examples:
§ 1.4-2 Elections.
(a) Making of election. The election to pay the optional tax imposed under section 3 shall be made by (1) filing a return on Form 1040A, or (2) filing a return on Form 1040 and electing in such return, in accordance with the provisions of section 144 and the regulations thereunder, to take the standard deduction provided by section 141.
(b) Election under section 3 and election of standard deduction. Section 144 (a) and the regulations thereunder provide rules for treating an election to pay the tax under section 3 as an election to take the standard deduction, and for treating an election to take the standard deduction as an election to pay the tax under section 3. For example, if the taxpayer’s return shows $5,000 or more of adjusted gross income and he elects to take the standard deduction, he will be deemed to have elected to pay the tax under section 3 if it is subsequently determined that his correct adjusted gross income is less than $5,000.
(c) [Reserved]
(d) Change of election. For rules relating to a change of election to pay, or not to pay, the optional tax imposed under section 3, see section 144 (b) and the regulations thereunder.
§ 1.4-3 Husband and wife filing separate returns.
(a) In general. If the separate adjusted gross income of a husband is less than $5,000 and the separate adjusted gross income of his wife is less than $5,000, and if each is required to file a return, the husband and the wife must each elect to pay the optional tax imposed under section 3 or neither may so elect. If the separate adjusted gross income of each spouse is $5,000 or more, then neither spouse can elect to pay the optional tax imposed under section 3. If the adjusted gross income of one spouse is $5,000 or more and that of the other spouse is less than $5,000, the election to pay the optional tax imposed under section 3 may be exercised by the spouse having adjusted gross income of less than $5,000 only if the spouse having adjusted gross income of $5,000 or more, in computing taxable income, uses the standard deduction provided by section 141. If the spouse having adjusted gross income of $5,000 or more does not use the standard deduction, then the spouse having adjusted gross income of less than $5,000 may not elect to pay the optional tax and must compute taxable income without regard to the standard deduction. Accordingly, if the spouse having adjusted gross income of $5,000 or more itemizes the deductions allowed by sections 161 and 211 in computing taxable income, the spouse having adjusted gross income of less than $5,000 must also compute taxable income by itemizing the deductions allowed by sections 161 and 211, and must pay the tax imposed by section 1. For rules relative to the election to take the standard deduction by husband and wife, see part IV (section 141 and following), subchapter B, chapter 1 of the Code, and the regulations thereunder.
(b) Taxable years beginning after December 31, 1963, and before January 1, 1970. (1) In the case of a husband and wife filing a separate return for a taxable year beginning after December 31, 1963, and before January 1, 1970, the optional tax imposed by section 3 shall be—
(i) For taxable years beginning in 1964, the lesser of the tax shown in Table IV (relating to the 10-percent standard deduction for married persons filing separate returns) or Table V (relating to the minimum standard deduction for married persons filing separate returns) of section 3(a), and
(ii) For a taxable year beginning after December 31, 1964, and before January 1, 1970, the lesser of the tax shown in Table IV (relating to the 10-percent standard deduction for married persons filing separate returns) or Table V (relating to minimum standard deduction for married persons filing separate returns) of section 3(b).
(2) If the tax of one spouse is determined with regard to the 10-percent standard deduction provided for in Table IV of section 3(a) or 3(b) or if such spouse in computing taxable income uses the 10-percent standard deduction provided for in section 141(b), then the minimum standard deduction provided for in Table V of section 3(a) or 3(b) shall not apply in the case of the other spouse, if such spouse elects to pay the optional tax imposed under section (3). Thus, if a husband and wife compute their tax with reference to the standard deduction, one cannot elect to use the 10-percent standard deduction and the other elect to use the minimum standard deduction. However, an individual described in section 141(d)(2) may elect pursuant to such section and the regulations thereunder to pay the tax shown in Table V of section 3(a) or 3(b) in lieu of the tax shown in Table IV of section 3(a) or 3(b). See section 141(d) and the regulations thereunder for rules relating to the standard deduction in the case of married individuals filing separate returns.
(c) Taxable years beginning after December 31, 1969. (1) In the case of a husband and wife filing a separate return for a taxable year beginning after December 31, 1969, the optional tax imposed by section 3 shall be the lesser of the tax shown in—
(i) The table prescribed under section 3 applicable to such taxable year in the case of married persons filing separate returns which applies the percentage standard deduction, or
(ii) The table prescribed under section 3 applicable to such taxable year in the case of married persons filing separate returns which applies the low income allowance.
(2) If the tax of one spouse is determined by the table described in subparagraph (1)(i) of this paragraph or if such spouse in computing taxable income uses the percentage standard deduction provided for in section 141(b), then the table described in subparagraph (1)(ii) of this paragraph shall not apply in the case of the other spouse, if such other spouse elects to pay the optional tax imposed under section 3. Thus, if a husband and wife compute the tax with reference to the standard deduction, one cannot elect to use the percentage standard deduction and the other elect to use the low income allowance. A married individual described in section 141(d)(2) may elect pursuant to such section and the regulations thereunder to pay the tax shown in the table described by subparagraph (1)(ii) of this paragraph in lieu of the tax shown in the table described by subparagraph (1)(i) of this paragraph. See section 141(d) and the regulations thereunder for rules relating to the standard deduction in the case of married individuals filing separate returns.
(d) Determination of marital status. For the purpose of applying the restrictions upon the right of a married person to elect to pay the tax under section 3, (1) the determination of marital status is made as of the close of the taxpayer’s taxable year or, if his spouse died during such year, as of the date of death; (2) a person legally separated from his spouse under a decree of divorce or separate maintenance on the last day of his taxable year (or the date of death of his spouse, whichever is applicable) is not considered as married; and (3) with respect to taxable years beginning after December 31, 1969, a person, although considered as married within the meaning of section 143(a), is considered as not married if he lives apart from his spouse and satisfies the requirements set forth in section 143(b). See section 143 and the regulations thereunder.
§ 1.4-4 Short taxable year caused by death.
An individual making a return for a period of less than 12 months on account of a change in his accounting period may not elect to pay the optional tax under section 3. However, the fact that the taxable year is less than 12 months does not prevent the determination of the tax for the taxable year under section 3 if the short taxable year results from the death of the taxpayer.
Tax on Corporations
§ 1.11-1 Tax on corporations.
(a) Every corporation, foreign or domestic, is liable to the tax imposed under section 11 except (1) corporations specifically excepted under such section from such tax; (2) corporations expressly exempt from all taxation under subtitle A of the Code (see section 501); and (3) corporations subject to tax under section 511(a). For taxable years beginning after December 31, 1966, foreign corporations engaged in trade or business in the United States shall be taxable under section 11 only on their taxable income which is effectively connected with the conduct of a trade or business in the United States (see section 882(a)(1)). For definition of the terms “corporations,” “domestic,” and “foreign,” see section 7701(a) (3), (4), and (5), respectively. It is immaterial that a domestic corporation, and for taxable years beginning after December 31, 1966, a foreign corporation engaged in trade or business in the United States, which is subject to the tax imposed by section 11 may derive no income from sources within the United States. The tax imposed by section 11 is payable upon the basis of the returns rendered by the corporations liable thereto, except that in some cases a tax is to be paid at the source of the income. See subchapter A (sections 6001 and following), chapter 61 of the Code, and section 1442.
(b) The tax imposed by section 11 consists of a normal tax and a surtax. The normal tax and the surtax are both computed upon the taxable income of the corporation for the taxable year, that is, upon the gross income of the corporation minus the deductions allowed by chapter 1 of the Code. However, the deduction provided in section 242 for partially tax-exempt interest is not allowed in computing the taxable income subject to the surtax.
(c) The normal tax is at the rate of 22 percent and is applied to the taxable income for the taxable year. However, in the case of a taxable year ending after December 31, 1974, and before January 1, 1976, the normal tax is at the rate of 20 percent of so much of the taxable income as does not exceed $25,000 and at the rate of 22 percent of so much of the taxable income as does exceed $25,000 and is applied to the taxable income for the taxable year.
(d) The surtax is at the rate of 26 percent and is upon the taxable income (computed without regard to the deduction, if any, provided in section 242 for partially tax-exempt interest) in excess of $25,000. However, in the case of a taxable year ending after December 31, 1974, and before January 1, 1976, the surtax is upon the taxable income (computed as provided in the preceding sentence) in excess of $50,000. In certain circumstances the exemption from surtax may be disallowed in whole or in part. See sections 269, 1551, 1561, and 1564 and the regulations thereunder. For purposes of sections 244, 247, 804, 907, 922 and §§ 1.51-1 and 1.815-4, when the phrase “the sum of the normal tax rate and the surtax rate for the taxable year” is used in any such section, the normal tax rate for all taxable years beginning after December 31, 1963, and ending before January 1, 1976, shall be considered to be 22 percent.
(e) The computation of the tax on corporations imposed under section 11 may be illustrated by the following example:
Gross income | $86,000 | |
Deductions: | ||
Partially tax-exempt interest | $5,000 | |
Other | 11,000 | 16,000 |
Taxable income | 70,000 | |
Normal tax (22 percent of $70,000) | 15,400 | |
Taxable income | 70,000 | |
Add: Amount of partially tax-exempt interest deducted in computing taxable income | 5,000 | |
Taxable income subject to surtax | 75,000 | |
Less: Exemption from surtax | 25,000 | |
Excess of taxable income subject to surtax over exemption | 50,000 | |
Surtax (26 percent of $50,000) | 13,000 |
(f) For special rules applicable to foreign corporations engaged in trade or business within the United States, see section 882 and the regulations thereunder. For additional tax on personal holding companies, see part II (section 541 and following), subchapter G, chapter 1 of the Code, and the regulations thereunder. For additional tax on corporations improperly accumulating surplus, see part I (section 531 and following), subchapter G, chapter 1 of the Code, and the regulations thereunder. For treatment of China Trade Act corporations, see sections 941 and 942 and the regulations thereunder. For treatment of Western Hemisphere trade corporations, see sections 921 and 922 and the regulations thereunder. For treatment of capital gains and losses, see subchapter P (section 1201 and following), chapter 1 of the Code. For computation of the tax for a taxable year during which a change in the tax rates occurs, see section 21 and the regulations thereunder.
Changes in Rates During a Taxable Year
§ 1.15-1 Changes in rate during a taxable year.
(a) Section 21 applies to all taxpayers, including individuals and corporations. It provides a general rule applicable in any case where (1) any rate of tax imposed by chapter 1 of the Code upon the taxpayer is increased or decreased, or any such tax is repealed, and (2) the taxable year includes the effective date of the change, except where that date is the first day of the taxable year. For example, the normal tax on corporations under section 11(b) was decreased from 30 percent to 22 percent in the case of a taxable year beginning after December 31, 1963. Accordingly, the tax for a taxable year of a corporation beginning on January 1, 1964, would be computed under section 11(b) at the new rate without regard to section 21. However, for any taxable year beginning before January 1, 1964, and ending on or after that date, the tax would be computed under section 21. For additional circumstances under which section 21 is not applicable, see paragraph (k) of this section.
(b) In any case in which section 21 is applicable, a tentative tax shall be computed by applying to the taxable income for the entire taxable year the rate for the period within the taxable year before the effective date of change, and another tentative tax shall be computed by applying to the taxable income for the entire taxable year the rate for the period within the taxable year on or after such effective date. The tax imposed on the taxpayer is the sum of—
(1) An amount which bears the same ratio to the tentative tax computed at the rate applicable to the period within the taxable year before the effective date of the change that the number of days in such period bears to the number of days in the taxable year, and
(2) An amount which bears the same ratio to the tentative tax computed at the rate applicable to the period within the taxable year on and after the effective date of the change that the number of days in such period bears to the number of days in the taxable year.
(c) If the rate of tax is changed for taxable years “beginning after” or “ending after” a certain date, the following day is considered the effective date of the change for purposes of section 21. If the rate is changed for taxable years “beginning on or after” a certain date, that date is considered the effective date of the change for purposes of section 21. This rule may be illustrated by the following examples:
(d) If a tax is repealed, the repeal will be treated as a change of rate for purposes of section 21, and the rate for the period after the repeal (for purposes of computing the tentative tax with respect to that period) will be considered zero. For example, the Tax Reform Act of 1969 repealed section 1562, which imposed a 6 percent additional tax on controlled corporations electing multiple surtax exemptions, effective for taxable years beginning after December 31, 1974. For such controlled corporations having taxable years beginning in 1974 and ending in 1975, the rate for the period ending before January 1, 1975, would be 6 percent; the rate for the period beginning after December 31, 1974, would be zero. However, subject to the rules stated in this section, section 21 does not apply to the imposition of a new tax. For example, if a new tax is imposed for taxable years beginning on or after July 1, 1972, a computation under section 21 would not be required with respect to such new tax in the case of taxable years beginning before July 1, 1972, and ending on or after that date. If the effective date of the imposition of a new tax and the effective date of a change in rate of such tax fall in the same taxable year, section 21 is not applicable in computing the taxpayer’s liability for such tax for such year unless the new tax is expressly imposed upon the taxpayer for a portion of his taxable year prior to the change in rate.
(e) If a husband and wife have different taxable years because of the death of either spouse, and if a joint return is filed with respect to the taxable year of each, then, for purposes of section 21, the joint return shall be treated as if the taxable years of both spouses ended on the date of the closing of the surviving spouse’s taxable year. See section 6013 (c), relating to treatment of joint return after death of either spouse. Accordingly, if a change in the rate of tax is effective during the taxable year of the surviving spouse, the tentative taxes with respect to the joint return shall be computed on the basis of the number of days during which each rate of tax was in effect for the taxable year of the surviving spouse.
(f) Section 21 applies whether or not the taxpayer has a taxable year of less than 12 months. Moreover, section 21 applies whether or not the taxable income for a taxable year of less than 12 months is required to be placed on an annual basis under section 443. If the taxable income is required to be computed under section 443(b) then the tentative taxes under section 21 are computed as provided in paragraph (1) or (2) of section 443(b) and are reduced as provided in those paragraphs. The tentative taxes so computed and reduced are then apportioned as provided in section 21(a)(2) to determine the tax for such taxable year as computed under section 21.
(g) If a taxpayer has made the election under section 441(f) (relating to computation of taxable income on the basis of an annual accounting period varying from 52 to 53 weeks), the rules provided in section 441(f)(2) shall be applicable for purposes of determining whether section 21 applies to the taxable year of the taxpayer. Where a taxpayer has made the election under section 441(f) and where section 21 applies to the taxable year of the taxpayer the computation under section 21(a)(2) shall be made upon the basis of the actual number of days in the taxable year and in each period thereof.
(h)(1) Section 21 is applicable only if the rate of tax imposed by chapter 1 changes. Sections in which rates of tax are specified or incorporated by reference include the following: 1, 2, 3, 11, 511, 531, 541, 821, 831, 871, 881, 1201, and 1348 (for taxable years beginning after December 31, 1970). Except as provided in subparagraph (3) of this paragraph, section 21 is not applicable with respect to changes in the law relating to deductions from gross income, exclusions from or inclusions in gross income, or other items taken into account in determining the amount or character of income subject to tax. Moreover, section 21 is not applicable with respect to changes in the law relating to credits against the tax or with respect to changes in the law relating to limitations on the amount of tax. Section 21 is applicable, however, to all those computations specified in the section providing the rate of tax which are implicit in determining the rate. For example, if one of the tax brackets in the tax tables under section 3 were to be changed, section 21 would be applicable to that change. Thus, if the bracket relating to “at least $4,200 but not less than $4,250” for heads of households should be changed to increase or decrease the last sum specified, with corresponding changes being made in subsequent brackets, section 21 would be applicable. The enactment of sections 1561 and 1562 is considered a change in section 11(d) which constitutes a change in rate for the period ending after December 31, 1963. The amendment of section 1561 and the repeal of section 1562 by the Tax Reform Act of 1969 is considered a change in section 11(d) which constitutes a change in rate for the period ending after December 31, 1974. The repeal of the 2 percent additional tax imposed under section 1503 on corporations filing consolidated returns constitutes a change in rate for the period ending after December 31, 1963. The addition to the Code of section 1348 (relating to 50 percent maximum rate on earned income) is a change in rate to which section 21(a) is applicable. The amendment of section 11(d) by the Tax Reduction Act of 1975 which increases to $50,000 the surtax exemption for a taxable year ending during 1975 constitutes a change in rate for such portion of the taxable year (if less than the entire taxable year) as follows December 31, 1974. Similarly, the return of the surtax exemption to $25,000 for a taxable year ending during 1976 constitutes a change in rate for such portion of the taxable year (if less than the entire taxable year) as follows December 31, 1975.
(2) Ordinarily, both the old and the new rates are applied to the same amount of taxable income. However, where the rate of tax is itself taken into account in determining taxable income (for example, the special deduction for Western Hemisphere trade corporations under section 922), the taxable income used in determining the tentative tax employing the rate before the effective date of change shall be determined by reference to that rate of tax, and the taxable income for the purpose of determining the tentative tax employing the rate for the period on and after the effective date of the change shall be determined by reference to the new tax rate.
(3) Section 21 is applicable with respect to changes in the law relating to the standard deduction for individuals provided in part IV of subchapter B and to the deduction for personal exemptions for individuals provided in part V of subchapter B.
(i) If the rate of tax changes more than once during the taxable year, section 21 is applicable to each change in rate. For example, if the rate of normal tax changed for taxable years beginning on or after March 1, 1954, and changed again for taxable years beginning on or after June 1, 1954, section 21 requires computation of 3 tentative taxes for any taxable year which began before March 1, 1954, and ended on or after June 1, 1954: One tentative tax at the rate in effect before the March 1 change; another tentative tax at the rate in effect from March 1 to May 31; and a third tentative tax at the rate in effect from June 1 to the end of the taxable year. The proportion of each such tentative tax taken into account in determining the tax imposed on the taxpayer is computed by reference to the portion of the taxable year before March 1, 1954, by reference to the portion of the taxable year from March 1, 1954, through May 31, 1954, and by reference to the portion of the taxable year from June 1, 1954, to the end of the taxable year, respectively.
(j)(1) If a change in the rate of one tax imposed by chapter 1 of the Code does not affect the amount of other taxes imposed by chapter 1 of the Code the other taxes may be determined without regard to section 21 and section 21 will be applied only to the tax for which a change in rate is made. However, if the change of rate of one tax does affect the amount of other taxes imposed under chapter 1 of the Code, then the computation of the taxes under chapter 1 of the Code so affected shall be made by applying section 21. For example, if section 1201 applies to an individual taxpayer for a taxable year containing the effective date of a change in a rate of tax provided in section 1, then under section 21 the taxpayer must compute a tentative tax for each period for which a different rate of tax is effective under section 1. The tentative tax for each such period as computed under section 1201 will reflect the rate of tax provided by section 1 for such period.
(2) In certain cases chapter 1 of the Code provides that the particular tax to be imposed upon the taxpayer shall be one of several taxes, the basis of selection being the tax that is greater or lesser. See, for example, sections 821 and 1201. If in any such case the rate of any one of these taxes changes, then the tentative taxes computed as provided by section 21 for each period shall be computed employing the tax selected in accordance with the general rule of selection for such a case, at the rate of tax in effect for such period. Thus, if a change in the rate of the alternative tax under section 1201 is such that the alternative tax under section 1201 is applicable if the old rate is used and is not applicable if the new rate is used, one tentative tax will consist of the alternative tax under section 1201 and the other tentative tax will consist of the tax imposed by the other applicable sections of chapter 1 of the Code. The two tentative taxes so computed are then prorated in accordance with section 21(a)(2) and the sum of the proportionate amounts is the tax imposed for the taxable year under chapter 1 of the Code. See the examples in paragraph (n) of this section.
(k) Section 21 does not apply in the following situations:
(1) The provisions of section 21 do not apply to the imposition of the tax surcharge by section 51. The proration rules of section 51(a) apply in the case of a taxable year ending on or after the effective date of the surcharge and beginning before July 1, 1970.
(2) The provisions of section 21 do not apply to the imposition of the minimum tax for tax preferences by section 56. The proration rules of section 301(c) of the Tax Reform Act of 1969 (83 Stat. 586) apply in the case of a taxable year beginning in 1969 and ending in 1970.
(l) In computing the number of days each rate of tax is in effect during the taxable year for purposes of section 21(a)(2), the effective date of the change in rate shall be counted in the period for which the new rate is in effect.
(m) Any credits against tax, and any limitation in any credit against tax, shall be based upon the tax computed under section 21. For credits against tax, see part IV (section 31 and following), subchapter A, chapter 1 of the Code.
(n) The application of section 21 may be illustrated by the following examples: (See also the examples in § 1.1561-2A(a)(3).)
Taxable income exclusive of capital gains and losses | $50,000 | ||
Long-term capital gain | 75,000 | ||
125,000 | |||
Deduct 50% of long-term capital gain | 37,500 | ||
Taxable income | 87,500 | ||
Tax under section 1 (1969 and 1970 rates) | 37,690 | ||
Taxable income ($50,000 + 50% of $75,000) | $87,500 | ||
Less 50% of long-term capital gain | 37,500 | ||
Taxable income exclusive of capital gains | 50,000 | ||
Partial tax (tax on $50,000) | 17,060 | ||
Plus 25% of $75,000 | 18,750 | ||
Alternative tax under section 1201(b) at 1969 rates | 35,810 | ||
Taxable income ($50,000 + 50% of $75,000) | $87,500 | ||
Deduct 50% of net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) | 37,500 | ||
50,000 | |||
Tax on $50,000 (taxable income exclusive of capital gains) | $17,060 | ||
(a) Net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) | 75,000 | ||
(b) Subsection (d) gain | 50,000 | ||
25% of $50,000 (lesser of (a) or (b)) | 12,500 | ||
(c) 29 | 7,375 | ||
(d) Ordinary income | $50,000 | ||
50% of net section 1201 gain (net capital gain for taxable years beginning after December 31, 1976) | 37,500 | ||
87,500 | |||
Tax on $87,500 | $37,690 | ||
Ordinary income | $50,000 | ||
50% of subsection (d) gain | 25,000 | ||
75,000 | |||
Tax on $75,000 | 30,470 | ||
Difference | 7,220 | ||
Lesser of (c) or (d) | $7,220 | ||
Alternative tax (total of 3 steps) at rates effective on and after January 1, 1970 | 36,780 |
1969—184/365 of $35,810 | $18,052.16 |
1970—181/365 of $36,780 | 18,238.85 |
36,291.01 | |
Tax surcharge (See § 1.51-1(d)(1)(i)) | 2,729.28 |
Total tax for the taxable year | 39,020.29 |
1970 | ||
Adjusted gross income | $18,500.00 | |
Less: | ||
Standard deduction | $1,000.00 | |
Personal exemption | 625.00 | 1,625.00 |
Taxable income under 1970 deduction provisions | 16,875.00 | |
Tax on $16,875 (1970 rates): | ||
Tax on first $16,000 | 4,330.00 | |
42 percent of $875 | 367.50 | |
Tentative tax at rates and deduction provisions effective on or after January 1, 1970 | 4,697.50 | |
1971 | ||
Adjusted gross income | $18,500.00 | |
Less: | ||
Standard deduction | $1,500 | |
Personal exemption | 650 | 2,150.00 |
Taxable income under 1971 deduction provisions | 16,350.00 | |
Tax on $16,350 (1971 rates): | ||
Tax on first $16,000 | 3,830 | |
34 percent of $350 | 119 | |
Tentative tax at rates and deduction provisions effective on or after Januray 1, 1971 | 3,949.00 | |
The 1970 and 1971 tentative taxes are apportioned as follows: | ||
1970—275/365 of $4,697.50 | 3,539.21 | |
1971—90/365 of $3,949.00 | 973.73 | |
4,512.94 | ||
Tax surcharge (see § 1.51-1(d)(1)(i)) | 56.26 | |
Total tax for the taxable year | 4,569.20 |
1969 | ||
Adjusted gross income | $12,500.00 | |
Less: | ||
Standard deduction | $1,000.00 | |
Personal exemption (2) | 1,200.00 | 2,200.00 |
Taxable income under 1969 deduction provisions | 10,300.00 | |
Taxable income reduced by one-half | 5,150.00 | |
Tax on $5,150 (1969 rates): | ||
Tax on first $4,000 | $690.00 | |
22 percent of $1,150 | 253.00 | 943.00 |
Twice the tax on $5,150 | $1,886.00 | |
Tentative tax at rates and deduction provisions effective on or after January 1, 1969 | 1,886.00 | |
1970 | ||
Adjusted gross income | $12,500.00 | |
Less: | ||
Standard deduction | $1,000.00 | |
Personal exemption (3) | 1,875.00 | 2,875.00 |
Taxable income under 1970 deduction provisions | $9,625.00 | |
Tax on $9,625 (1970 rates): | ||
Tax on first $8,000 | $1,380.00 | |
22 percent of $1,625 | 357.50 | |
Tentative tax at rates and deduction provisions effective on or after January 1, 1970 | 1,737.50 | |
The 1969 and 1970 tentative taxes are apportioned as follows: | ||
1969—122/365 of $1,886 | $630.39 | |
1970—243/365 of $1,737.50 | 1,156.75 | |
1,787.14 | ||
Tax surcharge (see § 1.51-1(d)(1)(i)) | 104.05 | |
Total tax for the taxable year | 1,891.19 |
1970 | ||
Adjusted gross income | $250,000.00 | |
Less: | ||
Itemized deductions | $34,000.00 | |
Personal exemption | 625.00 | 34,625.00 |
Taxable income under 1970 deduction provisions | 215,375.00 | |
Tax on $215,375 (1970 rates) | ||
Tax on first $100,000 | $55,490.00 | |
70 percent of $115,375 | 80,762.50 | |
Tentative tax at rates and deduction provisions effective on or after January 1, 1970 | 136,252.50 | |
Minimum tax: | ||
Total tax preference items | 175,000.00 | |
Less: | ||
Exemption | $30,000.00 | |
Income tax | 136,252.50 | 166,252.50 |
Subject to 10 percent tax | 8,747.50 | |
10 percent tax | 874.75 | |
Total tentative tax ($136,252.50 + $874.75) | 137,127.25 | |
1971 | ||
Adjusted gross income | $250,000.00 | |
Less: | ||
Itemized deductions | $34,000.00 | |
Personal exemption | 650.00 | 34,650.00 |
Taxable income under 1971 deduction provisions | 215,350.00 | |
(a) Tax on highest amount of taxable income on which rate does not exceed 60 percent ($50,000) (1971 rates) | 20,190.00 | |
(b) Earned taxable | ||
income: | ||
($215,350 × | ||
$240,000/ | ||
$250,000) | $206,736.00 | |
Less: Tax | ||
preference offset: | ||
($175,000 | ||
−$30,000) | 145,000.00 | |
61,736.00 | ||
(c) 60% of the amount by which $61,736 exceeds $50,000 | 7,041.60 | |
(d) Tax on $215,350 (1971 rates) | ||
Tax on first $100,000 | 53,090.00 | |
70% of $115,350 | 80,745.00 | |
Total | 133,835.00 | |
(e) Tax on $61,736 (1971 rates) | ||
Tax on first $60,000 | 26,390.00 | |
64% of $1,736 | 1,111.04 | |
Total | 27,501.04 | |
(f) Excess of $133,835 over $27,501.04 | 106,333.96 | |
Tentative tax (total of Steps (a), (c), and (f)) at rates and deduction provisions effective on or after January 1, 1971 | 133,565.56 | |
Minimum tax: | ||
Total tax preference items | 175,000.00 | |
Less: | ||
Exemption | $30,000.00 | |
Income tax | 133,565.56 | 163,565.56 |
Subject to 10 percent tax | $11,434.44 | |
10 percent tax | 1,143.44 | |
Total tentative tax ($133,565.56 + $1,143.44) | 134,709.00 | |
The 1970 and 1971 tentative taxes are apportioned as follows: | ||
1970—184/365 of $137,127.25 | 69,127.16 | |
1971—181/365 of $134,709 | 66,800.90 | |
Total tax for the taxable year | 135,928.06 |
1963 | ||
Taxable income | $100,000 | |
Normal tax on $100,000 (1963 rates) 30 percent of $100,000 | $30,000 | |
Surtax on $75,000 (1963 rates and $25,000 surtax exemption) 22 percent of $75,000 | 16,500 | |
Total tentative tax at rates and surtax exemption effective before January 1, 1964 | 46,500 | |
1964 | ||
Taxable income | $100,000 | |
Normal tax on $100,000 (1964 rates) 22 percent of $100,000 | $22,000 | |
Surtax on $95,000 (1964 rates and a $5,000 surtax exemption) 28 percent of $95,000 | 26,600 | |
Total tentative tax at rates and surtax exemption effective after January 1, 1964 | 48,600 | |
The 1963 and 1964 tentative taxes are apportioned as follows: | ||
1963—275/366 of $46,500 | 34,938.52 | |
1964—91/366 of $48,600 | 12,083.61 | |
Total tax for the taxable year | 47,022.13 | |
M has the same amount of taxable income in 1965. Its income tax liability for the fiscal year ending March 31, 1965, is computed as follows: | ||
1964 | ||
Taxable income | $100,000 | |
Normal tax on $100,000 (1964 rates) 22 percent of $100,000 | $22,000 | |
Surtax on $95,000 (1964 rates and a $5,000 surtax exemption) 28 percent of $95,000 | 26,600 | |
Total tentative tax at the 1964 rates | 48,600 | |
1965 | ||
Taxable income | $100,000 | |
Normal tax on $100,000 (1965 rates) 22 percent of $100,000 | $22,000 | |
Surtax on $95,000 (1965 rates and a $5,000 surtax exemption) 26 percent of $95,000 | 24,700 | |
Total tentative tax at the 1965 rates | 46,700 | |
The 1964 and 1965 tentative taxes are apportioned as follows: | ||
1964—275/365 of $48,600 | $36,616.44 | |
1965—90/365 of $46,700 | 11,515.07 | |
Total tax for the taxable year | 48,131.51 |
1963 | ||
Taxable income | $100,000 | |
Normal tax on $100,000 (1963 rates) 30 percent of $100,000 | $30,000 | |
Surtax on $75,000 (1963 rates and $25,000 surtax exemption) 22 percent of $75,000 | 16,500 | |
Total tentative tax at rates and surtax exemption effective before January 1, 1964 | 46,500 | |
1964 | ||
Taxable income | $100,000 | |
Normal tax on $100,000 (1964 rates) 22 percent of $100,000 | $22,000 | |
Surtax on $75,000 (1964 rates and $25,000 surtax exemption) 28 percent of $75,000 | 21,000 | |
Additional tax on $25,000 6 percent of $25,000 | 1,500 | |
Total tentative tax at rates and surtax exemption effective on and after January 1, 1964 | 44,500 | |
The 1963 and 1964 tentative taxes are apportioned as follows: | ||
1963—275/366 of $46,500 | $34,938.52 | |
1964—91/366 of $44,500 | 11,064.21 | |
Total tax for the taxable year | 46,002.73 |
1975 | ||
Taxable income | $100,000 | |
Normal tax on $100,000 (1975 rates) 20 percent of $25,000 | $5,000 | |
22 percent of $75,000 | 16,500 | |
Surtax on $50,000 (1975 rates and $50,000 surtax exemption) 26 percent of $50,000 | 13,000 | |
Total tentative tax at rates and surtax exemption effective on and after January 1, 1975 | 34,500 | |
1976 | ||
Taxable income | $100,000 | |
Normal tax on $100,000 (1976 rates) 22 percent of $100,000 | $22,000 | |
Surtax on $75,000 (1976 rates and $25,000 surtax exemption) 26 percent of $75,000 | 19,500 | |
Total tentative tax at rates and surtax exemption effective on and after January 1, 1976 | 41,500 | |
The 1975 and 1976 tentative taxes are apportioned as follows: | ||
1975—184/366 of $34,500 | $17,344 | |
1976—182/366 of $41,500 | 20,637 | |
Total tax for the taxable year | 37,981 |
§ 1.21-1 Expenses for household and dependent care services necessary for gainful employment.
(a) In general. (1) Section 21 allows a credit to a taxpayer against the tax imposed by chapter 1 for employment-related expenses for household services and care (as defined in paragraph (d) of this section) of a qualifying individual (as defined in paragraph (b) of this section). The purpose of the expenses must be to enable the taxpayer to be gainfully employed (as defined in paragraph (c) of this section). For taxable years beginning after December 31, 2004, a qualifying individual must have the same principal place of abode (as defined in paragraph (g) of this section) as the taxpayer for more than one-half of the taxable year. For taxable years beginning before January 1, 2005, the taxpayer must maintain a household (as defined in paragraph (h) of this section) that includes one or more qualifying individuals.
(2) The amount of the credit is equal to the applicable percentage of the employment-related expenses that may be taken into account by the taxpayer during the taxable year (but subject to the limits prescribed in § 1.21-2). Applicable percentage means 35 percent reduced by 1 percentage point for each $2,000 (or fraction thereof) by which the taxpayer’s adjusted gross income for the taxable year exceeds $15,000, but not less than 20 percent. For example, if a taxpayer’s adjusted gross income is $31,850, the applicable percentage is 26 percent.
(3) Expenses may be taken as a credit under section 21, regardless of the taxpayer’s method of accounting, only in the taxable year the services are performed or the taxable year the expenses are paid, whichever is later.
(4) The requirements of section 21 and §§ 1.21-1 through 1.21-4 are applied at the time the services are performed, regardless of when the expenses are paid.
(5) Examples. The provisions of this paragraph (a) are illustrated by the following examples.
(b) Qualifying individual—(1) In general. For taxable years beginning after December 31, 2004, a qualifying individual is—
(i) The taxpayer’s dependent (who is a qualifying child within the meaning of section 152) who has not attained age 13;
(ii) The taxpayer’s dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B)) who is physically or mentally incapable of self-care and who has the same principal place of abode as the taxpayer for more than one-half of the taxable year; or
(iii) The taxpayer’s spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as the taxpayer for more than one-half of the taxable year.
(2) Taxable years beginning before January 1, 2005. For taxable years beginning before January 1, 2005, a qualifying individual is—
(i) The taxpayer’s dependent for whom the taxpayer is entitled to a deduction for a personal exemption under section 151(c) and who is under age 13;
(ii) The taxpayer’s dependent who is physically or mentally incapable of self-care; or
(iii) The taxpayer’s spouse who is physically or mentally incapable of self-care.
(3) Qualification on a daily basis. The status of an individual as a qualifying individual is determined on a daily basis. An individual is not a qualifying individual on the day the status terminates.
(4) Physical or mental incapacity. An individual is physically or mentally incapable of self-care if, as a result of a physical or mental defect, the individual is incapable of caring for the individual’s hygiene or nutritional needs, or requires full-time attention of another person for the individual’s own safety or the safety of others. The inability of an individual to engage in any substantial gainful activity or to perform the normal household functions of a homemaker or care for minor children by reason of a physical or mental condition does not of itself establish that the individual is physically or mentally incapable of self-care.
(5) Special test for divorced or separated parents or parents living apart—(i) Scope. This paragraph (b)(5) applies to a child (as defined in section 152(f)(1) for taxable years beginning after December 31, 2004, and in section 151(c)(3) for taxable years beginning before January 1, 2005) who—
(A) Is under age 13 or is physically or mentally incapable of self-care;
(B) Receives over one-half of his or her support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or live apart at all times during the last 6 months of the calendar year; and
(C) Is in the custody of one or both parents for more than one-half of the calendar year.
(ii) Custodial parent allowed the credit. A child to whom this paragraph (b)(5) applies is the qualifying individual of only one parent in any taxable year and is the qualifying child of the custodial parent even if the noncustodial parent may claim the dependency exemption for that child for that taxable year. See section 21(e)(5). The custodial parent is the parent having custody for the greater portion of the calendar year. See section 152(e)(4)(A).
(6) Example. The provisions of this paragraph (b) are illustrated by the following examples.
(c) Gainful employment—(1) In general. Expenses are employment-related expenses only if they are for the purpose of enabling the taxpayer to be gainfully employed. The expenses must be for the care of a qualifying individual or household services performed during periods in which the taxpayer is gainfully employed or is in active search of gainful employment. Employment may consist of service within or outside the taxpayer’s home and includes self-employment. An expense is not employment-related merely because it is paid or incurred while the taxpayer is gainfully employed. The purpose of the expense must be to enable the taxpayer to be gainfully employed. Whether the purpose of an expense is to enable the taxpayer to be gainfully employed depends on the facts and circumstances of the particular case. Work as a volunteer or for a nominal consideration is not gainful employment.
(2) Determination of period of employment on a daily basis—(i) In general. Expenses paid for a period during only part of which the taxpayer is gainfully employed or in active search of gainful employment must be allocated on a daily basis.
(ii) Exception for short, temporary absences. A taxpayer who is gainfully employed is not required to allocate expenses during a short, temporary absence from work, such as for vacation or minor illness, provided that the care-giving arrangement requires the taxpayer to pay for care during the absence. An absence of 2 consecutive calendar weeks is a short, temporary absence. Whether an absence longer than 2 consecutive calendar weeks is a short, temporary absence is determined based on all the facts and circumstances.
(iii) Part-time employment. A taxpayer who is employed part-time generally must allocate expenses for dependent care between days worked and days not worked. However, if a taxpayer employed part-time is required to pay for dependent care on a periodic basis (such as weekly or monthly) that includes both days worked and days not worked, the taxpayer is not required to allocate the expenses. A day on which the taxpayer works at least 1 hour is a day of work.
(3) Examples. The provisions of this paragraph (c) are illustrated by the following examples:
(d) Care of qualifying individual and household services—(1) In general. To qualify for the dependent care credit, expenses must be for the care of a qualifying individual. Expenses are for the care of a qualifying individual if the primary function is to assure the individual’s well-being and protection. Not all expenses relating to a qualifying individual are for the individual’s care. Amounts paid for food, lodging, clothing, or education are not for the care of a qualifying individual. If, however, the care is provided in such a manner that the expenses cover other goods or services that are incidental to and inseparably a part of the care, the full amount is for care.
(2) Allocation of expenses. If an expense is partly for household services or for the care of a qualifying individual and partly for other goods or services, a reasonable allocation must be made. Only so much of the expense that is allocable to the household services or care of a qualifying individual is an employment-related expense. An allocation must be made if a housekeeper or other domestic employee performs household duties and cares for the qualifying children of the taxpayer and also performs other services for the taxpayer. No allocation is required, however, if the expense for the other purpose is minimal or insignificant or if an expense is partly attributable to the care of a qualifying individual and partly to household services.
(3) Household services. Expenses for household services may be employment-related expenses if the services are performed in connection with the care of a qualifying individual. The household services must be the performance in and about the taxpayer’s home of ordinary and usual services necessary to the maintenance of the household and attributable to the care of the qualifying individual. Services of a housekeeper are household services within the meaning of this paragraph (d)(3) if the services are provided, at least in part, to the qualifying individual. Such services as are performed by chauffeurs, bartenders, or gardeners are not household services.
(4) Manner of providing care. The manner of providing care need not be the least expensive alternative available to the taxpayer. The cost of a paid caregiver may be an expense for the care of a qualifying individual even if another caregiver is available at no cost.
(5) School or similar program. Expenses for a child in nursery school, pre-school, or similar programs for children below the level of kindergarten are for the care of a qualifying individual and may be employment-related expenses. Expenses for a child in kindergarten or a higher grade are not for the care of a qualifying individual. However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be for the care of a qualifying individual.
(6) Overnight camps. Expenses for overnight camps are not employment-related expenses.
(7) Day camps. (i) The cost of a day camp or similar program may be for the care of a qualifying individual and an employment-related expense, without allocation under paragraph (d)(2) of this section, even if the day camp specializes in a particular activity. Summer school and tutoring programs are not for the care of a qualifying individual and the costs are not employment-related expenses.
(ii) A day camp that meets the definition of dependent care center in section 21(b)(2)(D) and paragraph (e)(2) of this section must comply with the requirements of section 21(b)(2)(C) and paragraph (e)(2) of this section.
(8) Transportation. The cost of transportation by a dependent care provider of a qualifying individual to or from a place where care of that qualifying individual is provided may be for the care of the qualifying individual. The cost of transportation not provided by a dependent care provider is not for the care of the qualifying individual.
(9) Employment taxes. Taxes under sections 3111 (relating to the Federal Insurance Contributions Act) and 3301 (relating to the Federal Unemployment Tax Act) and similar state payroll taxes are employment-related expenses if paid in respect of wages that are employment-related expenses.
(10) Room and board. The additional cost of providing room and board for a caregiver over usual household expenditures may be an employment-related expense.
(11) Indirect expenses. Expenses that relate to, but are not directly for, the care of a qualifying individual, such as application fees, agency fees, and deposits, may be for the care of a qualifying individual and may be employment-related expenses if the taxpayer is required to pay the expenses to obtain the related care. However, forfeited deposits and other payments are not for the care of a qualifying individual if care is not provided.
(12) Examples. The provisions of this paragraph (d) are illustrated by the following examples:
(e) Services outside the taxpayer’s household—(1) In general. The credit is allowable for expenses for services performed outside the taxpayer’s household only if the care is for one or more qualifying individuals who are described in this section at—
(i) Paragraph (b)(1)(i) or (b)(2)(i); or
(ii) Paragraph (b)(1)(ii), (b)(2)(ii), (b)(1)(iii), or (b)(2)(iii) and regularly spend at least 8 hours each day in the taxpayer’s household.
(2) Dependent care centers—(i) In general. The credit is allowable for services performed by a dependent care center only if—
(A) The center complies with all applicable laws and regulations, if any, of a state or local government, such as state or local licensing requirements and building and fire code regulations; and
(B) The requirements provided in this paragraph (e) are met.
(ii) Definition. The term dependent care center means any facility that provides full-time or part-time care for more than six individuals (other than individuals who reside at the facility) on a regular basis during the taxpayer’s taxable year, and receives a fee, payment, or grant for providing services for the individuals (regardless of whether the facility is operated for profit). For purposes of the preceding sentence, a facility is presumed to provide full-time or part-time care for six or fewer individuals on a regular basis during the taxpayer’s taxable year if the facility has six or fewer individuals (including the taxpayer’s qualifying individual) enrolled for full-time or part-time care on the day the qualifying individual is enrolled in the facility (or on the first day of the taxable year the qualifying individual attends the facility if the qualifying individual was enrolled in the facility in the preceding taxable year) unless the Internal Revenue Service demonstrates that the facility provides full-time or part-time care for more than six individuals on a regular basis during the taxpayer’s taxable year.
(f) Reimbursed expenses. Employment-related expenses for which the taxpayer is reimbursed (for example, under a dependent care assistance program) may not be taken into account for purposes of the credit.
(g) Principal place of abode. For purposes of this section, the term principal place of abode has the same meaning as in section 152.
(h) Maintenance of a household—(1) In general. For taxable years beginning before January 1, 2005, the credit is available only to a taxpayer who maintains a household that includes one or more qualifying individuals. A taxpayer maintains a household for the taxable year (or lesser period) only if the taxpayer (and spouse, if applicable) occupies the household and furnishes over one-half of the cost for the taxable year (or lesser period) of maintaining the household. The household must be the principal place of abode for the taxable year of the taxpayer and the qualifying individual or individuals.
(2) Cost of maintaining a household. (i) Except as provided in paragraph (h)(2)(ii) of this section, for purposes of this section, the term cost of maintaining a household has the same meaning as in § 1.2-2(d) without regard to the last sentence thereof.
(ii) The cost of maintaining a household does not include the value of services performed in the household by the taxpayer or by a qualifying individual described in paragraph (b) of this section or any expense paid or reimbursed by another person.
(3) Monthly proration of annual costs. In determining the cost of maintaining a household for a period of less than a taxable year, the cost for the entire taxable year must be prorated on the basis of the number of calendar months within that period. A period of less than a calendar month is treated as a full calendar month.
(4) Two or more families. If two or more families occupy living quarters in common, each of the families is treated as maintaining a separate household. A taxpayer is maintaining a household if the taxpayer provides more than one-half of the cost of maintaining the separate household. For example, if two unrelated taxpayers with their respective children occupy living quarters in common and each taxpayer pays more than one-half of the household costs for each respective family, each taxpayer is treated as maintaining a household.
(i) Reserved.
(j) Expenses qualifying as medical expenses—(1) In general. A taxpayer may not take an amount into account as both an employment-related expense under section 21 and an expense for medical care under section 213.
(2) Examples. The provisions of this paragraph (j) are illustrated by the following examples:
(k) Substantiation. A taxpayer claiming a credit for employment-related expenses must maintain adequate records or other sufficient evidence to substantiate the expenses in accordance with section 6001 and the regulations thereunder.
(l) Effective/applicability date. This section and §§ 1.21-2 through 1.21-4 apply to taxable years ending after August 14, 2007.
§ 1.21-2 Limitations on amount creditable.
(a) Annual dollar limitation. (1) The amount of employment-related expenses that may be taken into account under § 1.21-1(a) for any taxable year cannot exceed—
(i) $2,400 ($3,000 for taxable years beginning after December 31, 2002, and before January 1, 2011) if there is one qualifying individual with respect to the taxpayer at any time during the taxable year; or
(ii) $4,800 ($6,000 for taxable years beginning after December 31, 2002, and before January 1, 2011) if there are two or more qualifying individuals with respect to the taxpayer at any time during the taxable year.
(2) The amount determined under paragraph (a)(1) of this section is reduced by the aggregate amount excludable from gross income under section 129 for the taxable year.
(3) A taxpayer may take into account the total amount of employment-related expenses that do not exceed the annual dollar limitation although the amount of employment-related expenses attributable to one qualifying individual is disproportionate to the total employment-related expenses. For example, a taxpayer with expenses in 2007 of $4,000 for one qualifying individual and $1,500 for a second qualifying individual may take into account the full $5,500.
(4) A taxpayer is not required to prorate the annual dollar limitation if a qualifying individual ceases to qualify (for example, by turning age 13) during the taxable year. However, the taxpayer may take into account only amounts that qualify as employment-related expenses before the disqualifying event. See also § 1.21-1(b)(6).
(b) Earned income limitation—(1) In general. The amount of employment-related expenses that may be taken into account under section 21 for any taxable year cannot exceed—
(i) For a taxpayer who is not married at the close of the taxable year, the taxpayer’s earned income for the taxable year; or
(ii) For a taxpayer who is married at the close of the taxable year, the lesser of the taxpayer’s earned income or the earned income of the taxpayer’s spouse for the taxable year.
(2) Determination of spouse. For purposes of this paragraph (b), a taxpayer must take into account only the earned income of a spouse to whom the taxpayer is married at the close of the taxable year. The spouse’s earned income for the entire taxable year is taken into account, however, even though the taxpayer and the spouse were married for only part of the taxable year. The taxpayer is not required to take into account the earned income of a spouse who died or was divorced or separated from the taxpayer during the taxable year. See § 1.21-3(b) for rules providing that certain married taxpayers legally separated or living apart are treated as not married.
(3) Definition of earned income. For purposes of this section, the term earned income has the same meaning as in section 32(c)(2) and the regulations thereunder.
(4) Attribution of earned income to student or incapacitated spouse. (i) For purposes of this section, a spouse is deemed, for each month during which the spouse is a full-time student or is a qualifying individual described in § 1.21-1(b)(1)(iii) or (b)(2)(iii), to be gainfully employed and to have earned income of not less than—
(A) $200 ($250 for taxable years beginning after December 31, 2002, and before January 1, 2011) if there is one qualifying individual with respect to the taxpayer at any time during the taxable year; or
(B) $400 ($500 for taxable years beginning after December 31, 2002, and before January 1, 2011) if there are two or more qualifying individuals with respect to the taxpayer at any time during the taxable year.
(ii) For purposes of this paragraph (b)(4), a full-time student is an individual who, during each of 5 calendar months of the taxpayer’s taxable year, is enrolled as a student for the number of course hours considered to be a full-time course of study at an educational organization as defined in section 170(b)(1)(A)(ii). The enrollment for 5 calendar months need not be consecutive.
(iii) Earned income may be attributed under this paragraph (b)(4), in the case of any husband and wife, to only one spouse in any month.
(c) Examples. The provisions of this section are illustrated by the following examples:
(d) Cross-reference. For an additional limitation on the credit under section 21, see section 26.
§ 1.21-3 Special rules applicable to married taxpayers.
(a) Joint return requirement. No credit is allowed under section 21 for taxpayers who are married (within the meaning of section 7703 and the regulations thereunder) at the close of the taxable year unless the taxpayer and spouse file a joint return for the taxable year. See section 6013 and the regulations thereunder relating to joint returns of income tax by husband and wife.
(b) Taxpayers treated as not married. The requirements of paragraph (a) of this section do not apply to a taxpayer who is legally separated under a decree of divorce or separate maintenance or who is treated as not married under section 7703(b) and the regulations thereunder (relating to certain married taxpayers living apart). A taxpayer who is treated as not married under this paragraph (b) is not required to take into account the earned income of the taxpayer’s spouse for purposes of applying the earned income limitation on the amount of employment-related expenses under § 1.21-2(b).
(c) Death of married taxpayer. If a married taxpayer dies during the taxable year and the survivor may make a joint return with respect to the deceased spouse under section 6013(a)(3), the credit is allowed for the year only if a joint return is made. If, however, the surviving spouse remarries before the end of the taxable year in which the deceased spouse dies, a credit may be allowed on the decedent spouse’s separate return.
(a) In general. A credit is not allowed under section 21 for any amount paid by the taxpayer to an individual—
(1) For whom a deduction under section 151(c) (relating to deductions for personal exemptions for dependents) is allowable either to the taxpayer or the taxpayer’s spouse for the taxable year;
(2) Who is a child of the taxpayer (within the meaning of section 152(f)(1) for taxable years beginning after December 31, 2004, and section 151(c)(3) for taxable years beginning before January 1, 2005) and is under age 19 at the close of the taxable year;
(3) Who is the spouse of the taxpayer at any time during the taxable year; or
(4) Who is the parent of the taxpayer’s child who is a qualifying individual described in § 1.21-1(b)(1)(i) or (b)(2)(i).
(b) Payments to partnerships or other entities. In general, paragraph (a) of this section does not apply to services performed by partnerships or other entities. If, however, the partnership or other entity is established or maintained primarily to avoid the application of paragraph (a) of this section to permit the taxpayer to claim the credit, for purposes of section 21, the payments of employment-related expenses are treated as made directly to each partner or owner in proportion to that partner’s or owner’s ownership interest. Whether a partnership or other entity is established or maintained to avoid the application of paragraph (a) of this section is determined based on the facts and circumstances, including whether the partnership or other entity is established for the primary purpose of caring for the taxpayer’s qualifying individual or providing household services to the taxpayer.
(c) Examples. The provisions of this section are illustrated by the following examples:
§ 1.24-1 Partial credit allowed for certain other dependents.
(a) In general. For purposes of section 24(h)(4)(A), a taxpayer may be eligible to increase the credit determined under section 24(a) by $500 for a dependent of the taxpayer, as defined in section 152, other than a qualifying child described in section 24(c).
(b) Applicability date. This section applies to taxable years beginning on or after October 13, 2020.
§ 1.25-1T Credit for interest paid on certain home mortgages (Temporary).
(a) In general. Section 25 permits States and political subdivisions to elect to issue mortgage credit certificates in lieu of qualified mortgage bonds. An individual who holds a qualified mortgage credit certificate (as defined in § 1.25-3T) is entitled to a credit against his Federal income taxes. The amount of the credit depends upon (1) the amount of mortgage interest paid or accrued during the year and (2) the applicable certificate credit rate. See § 1.25-2T. The amount of the deduction under section 163 for interest paid or accrued during any taxable year is reduced by the amount of the credit allowable under section 25 for such year. See § 1.163-6T. The holder of a qualified mortgage credit certificate may be entitled to additional withholding allowances. See section 3402 (m) and the regulations thereunder.
(b) Definitions. For purposes of §§ 1.25-2T through 1.25-8T and this section, the following definitions apply:
(1) Mortgage. The term “mortgage” includes deeds of trust, conditional sales contracts, pledges, agreements to hold title in escrow, and any other form of owner financing.
(2) State. (i) The term “State” includes a possession of the United States and the District of Columbia.
(ii) Mortgage credit certificates issued by or on behalf of any State or political subdivision (“governmental unit”) by constituted authorities empowered to issue such certificates are the certificates of such governmental unit.
(3) Qualified home improvement loan. The term “qualified home improvement loan” has the meaning given that term under section 103A (1)(6) and the regulations thereunder.
(4) Qualified rehabilitation loan. The term “qualified rehabilitation loan” has the meaning given that term under section 103A (1)(7)(A) and the regulations thereunder.
(5) Single-family and owner-occupied residences. The terms “single-family” and “owner-occupied” have the meaning given those terms under section 103A (1)(9) and the regulations thereunder.
(6) Constitutional home rule city. The term “constitutional home rule city” means, with respect to any calendar year, any political subdivision of a State which, under a State constitution which was adopted in 1970 and effective on July 1, 1971, had home rule powers on the 1st day of the calendar year.
(7) Targeted area residence. The term “targeted area residence” has the meaning given that term under section 103A (k) and the regulations thereunder.
(8) Acquisition cost. The term “acquisition cost” has the meaning given that term under section 103A (1)(5) and the regulations thereunder.
(9) Average area purchase price. The term “average area purchase price” has the meaning given that term under subparagraphs (2), (3), and (4) of section 103A (f) and the regulations thereunder. For purposes of this paragraph (b)(9), all determinations of average area purchase price shall be made with respect to residences as that term is defined in section 103A and the regulations thereunder.
(10) Total proceeds. The “total proceeds” of an issue is the sum of the products determined by multiplying—
(i) The certified indebtedness amount of each mortgage credit certificate issued pursuant to such issue, by
(ii) The certificate credit rate specified in such certificate.
(11) Residence. The term “residence” includes stock held by a tenant-stockholder in a cooperative housing corporation (as those terms are defined in section 216(b) (1) and (2)). It does not include property such as an appliance, a piece of furniture, a radio, etc., which, under applicable local law, is not a fixture. The term also includes any manufactured home which has a minimum of 400 square feet of living space and a minimum width in excess of 102 inches and which is of a kind customarily used at a fixed location. The preceding sentence shall not apply for purposes of determining the average area purchase price for single-family residences, nor shall it apply for purposes of determining the State ceiling amount. The term “residence” does not, however, include recreational vehicles, campers, and other similar vehicles.
(12) Related person. The term “related person” has the meaning given that term under section 103(b)(6)(C)(i) and § 1.103-10(e)(1).
(13) Date of issue. A mortgage credit certificate is considered issued on the date on which a closing agreement is signed with respect to the certified indebtedness amount.
(c) Affidavits. For purposes of §§ 1.25-1T through 1.25-8T, an affidavit filed in connection with the requirements of §§ 1.25-1T through 1.25-8T shall be made under penalties of perjury. Applicants for mortgage credit certificates who are required by a lender or the issuer to sign affidavits must be informed that any fraudulent statement will result in (1) the revocation of the individual’s mortgage credit certificate, and (2) a $10,000 penalty under section 6709. Other persons required by a lender or an issuer to provide affidavits must receive similar notice. A person may not rely on an affidavit where that person knows or has reason to know that the information contained in the affidavit is false.
§ 1.25-2T Amount of credit (Temporary).
(a) In general. Except as otherwise provided, the amount of the credit allowable for any taxable year to an individual who holds a qualified mortgage credit certificate is equal to the product of the certificate credit rate (as defined in paragraph (b)) and the amount of the interest paid or accrued by the taxpayer during the taxable year on the certified indebtedness amount (as defined in paragraph (c)).
(b) Certificate credit rate—(1) In general. For purposes of §§ 1.25-1T through 1.25-8T, the term “certificate credit rate” means the rate specified by the issuer on the mortgage credit certificate. The certificate credit rate shall not be less than 10 percent nor more than 50 percent.
(2) Limitation in certain States. (i) In the case of a State which—
(A) Has a State ceiling for the calendar year in which an election is made that exceeds 20 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family owner-occupied residences located within the jurisdiction of such State, or
(B) Issued qualified mortgage bonds in an aggregate amount less than $150 million for calendar year 1983.
(ii) The following example illustrates the application of this paragraph (b)(2):
(c) Certified indebtedness amount—(1) In general. The term “certified indebtedness amount” means the amount of indebtedness which is—
(i) Incurred by the taxpayer—
(A) To acquire his principal residence, § 1.25-2T(c)(1)(i),
(B) As a qualified home improvement loan, or
(C) As a qualified rehabilitation loan, and
(ii) Specified in the mortgage credit certificate.
(2) Example. The following example illustrates the application of this paragraph:
(d) Limitation on credit—(1) Limitation where certificate credit rate exceeds 20 percent. (i) If the certificate credit rate of any mortgage credit certificate exceeds 20 percent, the amount of the credit allowed to the taxpayer by section 25(a)(1) for any year shall not exceed $2,000. Any amount denied under this paragraph (d)(1) may not be carried forward under section 25(e)(1) and paragraph (d)(2) of this section.
(ii) If two or more persons hold interests in any residence, the limitation of paragraph (d)(1)(i) shall be allocated among such persons in proporation to their respective interests in the residence.
(2) Carryforward of unused credit. (i) If the credit allowable under section 25 (a) and § 1.25-2T for any taxable year exceeds the applicable tax limit for that year, the excess (the “unused credit”) will be a carryover to each of the 3 succeeding taxable years and, subject to the limitations of paragraph (d)(2)(ii), will be added to the credit allowable by section 25 (a) and § 1.25-2T for that succeeding year.
(ii) The amount of the unused credit for any taxable year (the “unused credit year”) which may be taken into account under this paragraph (d)(2) for any subsequent taxable year may not exceed the amount by which the applicable tax limit for that subsequent taxable year exceeds the sum of (A) the amount of the credit allowable under section 25 (a) and § 1.25-1T for the current taxable year, and (B) the sum of the unused credits which, by reason of this paragraph (d)(2), are carried to that subsequent taxable year and are attributable to taxable years before the unused credit year. Thus, if by reason of this paragraph (d)(2), unused credits from 2 prior taxable years are carried forward to a subsequent taxable year, the unused credit from the earlier of those 2 prior years must be taken into account before the unused credit from the later of those 2 years is taken into account.
(iii) For purposes of this paragraph (d)(2) the term “applicable tax limit” means the limitation imposed by section 26 (a) for the taxable year reduced by the sum of the credits allowable for that year under section 21, relating to expenses for household and dependent care services necessary for gainful employment, section 22, relating to the credit for the elderly and the permanently disabled, section 23, relating to the residential energy credit, and section 24, relating to contributions to candidates for public office. The limitation imposed by section 26 (a) for any taxable year is equal to the taxpayer’s tax liability (as defined in section 26 (b)) for that year.
(iv) The following examples illustrate the application of this paragraph (d)(2):
(ii) For 1987 B’s applicable tax limit is $1,500, the amount of the credit under section 25 (a) and § 1.25-2T is $1,700, and the unused credit is $200. For 1988 B’s applicable tax limit is $2,000, the amount of the credit under section 25 (a) and § 1.25-2T is $1,300, and there is no unused credit. For 1987 and 1988 B is not entitled to any of the credits described in sections 21 through 24. No portion of the unused credit for 1986 my be used in 1987. For 1988 B is entitled to claim a credit of $2,000 under section 25 (a) and § 1.25-2T, consisting of a $1,300 credit for 1988, the $600 unused credit for 1986, and $100 of the $200 unused credit for 1987. In addition, B may carry forward the remaining unused credit for 1987 ($100) to 1989 and 1990.
§ 1.25-3 Qualified mortgage credit certificate.
(a)-(g)(1)(ii) [Reserved]. For further guidance, see § 1.25-3T(a) through (g)(1)(ii).
(g)(1)(iii) Reissued certificate exception. See paragraph (p) of this section for rules regarding the exception in the case of refinancing existing mortgages.
(g)(2)-(o) [Reserved]. For further guidance, see § 1.25-3T(g)(2) through (o).
(p) Reissued certificates for certain refinancings—(1) In general. If the issuer of a qualified mortgage credit certificate reissues a certificate in place of an existing mortgage credit certificate to the holder of that existing certificate, the reissued certificate is treated as satisfying the requirements of this section. The period for which the reissued certificate is in effect begins with the date of the refinancing (that is, the date on which interest begins accruing on the refinancing loan).
(2) Meaning of existing certificate. For purposes of this paragraph (p), a mortgage credit certificate is an existing certificate only if it satisfies the requirements of this section. An existing certificate may be the original certificate, a certificate issued to a transferee under § 1.25-3T(h)(2)(ii), or a certificate previously reissued under this paragraph (p).
(3) Limitations on reissued certificate. An issuer may reissue a mortgage credit certificate only if all of the following requirements are satisfied:
(i) The reissued certificate is issued to the holder of an existing certificate with respect to the same property to which the existing certificate relates.
(ii) The reissued certificate entirely replaces the existing certificate (that is, the holder cannot retain the existing certificate with respect to any portion of the outstanding balance of the certified mortgage indebtedness specified on the existing certificate).
(iii) The certified mortgage indebtedness specified on the reissued certificate does not exceed the remaining outstanding balance of the certified mortgage indebtedness specified on the existing certificate.
(iv) The reissued certificate does not increase the certificate credit rate specified in the existing certificate.
(v) The reissued certificate does not result in an increase in the tax credit that would otherwise have been allowable to the holder under the existing certificate for any taxable year. The holder of a reissued certificate determines the amount of tax credit that would otherwise have been allowable by multiplying the interest that was scheduled to have been paid on the refinanced loan by the certificate rate of the existing certificate. In the case of a series of refinancings, the tax credit that would otherwise have been allowable is determined from the amount of interest that was scheduled to have been paid on the original loan and the certificate rate of the original certificate.
(A) In the case of a refinanced loan that is a fixed interest rate loan, the interest that was scheduled to be paid on the refinanced loan is determined using the scheduled interest method described in paragraph (p)(3)(v)(C) of this section.
(B) In the case of a refinanced loan that is not a fixed interest rate loan, the interest that was scheduled to be paid on the refinanced loan is determined using either the scheduled interest method described in paragraph (p)(3)(v)(C) of this section or the hypothetical interest method described in paragraph (p)(3)(v)(D) of this section.
(C) The scheduled interest method determines the amount of interest for each taxable year that was scheduled to have been paid in the taxable year based on the terms of the refinanced loan including any changes in the interest rate that would have been required by the terms of the refinanced loan and any payments of principal that would have been required by the terms of the refinanced loan (other than repayments required as a result of any refinancing of the loan).
(D) The hypothetical interest method (which is available only for refinanced loans that are not fixed interest rate loans) determines the amount of interest treated as having been scheduled to be paid for a taxable year by constructing an amortization schedule for a hypothetical self-amortizing loan with level payments. The hypothetical loan must have a principal amount equal to the remaining outstanding balance of the certified mortgage indebtedness specified on the existing certificate, a maturity equal to that of the refinanced loan, and interest equal to the annual percentage rate (APR) of the refinancing loan that is required to be calculated for the Federal Truth in Lending Act.
(E) A holder must consistently apply the scheduled interest method or the hypothetical interest method for all taxable years beginning with the first taxable year the tax credit is claimed by the holder based upon the reissued certificate.
(4) Examples. The following examples illustrate the application of paragraph (p)(3)(v) of this section:
(1) Applying the terms of the refinanced loan, including the variable interest rate or rates, for the taxable year as though the refinanced loan continued to exist; or
(2) Obtaining the amount of interest, and calculating the amount of credit that would have been available, from the schedule of equal payments that fully amortize a hypothetical loan with the principal amount equal to the remaining outstanding balance of the certified mortgage indebtedness specified on the existing certificate, the interest equal to the annual percentage rate (APR) of the refinancing loan, and the maturity equal to that of the refinanced loan.
(b) The holder must apply the same method for each taxable year the tax credit is claimed based upon the reissued mortgage credit certificate.
(5) Coordination with Section 143(m)(3). A refinancing loan underlying a reissued mortgage credit certificate that replaces a mortgage credit certificate issued on or before December 31, 1990, is not a federally subsidized indebtedness for the purposes of section 143(m)(3) of the Internal Revenue Code.
§ 1.25-3T Qualified mortgage credit certificate (Temporary).
(a) Definition of qualified mortgage credit certificate. For purposes of §§ 1.25-1T through 1.25-8T, the term “qualified mortgage credit certificate” means a certificate that meets all of the requirements of this section.
(b) Qualified mortgage credit certificate program. A certificate meets the requirements of this paragraph if it is issued under a qualified mortgage credit certificate program (as defined in § 1.25-4T).
(c) Required form and information. A certificate meets the requirements of this paragraph if it is in the form specified in § 1.25-6T and if all the information required by the form is specified on the form.
(d) Residence requirement—(1) In general. A certificate meets the requirements of this paragraph only if it is provided in connection with the acquisition, qualified rehabilitation, or qualified home improvement of a residence, that is—
(i) A single-family residence (as defined in § 1.25-1T(b)(5)) which, at the time the financing on the residence is executed or assumed, can reasonably be expected by the issuer to become (or, in the case of a qualified home improvement loan, to continue to be) the principal residence (as defined in section 1034 and the regulations thereunder) of the holder of the certificate within a reasonable time after the financing is executed or assumed, and
(ii) Located within the jurisdiction of the governmental unit issuing the certificate.
(2) Certification procedure. The requirements of this paragraph will be met if the issuer or its agent obtains from the holder of the certificate an affidavit stating his intent to use (or, in the case of a qualified home improvement loan, that he is currently using and intends to continue to use) the residence as his principal residence within a reasonable time (e.g., 60 days) after the mortgage credit certificate is issued and stating that the holder will notify the issuer of the mortgage credit certificate if the residence ceases to be his principal residence. The affidavit must also state facts that are sufficient for the issuer or his agent to determine whether the residence is located within the jurisdiction of the issuer that issued the mortgage credit certificate.
(e) 3-year requirement—(1) In general. A certificate meets the requirements of this paragraph only if the holder of the certificate had no present ownership interest in a principal residence at any time during the 3-year period prior to the date on which the mortgage on the residence in connection with which the certificate is provided is executed. For purposes of the preceding sentence, the holder’s interest in the residence with respect to which the certificate is being provided shall not be taken into account. See section 103A(e) and the regulations thereunder for further definitions and requirements.
(2) Exceptions. Paragraph (e)(1) shall not apply with respect to—
(i) Any certificate provided with respect to a targeted area residence (as defined in § 1.25-1T(b)(7)),
(ii) Any qualified home improvement loan (as defined in § 1.25-1T(b)(3)), and
(iii) Any qualified rehabilitation loan (as defined in § 1.25-1T(b)(4)).
(3) Certification procedure. The requirements of paragraph (e)(1) will be met if the issuer or its agent obtains from the holder of the certificate an affidavit stating that he had no present ownership interest in a principal residence at any time during the 3-year period prior to the date of which the certificate is issued and the issuer or its agent obtains from the applicant copies of the applicant’s Federal tax returns for the preceding 3 years and examines each statement to determine whether the applicant has claimed a deduction for taxes on property which was the applicant’s principal residence pursuant to section 164(a)(1) or a deduction pursuant to section 163 for interest paid on a mortgage secured by property which was the applicant’s principal residence. Where the mortgage is executed during the period between January 1 and February 15 and the applicant has not yet filed has Federal income tax return with the Internal Revenue Service, the issuer may, with respect to such year, rely on an affidavit of the applicant that the applicant is not entitled to claim deductions for taxes or interest on indebtedness with respect to property constituting his principal residence for the preceding calendar year. In the alternative, when applicable, the holder may provide an affidavit stating that one of the exceptions provided in paragraph (e)(2) applies.
(4) Special rule. An issuer may submit a plan to the Commissioner for distributing certificates, in an amount not to exceed 10 percent of the proceeds of the issue, to individuals who do not meet the requirements of this paragraph. Such plan must describe a procedure for ensuring that no more than 10 percent of the proceeds of a such issue will be used to provide certificates to such individuals. If the Commissioner approves the issuer’s plan, certificates issued in accordance with the terms of the plan to holders who do not meet the 3-year requirement do not fail to satisfy the requirements of this paragraph.
(f) Purchase price requirement—(1) In general. A certificate meets the requirements of this paragraph only if the acquisition cost (as defined in § 1.25-1T(b)(8)) of the residence, other than a targeted area residence, in connection with which the certificate is provided does not exceed 110 percent of the average area purchase price (as defined in § 1.25-1T(b)(9)) applicable to that residence. In the case of a targeted area residence (as defined in § 1.251T(b)(7)) the acquisition cost may not exceed 120 percent of the average area purchase price applicable to such residence. See section 1093A(f) and the regulations thereunder for further definitions and requirements.
(2) Certification procedure. The requirements of paragraph (f)(1) will be met if the issuer or its agent obtains affidavits executed by the seller and the buyer that state these requirements have been met. Such affidavits must include an itemized list of—
(i) Any payments made by the buyer (or a related person) or for the benefit of the buyer,
(ii) If the residence is incomplete, an estimate of the reasonable cost of completing the residence, and
(iii) If the residence is purchased subject to a ground rent, the capitalized value of the ground rent.
(g) New mortgage requirement—(1) In general. (i) A certificate meets the requirements of this paragraph only if the certificate is not issued in connection with the acquisition or replacement of an existing mortgage. Except in the case of a qualified home improvement loan, the certificate must be issued to an individual who did not have a mortgage (whether or not paid off) on the residence with respect to which the certificate is issued at any time prior to the execution of the mortgage.
(ii) Exceptions. For purposes of this paragraph, a certificate used in connection with the replacement of—
(A) Construction period loans,
(B) Bridge loans or similar temporary initial financing, and
(C) In the case of a qualified rehabilitation loan, an existing mortgage,
(2) Certification procedure. The requirements of paragraph (g)(1) will be met if the issuer or its agent obtains from the holder of the certificate an affidavit stating that the mortage being acquired in connection with the certificate will not be used to acquire or replace an existing mortgage (other than one that falls within the exceptions described in paragraph (g)(1)(ii)).
(h) Transfer of mortgage credit certificates—(1) In general. A certificate meets the requirements of this paragraph only if it is (i) not transferable or (ii) transferable only with the approval of the issuer.
(2) Transfer procedure. A certificate that is transferred with the approval of the issuer is a qualified mortgage credit certificate in the hands of the transferee only if each of the following requirements is met:
(i) The transferee assumed liability for the remaining balance of the certified indebtedness amount in connection with the acquisition of the residence from the transferor,
(ii) The issuer issues a new certificate to the transferee, and
(iii) The new certificate meets each of the requirements of paragraphs (d), (e), (f), and (i) of this section based on the facts as they exist at the time of the transfer as if the mortgage credit certificate were being issued for the first time. For example, the purchase price requirement is to be determined by reference to the average area purchase price at the time of the assumption and not when the mortgage credit certificate was originally issued.
(3) Statement on certificate. The requirements of paragraph (h)(1) will be met if the mortgage credit certificate states that the certificate may not be transferred or states that the certificate may not be transferred unless the issuer issues a new certificate in place of the original certificate.
(i) Prohibited mortgages—(1) In general. A certificate meets the requirements of this paragraph only if it is issued in connection with the acquisition of a residence none of the financing of which is provided from the proceeds of—
(i) A qualified mortgage bond (as defined under section 103A(c)(1) and the regulations thereunder), or
(ii) A qualified veterans’ mortgage bond (as defined under section 103A(c)(3) and the regulations thereunder).
(2) Certification procedure. The requirements of paragraph (i)(1) will be met if the issuer or its agent obtains from the holder of the certificate an affidavit stating that no portion of the financing of the residence in connection with which the certificate is issued is provided from the proceeds of a qualified mortgage bond or a qualified veterans’ mortgage bond.
(j) Particular lenders—(1) In general. Except as otherwise provided in paragraph (j)(2), a certificate meets the requirements of this paragraph only if the certificate is not limited to indebtedness incurred from particular lenders. A certificate is limited to indebtedness from particular lenders if the issuer, directly or indirectly, prohibits the holder of a certificate from obtaining financing from one or more lenders or requires the holder of a certificate to obtain financing from one or more lenders. For purposes of this paragraph, a lender is any person, including an issuer of mortgage credit certificates, that provides financing for the acquisition, qualified rehabilitation, or qualified home improvement of a residence.
(2) Exception. A mortgage credit certificate that is limited to indebtedness incurred from particular lenders will not cease to meet the requirements of this paragraph if the Commissioner approves the basis for such limitation. The Commissioner may approve the basis for such limitation if the issuer establishes to the satisfaction of the Commissioner that it will result in a significant economic benefit to the holders of mortgage credit certificates (e.g., substantially lower financing costs) compared to the result without such limitation.
(3) Taxable bonds. The requirements of this paragraph do not prevent an issuer of mortgage credit certificates from issuing mortgage subsidy bonds (other than obligations described in section 103 (a)) the proceeds of which are to be used to provide mortgages to holders of mortgage credit certificates provided that the holders of such certificates are not required to obtain financing from the proceeds of the bond issue. See § 1.25-4T (h) with respect to permissible fees.
(4) Lists of participating lenders. The requirements of this paragraph do not prohibit an issuer from maintaining a list of lenders that have stated that they will make loans to qualified holders of mortgage credit certificates, provided that (i) the issuer solicits such statements in a public notice similar to the notice described in § 1.25-7T, (ii) lenders are provided a reasonable period of time in which to express their interest in being included in such a list, and (iii) holders of mortgage credit certificates are not required to obtain financing from the lenders on the list. If an issuer maintains such a list, it must update the list at least annually.
(5) Certification procedure. The requirements of this paragraph will be met if (i) the issuer or its agent obtains from the holder of the certificate an affidavit stating that the certificate was not limited to indebtedness incurred from particular lenders or (ii) the issuer obtains a ruling from the Commissioner under paragraph (j)(2).
(6) Examples. The following examples illustrate the application of this paragraph:
(k) Developer certification—(1) In general. A mortgage credit certificate that is allocated by the issuer to any particular development meets the requirements of this paragraph only if the developer provides a certification to the purchaser of the residence and the issuer stating that the purchase price of that residence is not higher than the price would be if the issuer had not allocated mortgage credit certificates to the development. The certification must be made by the developer if a natural person or, if not, by a duly authorized official of the developer.
(2) Certification procedure. The requirements of this paragraph will be met if the issuer or its agent obtains from the holder of the certificate an affidavit stating that he has received from the developer the certification described in this paragraph.
(l) Expiration—(1) In general. A certificate meets the requirements of this paragraph if the certified indebtedness amount is incurred prior to the close of the second calendar year following the calendar year for which the issuer elected not to issue qualified mortgage bonds under § 1.25-4T with respect to that issue of mortgage credit certificates. Thus, for example, if on October 1, 1984, an issuing authority elects under § 1.25-4T not to issue qualified mortgage bonds, a mortgage credit certificate provided under that program does not meet the requirements of this paragraph unless the indebtedness is incurred on or before December 31, 1986.
(2) Issuer-imposed expiration dates. An issuer of mortgage credit certificates may provide that a certificate shall expire if the holder of the certificate does not incure certified indebtedness by a date that is prior to the expiration date provided in paragraph (l)(1). A certificate that expires prior to the date provided in paragraph (l)(1) may be reissued provided that the requirements of this paragraph are met.
(m) Revocation. A certificate meets the requirements of this paragraph only if it has not been revoked. Thus, the credit provided by section 25 and § 1.25-1T does not apply to interest paid or accrued following the revocation of a certificate. A certificate is treated as revoked when the residence to which the certificate relates ceases to be the holder’s principal residence. An issuer may revoke a mortgage credit certificate if the certificate does not meet all the requirements of § 1.25-3T (d), (e), (f), (g), (h), (i), (j), (k), and (n). The certificate is revoked by the issure’s notifying the holder of the certificate and the Internal Revenue Service that the certificate is revoked. The notice to the Internal Revenue Service shall be made as part of the report requred by § 1.25-8T (b)(2).
(n) Interest paid to related person—(1) In general. A certificate does not meet the requirements of this paragraph if interest on the certified indebtedness amount is paid to a person who is a related person to the holder of the certificate.
(2) Certification procedure. The requirements of this paragraph will be met if the issuer or its agent obtains from the holder of the certificate an affidavit stating that a related person does not have, and is not expected to have, an interest as a creditor in the certified indebtedness amount.
(o) Fraud. Notwithstanding any other provision of this section, a mortgage credit certificate does not meet the requirements of this section and, therefore, the certificate is not a qualified mortgage credit certificate for any calendar year, if the holder of the certificate provides a certification or any other information to the lender providing the mortgage or to the issuer of the certificate containing a material misstatement and such misstatement is due to fraud. In determining whether any misstatement is due to fraud, the rules generally applicable to underpayments of tax due to fraud (including rules relating to the statute of limitations) shall apply. See § 1.6709-1T with respect to the penalty for filing negligent or fraudulent statements.
§ 1.25-4T Qualified mortgage credit certificate program (Temporary).
(a) In general—(1) Definition of qualified mortgage credit certificate program. For purposes of §§ 1.25-1T through 1.25-8T, the term “qualified mortgage credit certificate program” means a program to issue qualified mortgage credit certificates which meets all of the requirements of paragraphs (b) through (i) of this section.
(2) Requirements are a minimum. Except as otherwise provided in this section, the requirements of this section are minimum requirements. Issuers may establish more stringent criteria for participation in a qualified mortgage credit certificate program. Thus, for example, an issuer may target 30 percent of the proceeds of an issue of mortgage credit certificates to targeted areas. Further, issuers may establish additional eligibility criteria for participation in a qualified mortgage credit certificate program. Thus, for example, issuers may impose an income limitation designed to ensure that only those individuals who could not otherwise purchase a residence will benefit from the credit.
(3) Except as otherwise provided in this section and § 1.25-3T, issuers may use mortgage credit certificates in connection with other Federal, State, and local programs provided that such use complies with the requirements of § 1.25-3T(j). Thus, for example, a mortgage credit certificate may be issued in connection with the qualified rehabilitation of a residence part of the cost of which will be paid from the proceeds of a State grant.
(b) Establishment of program. A program meets the requirements of this paragraph only if it is established by a State or political subdivision thereof for any calendar year for which it has the authority to issue qualified mortgage bonds.
(c) Election not to issue qualified mortgage bonds—(1) In general. A program meets the requirements of this paragraph only if the issuer elects, in the time and manner specified in this paragraph, not to issue an amount of qualified mortgage bonds that it may otherwise issue during the calendar year under section 103A and the regulations thereunder.
(2) Manner of making election. On or before the earlier of the date of distribution of mortgage credit certificates under a program or December 31, 1987, the issuer must file an election not to issue an amount of qualified mortgage bonds. The election (and the certification (or affidavit) described in paragraph (d)) shall be filed with the Internal Revenue Service Center, Philadelphia, Pennsylvania 19255. The election should be titled “Mortgage Credit Certificate Election” and must include—
(i) The name, address, and TIN of the issuer,
(ii) The issuer’s applicable limit, as defined in section 103A (g) and the regulations thereunder,
(iii) The aggregate amount of qualified mortgage bonds issued by the issuing authority during the calendar year,
(iv) The amount of the issuer’s applicable limit that it has surrendered to other issuers during the calendar year,
(v) The date and amount of any previous elections under this paragraph for the calendar year, and
(vi) The amount of qualfied mortgage bonds that the issuer elects not to issue.
(3) Revocation of election. Any election made under this paragraph may be revoked, in whole or in part, at any time during the calendar year in which the election was made. The revocation, however, may not be made with respect to any part of the nonissued bond amount that has been used to issue mortgage credit certificates pursuant to the election. The revocation shall be filed with the Internal Revenue Service Center, Philadelphia, Pennsylvania 19255. The revocation should be titled “Revocation of Mortgage Credit Certificate Election” and must include—
(i) The name, address, and TIN of the issuer,
(ii) The nonissued bond amount as originally elected, and
(iii) The portion of the nonissued bond amount with respect to which the election is being revoked.
(4) Special rule. If at the time that an issuer makes an election under this paragraph it does not know its applicable limit, the issuer may elect not to use all of its remaining authority to issue qualified mortgage bonds; this form of election will be treated as meeting the requirements of paragraph (c)(2) if, prior to the later of the end of the calendar year and December 31, 1985, the issuer amends its election so as to indicate the exact amount of qualified mortgage bond authority that it elected not to issue.
(5) Limitation on nonissued bond amount. The amount of qualified mortgage bonds which an issuer elects not to issue may not exceed the issuer’s applicable limit (as determined under section 103A (g) and the regulations thereunder). For example, a governmental unit that, pursuant to section 103A (g)(3), may issue $10 million of qualified mortgage bonds that elects to trade in $11 million in qualified mortgage bond authority has not met the requirements of this paragraph, and mortgage credit certificates issued pursuant to such election are not qualified mortgage credit certificates.
(d) State certification requirement—(1) In general. A program meets the requirements of this paragraph only if the State official designated by law (or, where there is no State official, the Governor) certifies, based on facts and circumstances as of the date on which the certification is requested, following a request for such certification, that the issue meets the requirements of section 103A(g) (relating to volume limitation) and the regulations thereunder. A copy of the State certification must be attached to the issuer’s election not to issue qualified mortgage bonds, except that, in the case of elections made during calendar year 1984, the certification may be filed with the Service prior to July 8, 1985 provided that mortgage credit certificates may not be distributed until the certification is filed. In the case of any constitutional home rule city, the certification shall be made by the chief executive officer of the city.
(2) Certification procedure. The official making the certification described in this paragraph (d) need not perform an independent investigation to determine whether the issuer has met the requirements of section 103A(g). In determining the aggregate amount of qualified mortgage bonds previously issued by that issuer during the calendar year the official may rely on copies of prior elections under paragraph (c) of this section made by the issuer for that year, together with an affidavit executed by an official of the issuer who is responsible for issuing bonds stating that the issuer has not, to date, issued any other issues of qualified mortgage bonds during the calendar year and stating the amount, if any, of the issuer’s applicable limit that it has surrendered to other issuers during the calendar year; for any calendar year prior to 1985, the official may rely on an affidavit executed by a duly authorized official of the issuer who states the aggregate amount of qualified mortgage bonds issued by the issuer during the year. In determining the aggregate amount of qualified mortgage bonds that the issuer has previously elected not to issue during that calendar year, the official may rely on copies of any elections not to issue qualified mortgage bonds filed by the issuer for that calendar year, together with an affidavit executed by an official of the issuer responsible for issuing mortgage credit certificates stating that the issuer has not, to date, made any other elections not to issue qualified mortgage bonds. If, based on such information, the certifying official determines that the issuer has not, as of the date on which the certification is provided, exceeded its applicable limit for the year, the official may certify that the issue meets the requirements of section 103A(g). The fact that the certification described in this paragraph (d) is provided does not ensure that the issuer has met the requirements of section 103A(g) and the regulations thereunder, nor does it preclude the application of the penalty for over-issuance of mortgage credit certificates if such over-issuance actually occurs. See § 1.25-5T.
(3) Special rule. If within 30 days after the issuer files a proper request for the certification described in this paragraph (d) the issuer has not received from the State official designated by law (or, if there is no State official, the Governor) certification that the issue meets the requirements of section 103A(g) or, in the alternative, a statement that the issue does not meet such requirements, the issuer may submit, in lieu of the certification required by this paragraph (d), an affidavit executed by an officer of the issuer responsible for issuing mortgage credit certificates stating that—
(i) The issue meets the requirements of section 103A(g) and the regulations thereunder,
(ii) At least 30 days before the execution of the affidavit the issuer filed a proper request for the certification described in this paragraph (d), and
(iii) The State official designated by law (or, if there is no State official, the Governor) has not provided the certification described in this paragraph (d) or a statement that the issue does not meet such requirements.
(e) Information reporting requirement—(1) Reports. With respect to mortgage credit certificates issued after September 30, 1985, a program meets the requirements of this paragraph only if the issuer submits a report containing the information concerning the holders of certificates issued during the preceding reporting period required by this paragraph. The report must be filed for each reporting period in which certificates (other than transferred certificates) are issued under the program. The issuer is not responsible for false information provided by a holder if the issuer did not know or have reason to know that the information was false. The report must be filed on the form prescribed by the Internal Revenue Service. If no form is prescribed, or if the form prescribed is not readily available, the issuer may use its own form provided that such form is in the format set forth in this paragraph and contains the information required by this paragraph. The report must be titled “Mortgage Credit Certificate Information Report” and must include the name, address, and TIN of the issuer, the reporting period for which the information is provided, and the following tables containing information concerning the holders of certificates issued during the reporting period for which the report is filed:
(i) A table titled “Number of Mortgage Credit Certificates by Income and Acquisition Cost” showing the number of mortgage credit certificates issued (other than those issued in connection with qualified home improvement and rehabilitation loans) according to the annualized gross income of the holders (categorized in the following intervals of income:
(A) The aggregate amount of fees charged to holders to cover any administrative costs incurred by the issuer in issuing mortgage credit certificates, and
(B) The number of holders that—
(1) Did not have a present ownership interest in a principal residence at any time during the 3-year period ending on the date the mortgage credit certificate is executed (i.e., satisfied the 3-year requirement) and purchased residences in targeted areas,
(2) Satisfied the 3-year requirement and purchased residences not located in targeted areas,
(3) Did have a present ownership interest in a principal residence at any time during the 3-year period ending on the date the mortgage credit certificate is executed (i.e., did not satisfy the 3-year requirement) and purchased residences in targeted areas, and
(4) Did not satisfy the 3-year requirement and purchased residences not located in targeted areas.
(ii) A table titled “Volume of Mortgage Credit Certificates by Income and Acquisition Cost” containing data on—
(A) The total of the certified indebtedness amounts of the certificates issued (other than those issued in connection with qualified home improvement and rehabilitation loans);
(B) The sum of the products of the certified indebtedness amount and the certificate credit rate for each certificate (other than those issued in connection with qualified home improvement and rehabilitation loans) according to annualized gross income (categorized in the same intervals of income as the preceding table) and according to the acquisition cost of the residences acquired in connection with mortgage credit certificates (categorized in the same intervals of acquisition cost as the preceding table); and
(C) For each interval of income and acquisition cost, the information described in paragraph (e)(1)(ii) (A) and (B) categorized according to the holders that—
(1) Satisfied the 3-year requirement and purchased residences in targeted areas,
(2) Satisfied the 3-year requirement and purchased residences not located in targeted areas,
(3) Did not satisfy the 3-year requirement and purchased residences in targeted areas, and
(4) Did not satisfy the 3-year requirement and purchased residences not located in targeted areas.
(iii) A table titled “Mortgage Credit Certificates for Qualified Home Improvement and Rehabilitation Loans” showing the number of mortgage credit certificates issued in connection with qualified home improvement loans and qualified rehabilitation loans, the total of the certified indebtedness amount with respect to such certificates, and the sum of the products of the certified indebtedness amount and the certificate credit rate for each certificate; the information contained in the table must also be categorized according to whether the residences with respect to which the certificates were provided are located in targeted areas.
(2) Format. If no form is prescribed by the Internal Revenue Service, or if the prescribed form is not readily available, the issuer must submit the report in the format specified in this paragraph (e)(2). The specified format of the report is the following:
Number of Mortgage Credit Certificates by Income and Acquisition Cost
3-year requirement: Annualized gross monthly income of borrowers | Satisfied | Not satisfied | Totals fees | ||
---|---|---|---|---|---|
Nontargeted area | Targeted area | Nontargeted area | Targeted area | ||
$0 to $9,999 | |||||
$10,000 to $19,999 | |||||
$20,000 to $29,999 | |||||
$30,000 to $39,999 | |||||
$40,000 to $49,999 | |||||
$50,000 to $74,999 | |||||
$75,000 or more | |||||
Total | |||||
Acquisition Cost | |||||
0 to $19,999 | |||||
$20,000 to $39,999 | |||||
$40,000 to $59,999 | |||||
$60,000 to $79,999 | |||||
$80,000 to $99,999 | |||||
$100,000 to $119,999 | |||||
$120,000 to $149,999 | |||||
$150,000 to $199,999 | |||||
$200,000 or more | |||||
Total |
Volume of Mortgage Credit Certificates by Income and Acouisition Cost
Annualized gross monthly income of holders | Holders satisfying the 3-year requirement | 3-year requirement not satisfied | Totals | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Nontargeted area | Targeted area | Nontargeted area | Targeted area | Total of the certified indebtedness amounts | Total sum of products of certified indebtedness amounts and credit rates | |||||
Total of the certified indebtedness amounts | Sum of products of certified indebtedness amounts and credit rates | Total of the certified indebtedness amounts | Sum of products of certified indebtedness amounts and credit rates | Total of the certified indebtedness amounts | Sum of products of certified indebtedness amounts and credit rates | Total of the certified indebtedness amounts | Sum of products of certified indebtedness amounts and credit rates | |||
$0 to $9,999 | ||||||||||
$10,000 to $19,999 | ||||||||||
$20,000 to $29,999 | ||||||||||
$30,000 to $39,999 | ||||||||||
$40,000 to $49,999 | ||||||||||
$50,000 to $74,999 | ||||||||||
$75,000 to more | ||||||||||
Total | ||||||||||
Acquisition Cost | ||||||||||
$0 to $19,999 | ||||||||||
$20,000 to $39,999 | ||||||||||
$40,000 to $59,999 | ||||||||||
$60,000 to $79,999 | ||||||||||
$80,000 to $99,999 | ||||||||||
$100,000 to $119,999 | ||||||||||
$120,000 to $149,999 | ||||||||||
$150,000 to $199,999 | ||||||||||
$200,000 or more | ||||||||||
Total |
Mortgage Credit Certificates for Qualified Home Improvement and Rehabilitation Loans
Nontargeted area | Targeted area | Totals | |
---|---|---|---|
Home Improvement Loans | |||
Number of mortgage credit certificates | |||
Total of the certified indebtedness amounts | |||
Product of certified indebtedness amounts and credit rates | |||
Rehabilitation Loans | |||
Number of mortgage credit certificates | |||
Total of the certified indebtedness amounts | |||
Product of certified indebtedness amounts and credit rates |
(3) Definitions and special rules. (i) For purposes of this paragraph the term “annualized gross income” means the borrower’s gross monthly income multiplied by 12. Gross monthly income is the sum of monthly gross pay, any additional income from investments, pensions, Veterans Administration (VA) compensation, part-time employment, bonuses, dividends, interest, current overtime pay, net rental income, etc., and other income (such as alimony and child support, if the borrower chooses to disclose such income). Information with respect to gross monthly income may be obtained from available loan documents, e.g., the sum of lines 23D and 23E on the Application for VA or FmHA Home Loan Guaranty or for HUD/FHA Insured Mortgage (VA Form 26-1802a, HUD 92900, Jan. 1982), or the total line from the Gross Monthly Income section of FHLMC Residential Loan Application form (FHLMC 65 Rev. 8/78).
(ii) For purposes of this paragraph, the term “reporting period” means each one year period beginning July 1 and ending June 30, except that issuers need not provide data with respect to the period prior to October 1, 1985.
(iii) For purposes of this paragraph, verification of information concerning a holder’s gross monthly income by utilizing other available information concerning the holder’s income (e.g., Federal income tax returns) is not required. In determining whether the holder of a mortgage credit certificate acquiring a residence in a targeted area satisfies the 3-year requirement, the issuer may rely on a statement signed by the holder.
(4) Time for filing. The report required by this paragraph shall be filed not later than the 15th day of the second calendar month after the close of the reporting period. The Commissioner may grant an extension of time for the filing of a report required by this paragraph if there is reasonable cause for the failure to file such report in a timely fashion. The report may be filed at any time before such date but must be complete based on facts and reasonable expectations as of the date the report is filed. The report need not be amended to reflect information learned subsequent to the date of filing, or to reflect changed circumstances with respect to any holder.
(5) Place for filing. The report required by this paragraph is to be filed at the Internal Revenue Service Center, Philadelphia, Pennsylvania 19255.
(f) Policy statement. A program established pursuant to an election under paragraph (c) made after 1984 meets the requirements of this paragraph only if the applicable elected representative of the governmental unit—
(1) Which is the issuer, or
(2) On whose behalf the certificates were issued,
(g) Targeted areas requirement—(1) In general. A program meets the requirements of this paragraph only if—
(i) The portion of the total proceeds of the issue specified in paragraph (g)(2) is made available to provide mortgage credit certificates in connection with owner financing of targeted area residents for at least 1 year after the date on which mortgage credit certificates are first made available with respect to targeted area residences, and
(ii) The issuer attempts with reasonable diligence to place such proceeds with qualified persons.
(2) Specified portion. (i) The specified portion of the total proceeds of an issue is the lesser of—
(A) 20 percent of the total proceeds, or
(B) 8 percent of the average annual aggregate principal amount of mortgages executed during the immediately preceding 3 calendar years for single-family, owner-occupied residences in targeted areas within the jurisdiction of the issuing authority.
(ii) See § 1.25-1T(b)(10)(ii) for the definition of “total proceeds”.
(h) Fees—(1) In general. A program meets the requirements of this paragraph only if each applicant is required to pay, directly or indirectly, no fee other than those fees permitted under this paragraph.
(2) Permissible fees. Applicants may be required to pay the following fees provided that they are reasonable:
(i) Points, origination fees, servicing fees, and other fees in amounts that are customarily charged with respect to mortgages not provided in connection with mortgage credit certificates,
(ii) Application fees, survey fees, credit report fees, insurance fees, or similar settlement or financing costs to the extent such amounts do not exceed the amounts charged in the area in cases where mortgages are not provided in connection with mortgage credit certificates. For example, amounts charged for FHA, VA, or similar private mortgage insurance on an individual’s mortgage are permissible so long as such amounts do not exceed the amounts charged in the area with respect to a similar mortgage that is not provided in connection with a mortgage credit certificate, and
(iii) Other fees that, taking into account all the facts and circumstances, are reasonably necessary to cover any administrative costs incurred by the issuer or its agent in issuing mortgage credit certificates.
(i) Qualified mortgage credit certificate. A program meets the requirements of this paragraph only if each mortgage credit certificate issued under the program meets each of the requirements of paragraphs (c) through (o) of § 1.25-3T.
(j) Good faith compliance efforts—(1) Eligibility requirements. (i) A program under which each of the mortgage credit certificates issued does not meet each of the requirements of paragraphs (c) through (o) of § 1.25-3T shall be treated as meeting the requirements of paragraph (i) of this section if each of the requirements of this paragraph (j)(1) is satisfied. A mortgage credit certificate program meets the requirements of this paragraph (j)(1) only if each of the following provisions is met:
(A) The issuer in good faith attempted to issue mortgage credit certificates only to individuals meeting each of the requirements of paragraphs (c) through (o) of § 1.25-3T. Good faith requires that agreements with lenders and agents and other relevant instruments contain restrictions that permit the approval of mortgage credit certificates only in accordance with the requirements of paragraphs (c) through (o) of § 1.25-3T. In addition, the issuer must establish reasonable procedures to ensure compliance with those requirements. Reasonable procedures include reasonable investigations by the issuer to determine whether individuals satisfy the requirements of paragraphs (c) through (o) of § 1.25-3T.
(B) 95 percent or more of the total proceeds of the issue were devoted to individuals with respect to whom, at the time that the certificate was issued, all the requirements of paragraphs (c) through (o) of § 1.25-3T were met. If a holder of a mortgage credit certificate fails to meet more than one of these requirements, the amount of the certificate (i.e., the certificate credit rate multiplied by the certified indebtedness amount) issued to that individual will be taken into account only once in determining whether the 95-percent requirement is met. However, all of the defects in that individual’s certificate must be corrected pursuant to paragraph (j)(1)(i)(C).
(C) Any failure to meet the requirements of paragraphs (c) through (o) of § 1.25-3T is corrected within a reasonable period after that failure is discovered. For example, if an individual fails to meet one or more of such requirements those failures can be corrected by revoking that individual’s certificate.
(ii) Examples. The following examples illustrate the application of this paragraph (j)(1):
(i) An affidavit stating that the applicant intends to use the residence in connection with which the mortgage credit certificate is issued as his principal residence within a reasonable time after the certificate is issued by County X, that the applicant will notify the County if the residence ceases to be his principal residence, and facts that are sufficient for County X to determine whether the residence is located within the jurisdiction of County X,
(ii) An affidavit stating that the applicant had no present ownership interest in a principal residence at any time during the 3-year period prior to the date on which the certificate is issued,
(iii) Copies of the applicant’s Federal tax returns for the preceding 3 years,
(iv) Affidavits from the seller of the residence with respect to which the certificate is issued and the applicant stating the purchase price of the residence, including an itemized list of (A) payments made by or for the benefit of the applicant, (B) if the residence is incomplete, an estimate of the reasonable cost of completing the residence, and (C) if the residence is subject to a ground rent, the capitalized value of the ground rent,
(v) An affidavit executed by the applicant stating that the mortgage being acquired in connection with the certificate will not be used to acquire or replace an existing mortgage,
(vi) An affidavit executed by the applicant stating that no portion of the financing for the residence in connection with which the certificate is issued is provided from the proceeds of a qualified mortgage bond or qualified veterans’ mortgage bond and that no portion of the mortgage for the residence is provided by a person related to the applicant (as defined in § 1.25-3T(n)),
(vii) An affidavit executed by the applicant stating that the certificate was not limited to indebtedness incurred from particular lenders, and
(viii) In the case of a mortgate credit certificate allocated for use in connection with a particular development, and affidavit executed by the applicant stating that the applicant received from the developer a certification stating that the price of the residence with respect to which the certificate was issued is no higher than it would be without the use of a mortgage credit certificate.
(i) An affidavit stating that the applicant intends to use the residence in connection with which the mortgage credit certificate is issued as his principal residence within a reasonable time after the certificate is issued by County W, that the applicant will notify the County if the residence ceases to be his principal residence, and facts that are sufficient for County W to determine whether the residence is located within the jurisdication of County W,
(ii) An affidavit stating that the applicant had no present ownership interest in a principal residence at any time during the 3-year period prior to the date on which the certificate is issued,
(iii) Copies of the applicant’s Federal tax returns for the preceding 3 years,
(iv) Affidavits from the seller of the residence with respect to which the certificate is issued and the applicant stating the purchase price of the residence, including an itemized list of (A) payments made by or for the benefit of the applicant, (B) if the residence is incomplete, an estimate of the reasonable cost of completing the residence, and (C) if the residence is subject to a ground rent, the capitalized value of the ground rent,
(v) An affidavit executed by the applicant stating that the mortgage being acquired in connection with the certificate will not be used to acquire or replace an existing mortgage,
(vi) An affidavit executed by the applicant stating that no portion of the financing for the residence in connection with which the certificate is issued in provided from the proceeds of a qualified mortgage bond or qualified veterans’ mortgage bond and that no portion of the mortgage for the residence is provided by a person related to the applicant (as defined in § 1.25-3T(n)),
(vii) An affidavit executed by the applicant stating that the certificate was not limited to indebtedness incurred from particular lenders, and
(viii) In the case of a mortgage credit certificate allocated for use in connection with a particular development, an affidavit executed by the applicant stating that the applicant received from the developer a certification stating that the price of the residence with respect to which the certificate was issued is no higher than it would be without the use of a mortgage credit certificate.
(2) Program requirements. (i) A mortgage credit certificate program which fails to meet one or more of the requirements of paragraphs (b) through (h) of this section shall be treated as meeting such requirements if the requirements of this paragraph (j)(2) are satisfied. A mortgage credit certificate program meets the requirements of this paragraph (j)(2) only if each of the following provisions is met:
(A) The issuer in good faith attempted to meet all of the requirements of paragraphs (b) through (h) of this section. This good faith requirement will be met if all reasonable steps are taken by the issuer to ensure that the program complies with these requirements.
(B) Any failure to meet such requirements is due to inadvertent error, e.g., mathematical error, after taking reasonable steps to comply with such requirements.
(ii) The following example illustrate the application of this paragraph (j)(2):
§ 1.25-5T Limitation on aggregate amount of mortgage credit certificates (Temporary).
(a) In general. If the aggregate amount of qualified mortgage credit certificates (as defined in paragraph (b)) issued by an issuer under a qualified mortgage credit certificate program exceeds 20 percent of the nonissued bond amount (as defined in paragraph (c)), the provisions of paragraph (d) shall apply.
(b) Aggregate amount of mortgage credit certificates—(1) In general. The aggregate amount of qualified mortgage credit certificates issued under a qualified mortgage credit certificate program is the sum of the products determined by multiplying—
(i) The certified indebtedness amount of each qualified mortgage credit certificate issued under that program, by
(ii) The certificate credit rate with respect to such certificate.
(2) Examples. The following examples illustrate the application of this paragraph (b):
(c) Nonissued bond amount. The term “nonissued bond amount” means, with respect to any qualified mortgage credit certificate program, the amount of qualified mortgage bonds (as defined in section 103A(c)(1) and the regulations thereunder) which the issuer is otherwise authorized to issue and elects not to issue under section 25(c)(2) and § 1.25-4T(b). The amount of qualified mortgage bonds which an issuing authority is authorized to issue is determined under section 103A(g) and the regulations thereunder; such determination shall take into account any prior elections by the issuer not to issue qualified mortgage bonds, the amount of any reduction in the State ceiling under paragraph (d) of this section, and the aggregate amount of qualified mortgage bonds issued by the issuer prior to its election not to issue qualified mortgage bonds.
(d) Noncompliance with limitation on aggregate amount of mortgage credit certificates—(1) In general. If the provisions of this paragraph apply, the State ceiling under section 103A(g)(4) and the regulations thereunder for the calendar year following the calendar year in which the Commissioner determines the correction amount for the State in which the issuer which exceeded the limitation on the aggregate amount of mortgage credit certificates is located shall be reduced by 1.25 times the correction amount with respect to such failure.
(2) Correction amount. (i) The term “correction amount” means an amount equal to the excess credit amount divided by .20.
(ii) The term “excess credit amount” means the excess of—
(A) The credit amount for any mortgage credit certificate program, over
(B) The amount which would have been the credit amount for such program had such program met the requirements of section 25(d)(2) and paragraph (a) of this section.
(iii) The term “credit amount” means the sum of the products determined by multiplying—
(A) The certified indebtedness amount of each qualified mortgage credit certificate issued under the program, by
(B) The certificate credit rate with respect to such certificate.
(3) Example. The following example illustrates the application of this paragraph:
(4) Cross-references. See section 103A(g)(4) and the regulations thereunder with respect to the reduction of the applicable State ceiling.
§ 1.25-6T Form of qualified mortgage credit certificate (Temporary).
(a) In general. Qualified mortgage credit certificates are to be issued on the form prescribed by the Internal Revenue Service. If no form is prescribed by the Internal Revenue Service, or if the form prescribed by the Internal Revenue Service is not readily available, the issuer may use its own form provided that such form contains the information required by this section. Each mortgage credit certificate must be issued in a form such that there are at least three copies of the form. One copy of the certificate shall be retained by the issuer; one copy shall be retained by the lender; and one copy shall be forwarded to the State official who issued the certification required by § 1.25-4T(d), unless that State official has stated in writing that he does not want to receive such copies.
(b) Required information. Each qualified mortgage credit certificate must include the following information:
(1) The name, address, and TIN of the issuer,
(2) The date of the issuer’s election not to issue qualified mortgage bonds pursuant to which the certificate is being issued,
(3) The number assigned to the certificate,
(4) The name, address, and TIN of the holder of the certificate,
(5) The certificate credit rate,
(6) The certified indebtness amount,
(7) The acquisition cost of the residence being acquired in connection with the certificate,
(8) The average area purchase price applicable to the residence,
(9) Whether the certificate meets the requirements of § 1.25-3T(d), relating to residence requirement,
(10) Whether the certificate meets the requirements of § 1.25-3T(e), relating to 3-year requirement,
(11) Whether the certificate meets the requirements of § 1.25-3T(g), relating to new mortgage requirement,
(12) Whether the certificate meets the requirements of § 1.25-3T(i), relating to prohibited mortgages,
(13) Whether the certificate meets the requirements of § 1.25-3T(j), relating to particular lenders,
(14) Whether the certificate meets the requirements of § 1.25-3T(k), relating to allocations to particular developments,
(15) Whether the certificate meets the requirements of § 1.25-3T(n), relating to interest paid to related persons,
(16) Whether the residence in connection with which the certificate is issued is a targeted area residence,
(17) The date on which a closing agreement is signed with respect to the certified indebtness amount,
(18) The expiration date of the certificate,
(19) A statement that the certificate is not transferable or a statement that the certificate may be transferred only if the issuer issues a new certificate, and
(20) A statement, signed under penalties of perjury by an authorized official of the issuer or its agent, that such person has made the determinations specified in paragraph (b) (9) through (16).
§ 1.25-7T Public notice (Temporary).
(a) In general. At least 90 days prior to the issuance of any mortgage credit certificate under a qualified mortgage credit certificate program, the issuer shall provide reasonable public notice of—
(1) The eligibility requirements for such certificate,
(2) The methods by which such certificates are to be issued, and
(3) The other information required by this section.
(b) Reasonable public notice—(1) In general. Reasonable public notice means published notice which is reasonably designed to inform individuals who would be eligible to receive mortgage credit certificates of the proposed issuance. Reasonable public notice may be provided through newspapers of general circulation.
(2) Contents of notice. The public notice required by paragraph (a) must include a brief description of the principal residence requirement, 3-year requirement, purchase price requirement, and new mortgage requirement. The notice must also provide a brief description of the methods by which the certificates are to be issued and the address and telephone number for obtaining further information.
§ 1.25-8T Reporting requirements (Temporary).
(a) Lender—(1) In general. Each person who makes a loan that is a certified indebtedness amount with respect to any mortgage credit certificate must file the report described in paragraph (a)(2) and must retain on its books and records the information described in paragraph (a)(3). The report described in paragraph (a)(2) is an annual report and must be filed on or before January 31 of the year following the calendar year to which the report relates. See section 6709(c) and the regulations thereunder for the applicable penalties with respect to failure to file reports.
(2) Information required. The report shall be submitted on Form 8329 and shall contain the information required therein. A separate Form 8329 shall be filed for each issue of mortgage credit certificates with respect to which the lender made mortgage loans during the preceding calendar year. Thus, for example, if during 1986 Bank M makes three mortgage loans which are certified indebtedness amounts with respect to State Z’s January 15, 1986, issue of mortgage credit certificates, and two mortgage loans which are certified indebtedness amounts with respect to State Z’s April 15, 1986, issue of mortgage credit certificates, and fifty mortgage loans which are certified indebtedness amounts with respect to County X’s December 31, 1985, issue of mortgage credit certificates, Bank M must file three separate reports for calendar year 1986. The lender must submit the Form 8329 with the information required therein, including—
(i) The name, address, and TIN of the issuer of the mortgage credit certificates,
(ii) The date on which the election not to issue qualified mortgage bonds with respect to that mortgage credit certificate was made,
(iii) The name, address, and TIN of the lender, and
(iv) The sum of the products determined by multiplying—
(A) The certified indebtedness amount of each mortgage credit certificate issued under such program, by
(B) The certificate credit rate with respect to such certificate.
(3) Recordkeeping requirements. Each person who makes a loan that is a certified indebtedness amount with respect to any mortgage credit certificate must retain the information specified in this paragraph (a)(3) on its books and records for 6 years following the year in which the loan was made. With respect to each loan the lender must retain the following information:
(i) The name, address, and TIN of each holder of a qualified mortgage credit certificate with respect to which a loan is made,
(ii) The name, address, and TIN of the issuer of such certificate, and
(iii) The date the loan for the certified indebtedness amount is closed, the certified indebtedness amount, and the certificate credit rate of such certificate.
(b) Issuers—(1) In general. Each issuer of mortgage credit certificates shall file the report described in paragraph (b)(2) of this section.
(2) Quarterly reports. (i) Each issuer which elects to issue mortgage credit certificates shall file reports on Form 8330. These reports shall be filed on a quarterly basis, beginning with the quarter in which the election is made, and are due on the following dates: April 30 (for the quarter ending March 31), July 31 (for the quarter ending June 30), October 31 (for the quarter ending September 30), and January 31 (for the quarter ending December 31). For elections made prior to May 8, 1985, the first report need not be filed until July 31, 1985. An issuer shall file a separate report for each issue of mortgage credit certificates. In the quarter in which the last qualified mortgage credit certificate that may be issued under a program is issued, the issuer must state that fact on the report to be filed for that quarter; the issuer is not required to file any subsequent reports with respect to that program. See section 6709(c) for the penalties with respect to failure to file a report.
(ii) The report shall be submitted on Form 8330 and shall contain the information required therein, including—
(A) The name, address, and TIN of the issuer of the mortgage credit certificates,
(B) The date of the issuer’s election not to issue qualified mortgage bonds with respect to the mortgage credit certificate program and the nonissued bond amount of the program,
(C) The sum of the products determined by multiplying—
(1) The certified indebtedness amount of each qualified mortgage credit certificate issued under that program during the calendar quarter, by
(2) The certificate credit rate with respect to such certificate, and
(D) A listing of the name, address, and TIN of each holder of a qualified mortgage credit certificate which has been revoked during the calendar quarter.
(c) Extensions of time for filing reports. The Commissioner may grant an extension of time for the filing of a report required by this section if there is reasonable cause for the failure to file such report in a timely fashion.
(d) Place for filing. The reports required by this section are to be filed at the Internal Revenue Service Center, Philadelphia, Pennsylvania 19225.
(e) Cross reference. See section 6709 and the regulations thereunder with respect to the penalty for failure to file a report required by this section.
§ 1.25A-0 Table of contents.
This section lists captions contained in §§ 1.25A-1, 1.25A-2, 1.25A-3, 1.25A-4, and 1.25A-5.
(a) Amount of education tax credit.
(b) Coordination of Hope Scholarship Credit and Lifetime Learning Credit.
(1) In general.
(2) Hope Scholarship Credit.
(3) Lifetime Learning Credit.
(4) Examples.
(c) Limitation based on modified adjusted gross income.
(1) In general.
(2) Modified adjusted gross income defined.
(3) Inflation adjustment.
(d) Election.
(e) Identification requirement.
(f) Claiming the credit in the case of a dependent.
(1) In general.
(2) Examples.
(g) Married taxpayers.
(h) Nonresident alien taxpayers and dependents.
(a) Claimed dependent.
(b) Eligible educational institution.
(1) In general.
(2) Rules on Federal financial aid programs.
(c) Academic period.
(d) Qualified tuition and related expenses.
(1) In general.
(2) Required fees.
(i) In general.
(ii) Books, supplies, and equipment.
(iii) Nonacademic fees.
(3) Personal expenses.
(4) Treatment of a comprehensive or bundled fee.
(5) Hobby courses.
(6) Examples.
(a) Amount of the credit.
(1) In general.
(2) Maximum credit.
(b) Per student credit.
(1) In general.
(2) Example.
(c) Credit allowed for only two taxable years.
(d) Eligible student.
(1) Eligible student defined.
(i) Degree requirement.
(ii) Work load requirement.
(iii) Year of study requirement.
(iv) No felony drug conviction.
(2) Examples.
(e) Academic period for prepayments.
(1) In general.
(2) Example.
(f) Effective date.
(a) Amount of the credit.
(1) Taxable years beginning before January 1, 2003.
(2) Taxable years beginning after December 31, 2002.
(3) Coordination with the Hope Scholarship Credit.
(4) Examples.
(b) Credit allowed for unlimited number of taxable years.
(c) Both degree and nondegree courses are eligible for the credit.
(1) In general.
(2) Examples.
(d) Effective date.
(a) Educational expenses paid by claimed dependent.
(b) Educational expenses paid by a third party.
(1) In general.
(2) Special rule for tuition reduction included in gross income of employee.
(3) Examples.
(c) Adjustment to qualified tuition and related expenses for certain excludable educational assistance.
(1) In general.
(2) No adjustment for excludable educational assistance attributable to expenses paid in a prior year.
(3) Scholarships and fellowship grants.
(4) Examples.
(d) No double benefit.
(e) Timing rules.
(1) In general.
(2) Prepayment rule.
(i) In general.
(ii) Example.
(3) Expenses paid with loan proceeds.
(4) Expenses paid through third party installment payment plans.
(i) In general.
(ii) Example.
(f) Refund of qualified tuition and related expenses.
(1) Payment and refund of qualified tuition and related expenses in the same taxable year.
(2) Payment of qualified tuition and related expenses in one taxable year and refund in subsequent taxable year before return filed for prior taxable year.
(3) Payment of qualified tuition and related expenses in one taxable year and refund in subsequent taxable year.
(i) In general.
(ii) Recapture amount.
(4) Refund of loan proceeds treated as refund of qualified tuition and related expenses.
(5) Excludable educational assistance received in a subsequent taxable year treated as a refund.
(6) Examples.
§ 1.25A-1 Calculation of education tax credit and general eligibility requirements.
(a) Amount of education tax credit. An individual taxpayer is allowed a nonrefundable education tax credit against income tax imposed by chapter 1 of the Internal Revenue Code for the taxable year. The amount of the education tax credit is the total of the Hope Scholarship Credit (as described in § 1.25A-3) plus the Lifetime Learning Credit (as described in § 1.25A-4). For limitations on the credits allowed by subpart A of part IV of subchapter A of chapter 1 of the Internal Revenue Code, see section 26.
(b) Coordination of Hope Scholarship Credit and Lifetime Learning Credit—(1) In general. In the same taxable year, a taxpayer may claim a Hope Scholarship Credit for each eligible student’s qualified tuition and related expenses (as defined in § 1.25A-2(d)) and a Lifetime Learning Credit for one or more other students’ qualified tuition and related expenses. However, a taxpayer may not claim both a Hope Scholarship Credit and a Lifetime Learning Credit with respect to the same student in the same taxable year.
(2) Hope Scholarship Credit. Subject to certain limitations, a Hope Scholarship Credit may be claimed for the qualified tuition and related expenses paid during a taxable year with respect to each eligible student (as defined in § 1.25A-3(d)). Qualified tuition and related expenses paid during a taxable year with respect to one student may not be taken into account in computing the amount of the Hope Scholarship Credit with respect to any other student. In addition, qualified tuition and related expenses paid during a taxable year with respect to any student for whom a Hope Scholarship Credit is claimed may not be taken into account in computing the amount of the Lifetime Learning Credit.
(3) Lifetime Learning Credit. Subject to certain limitations, a Lifetime Learning Credit may be claimed for the aggregate amount of qualified tuition and related expenses paid during a taxable year with respect to students for whom no Hope Scholarship Credit is claimed.
(4) Examples. The following examples illustrate the rules of this paragraph (b):
(c) Limitation based on modified adjusted gross income—(1) In general. The education tax credit that a taxpayer may otherwise claim is phased out ratably for taxpayers with modified adjusted gross income between $40,000 and $50,000 ($80,000 and $100,000 for married individuals who file a joint return). Thus, taxpayers with modified adjusted gross income above $50,000 (or $100,000 for joint filers) may not claim an education tax credit.
(2) Modified adjusted gross income defined. The term modified adjusted gross income means the adjusted gross income (as defined in section 62) of the taxpayer for the taxable year increased by any amount excluded from gross income under section 911, 931, or 933 (relating to income earned abroad or from certain U.S. possessions or Puerto Rico).
(3) Inflation adjustment. For taxable years beginning after 2001, the amounts in paragraph (c)(1) of this section will be increased for inflation occurring after 2000 in accordance with section 1(f)(3). If any amount adjusted under this paragraph (c)(3) is not a multiple of $1,000, the amount will be rounded to the next lowest multiple of $1,000.
(d) Election. No education tax credit is allowed unless a taxpayer elects to claim the credit on the taxpayer’s federal income tax return for the taxable year in which the credit is claimed. The election is made by attaching Form 8863, “Education Credits (Hope and Lifetime Learning Credits),” to the federal income tax return.
(e) Identification requirement. No education tax credit is allowed unless a taxpayer includes on the federal income tax return claiming the credit the name and the taxpayer identification number of the student for whom the credit is claimed. For rules relating to assessment for an omission of a correct taxpayer identification number, see section 6213(b) and (g)(2)(J).
(f) Claiming the credit in the case of a dependent—(1) In general. If a student is a claimed dependent of another taxpayer, only that taxpayer may claim the education tax credit for the student’s qualified tuition and related expenses. However, if another taxpayer is eligible to, but does not, claim the student as a dependent, only the student may claim the education tax credit for the student’s qualified tuition and related expenses.
(2) Examples. The following examples illustrate the rules of this paragraph (f):
(g) Married taxpayers. If a taxpayer is married (within the meaning of section 7703), no education tax credit is allowed to the taxpayer unless the taxpayer and the taxpayer’s spouse file a joint Federal income tax return for the taxable year.
(h) Nonresident alien taxpayers and dependents. If a taxpayer or the taxpayer’s spouse is a nonresident alien for any portion of the taxable year, no education tax credit is allowed unless the nonresident alien is treated as a resident alien by reason of an election under section 6013(g) or (h). In addition, if a student is a nonresident alien, a taxpayer may not claim an education tax credit with respect to the qualified tuition and related expenses of the student unless the student is a claimed dependent (as defined in § 1.25A-2(a)).
§ 1.25A-2 Definitions.
(a) Claimed dependent. A claimed dependent means a dependent (as defined in section 152) for whom a deduction under section 151 is allowed on a taxpayer’s federal income tax return for the taxable year. Among other requirements under section 152, a nonresident alien student must be a resident of a country contiguous to the United States in order to be treated as a dependent.
(b) Eligible educational institution—(1) In general. In general, an eligible educational institution means a college, university, vocational school, or other postsecondary educational institution that is—
(i) Described in section 481 of the Higher Education Act of 1965 (20 U.S.C. 1088) as in effect on August 5, 1997, (generally all accredited public, nonprofit, and proprietary postsecondary institutions); and
(ii) Participating in a Federal financial aid program under title IV of the Higher Education Act of 1965 or is certified by the Department of Education as eligible to participate in such a program but chooses not to participate.
(2) Rules on Federal financial aid programs. For rules governing an educational institution’s eligibility to participate in Federal financial aid programs, see 20 U.S.C. 1070; 20 U.S.C. 1094; and 34 CFR 600 and 668.
(c) Academic period. Academic period means a quarter, semester, trimester, or other period of study as reasonably determined by an eligible educational institution. In the case of an eligible educational institution that uses credit hours or clock hours, and does not have academic terms, each payment period (as defined in 34 CFR 668.4, revised as of July 1, 2002) may be treated as an academic period.
(d) Qualified tuition and related expenses—(1) In general. Qualified tuition and related expenses means tuition and fees required for the enrollment or attendance of a student for courses of instruction at an eligible educational institution.
(2) Required fees—(i) In general. Except as provided in paragraph (d)(3) of this section, the test for determining whether any fee is a qualified tuition and related expense is whether the fee is required to be paid to the eligible educational institution as a condition of the student’s enrollment or attendance at the institution.
(ii) Books, supplies, and equipment. Qualified tuition and related expenses include fees for books, supplies, and equipment used in a course of study only if the fees must be paid to the eligible educational institution for the enrollment or attendance of the student at the institution.
(iii) Nonacademic fees. Except as provided in paragraph (d)(3) of this section, qualified tuition and related expenses include fees charged by an eligible educational institution that are not used directly for, or allocated to, an academic course of instruction only if the fee must be paid to the eligible educational institution for the enrollment or attendance of the student at the institution.
(3) Personal expenses. Qualified tuition and related expenses do not include the costs of room and board, insurance, medical expenses (including student health fees), transportation, and similar personal, living, or family expenses, regardless of whether the fee must be paid to the eligible educational institution for the enrollment or attendance of the student at the institution.
(4) Treatment of a comprehensive or bundled fee. If a student is required to pay a fee (such as a comprehensive fee or a bundled fee) to an eligible educational institution that combines charges for qualified tuition and related expenses with charges for personal expenses described in paragraph (d)(3) of this section, the portion of the fee that is allocable to personal expenses is not included in qualified tuition and related expenses. The determination of what portion of the fee relates to qualified tuition and related expenses and what portion relates to personal expenses must be made by the institution using a reasonable method of allocation.
(5) Hobby courses. Qualified tuition and related expenses do not include expenses that relate to any course of instruction or other education that involves sports, games, or hobbies, or any noncredit course, unless the course or other education is part of the student’s degree program, or in the case of the Lifetime Learning Credit, the student takes the course to acquire or improve job skills.
(6) Examples. The following examples illustrate the rules of this paragraph (d). In each example, assume that the institution is an eligible educational institution and that all other relevant requirements to claim an education tax credit are met. The examples are as follows:
§ 1.25A-3 Hope Scholarship Credit.
(a) Amount of the credit—(1) In general. Subject to the phaseout of the education tax credit described in § 1.25A-1(c), the Hope Scholarship Credit amount is the total of—
(i) 100 percent of the first $1,000 of qualified tuition and related expenses paid during the taxable year for education furnished to an eligible student (as defined in paragraph (d) of this section) who is the taxpayer, the taxpayer’s spouse, or any claimed dependent during any academic period beginning in the taxable year (or treated as beginning in the taxable year, see § 1.25A-5(e)(2)); plus
(ii) 50 percent of the next $1,000 of such expenses paid with respect to that student.
(2) Maximum credit. For taxable years beginning before 2002, the maximum Hope Scholarship Credit allowed for each eligible student is $1,500. For taxable years beginning after 2001, the amounts used in paragraph (a)(1) of this section to determine the maximum credit will be increased for inflation occurring after 2000 in accordance with section 1(f)(3). If any amount adjusted under this paragraph (a)(2) is not a multiple of $100, the amount will be rounded to the next lowest multiple of $100.
(b) Per student credit—(1) In general. A Hope Scholarship Credit may be claimed for the qualified tuition and related expenses of each eligible student (as defined in paragraph (d) of this section).
(2) Example. The following example illustrates the rule of this paragraph (b). In the example, assume that all the requirements to claim an education tax credit are met. The example is as follows:
(c) Credit allowed for only two taxable years. For each eligible student, the Hope Scholarship Credit may be claimed for no more than two taxable years.
(d) Eligible student—(1) Eligible student defined. For purposes of the Hope Scholarship Credit, the term eligible student means a student who satisfies all of the following requirements—
(i) Degree requirement. For at least one academic period that begins during the taxable year, the student enrolls at an eligible educational institution in a program leading toward a postsecondary degree, certificate, or other recognized postsecondary educational credential;
(ii) Work load requirement. For at least one academic period that begins during the taxable year, the student enrolls for at least one-half of the normal full-time work load for the course of study the student is pursuing. The standard for what is half of the normal full-time work load is determined by each eligible educational institution. However, the standard for half-time may not be lower than the applicable standard for half-time established by the Department of Education under the Higher Education Act of 1965 and set forth in 34 CFR 674.2(b) (revised as of July 1, 2002) for a half-time undergraduate student;
(iii) Year of study requirement. As of the beginning of the taxable year, the student has not completed the first two years of postsecondary education at an eligible educational institution. Whether a student has completed the first two years of postsecondary education at an eligible educational institution as of the beginning of a taxable year is determined based on whether the institution in which the student is enrolled in a degree program (as described in paragraph (d)(1)(i) of this section) awards the student two years of academic credit at that institution for postsecondary course work completed by the student prior to the beginning of the taxable year. Any academic credit awarded by the eligible educational institution solely on the basis of the student’s performance on proficiency examinations is disregarded in determining whether the student has completed two years of postsecondary education; and
(iv) No felony drug conviction. The student has not been convicted of a Federal or State felony offense for possession or distribution of a controlled substance as of the end of the taxable year for which the credit is claimed.
(2) Examples. The following examples illustrate the rules of this paragraph (d). In each example, assume that the student has not been convicted of a felony drug offense, that the institution is an eligible educational institution unless otherwise stated, that the qualified tuition and related expenses are paid during the same taxable year that the academic period begins, and that a Hope Scholarship Credit has not previously been claimed for the student (see paragraph (c) of this section). The examples are as follows:
(e) Academic period for prepayments—(1) In general. For purposes of determining whether a student meets the requirements in paragraph (d) of this section for a taxable year, if qualified tuition and related expenses are paid during one taxable year for an academic period that begins during January, February or March of the next taxable year (for taxpayers on a fiscal taxable year, use the first three months of the next taxable year), the academic period is treated as beginning during the taxable year in which the payment is made.
(2) Example. The following example illustrates the rule of this paragraph (e). In the example, assume that all the requirements to claim a Hope Scholarship Credit are met. The example is as follows:
(f) Effective date. The Hope Scholarship Credit is applicable for qualified tuition and related expenses paid after December 31, 1997, for education furnished in academic periods beginning after December 31, 1997.
§ 1.25A-4 Lifetime Learning Credit.
(a) Amount of the credit—(1) Taxable years beginning before January 1, 2003. Subject to the phaseout of the education tax credit described in § 1.25A-1(c), for taxable years beginning before 2003, the Lifetime Learning Credit amount is 20 percent of up to $5,000 of qualified tuition and related expenses paid during the taxable year for education furnished to the taxpayer, the taxpayer’s spouse, and any claimed dependent during any academic period beginning in the taxable year (or treated as beginning in the taxable year, see § 1.25A-5(e)(2)).
(2) Taxable years beginning after December 31, 2002. Subject to the phaseout of the education tax credit described in § 1.25A-1(c), for taxable years beginning after 2002, the Lifetime Learning Credit amount is 20 percent of up to $10,000 of qualified tuition and related expenses paid during the taxable year for education furnished to the taxpayer, the taxpayer’s spouse, and any claimed dependent during any academic period beginning in the taxable year (or treated as beginning in the taxable year, see § 1.25A-5(e)(2)).
(3) Coordination with the Hope Scholarship Credit. Expenses paid with respect to a student for whom the Hope Scholarship Credit is claimed are not eligible for the Lifetime Learning Credit.
(4) Examples. The following examples illustrate the rules of this paragraph (a). In each example, assume that all the requirements to claim a Lifetime Learning Credit or a Hope Scholarship Credit, as applicable, are met. The examples are as follows:
(b) Credit allowed for unlimited number of taxable years. There is no limit to the number of taxable years that a taxpayer may claim a Lifetime Learning Credit with respect to any student.
(c) Both degree and nondegree courses are eligible for the credit—(1) In general. For purposes of the Lifetime Learning Credit, amounts paid for a course at an eligible educational institution are qualified tuition and related expenses if the course is either part of a postsecondary degree program or is not part of a postsecondary degree program but is taken by the student to acquire or improve job skills.
(2) Examples. The following examples illustrate the rule of this paragraph (c). In each example, assume that all the requirements to claim a Lifetime Learning Credit are met. The examples are as follows:
(d) Effective date. The Lifetime Learning Credit is applicable for qualified tuition and related expenses paid after June 30, 1998, for education furnished in academic periods beginning after June 30, 1998.
§ 1.25A-5 Special rules relating to characterization and timing of payments.
(a) Educational expenses paid by claimed dependent. For any taxable year for which the student is a claimed dependent of another taxpayer, qualified tuition and related expenses paid by the student are treated as paid by the taxpayer to whom the deduction under section 151 is allowed.
(b) Educational expenses paid by a third party—(1) In general. Solely for purposes of section 25A, if a third party (someone other than the taxpayer, the taxpayer’s spouse if the taxpayer is treated as married within the meaning of section 7703, or a claimed dependent) makes a payment directly to an eligible educational institution to pay for a student’s qualified tuition and related expenses, the student is treated as receiving the payment from the third party and, in turn, paying the qualified tuition and related expenses to the institution.
(2) Special rule for tuition reduction included in gross income of employee. Solely for purposes of section 25A, if an eligible educational institution provides a reduction in tuition to an employee of the institution (or to the spouse or dependent child of an employee, as described in section 132(h)(2)) and the amount of the tuition reduction is included in the employee’s gross income, the employee is treated as receiving payment of an amount equal to the tuition reduction and, in turn, paying such amount to the institution.
(3) Examples. The following examples illustrate the rules of this paragraph (b). In each example, assume that all the requirements to claim an education tax credit are met. The examples are as follows:
(c) Adjustment to qualified tuition and related expenses for certain excludable educational assistance—(1) In general. In determining the amount of an education tax credit, qualified tuition and related expenses for any academic period must be reduced by the amount of any tax-free educational assistance allocable to such period. For this purpose, tax-free educational assistance means—
(i) A qualified scholarship that is excludable from income under section 117;
(ii) A veterans’ or member of the armed forces’ educational assistance allowance under chapter 30, 31, 32, 34 or 35 of title 38, United States Code, or under chapter 1606 of title 10, United States Code;
(iii) Employer-provided educational assistance that is excludable from income under section 127; or
(iv) Any other educational assistance that is excludable from gross income (other than as a gift, bequest, devise, or inheritance within the meaning of section 102(a)).
(2) No adjustment for excludable educational assistance attributable to expenses paid in a prior year. A reduction is not required under paragraph (c)(1) of this section if the amount of excludable educational assistance received during the taxable year is treated as a refund of qualified tuition and related expenses paid in a prior taxable year. See paragraph (f)(5) of this section.
(3) Scholarships and fellowship grants. For purposes of paragraph (c)(1)(i) of this section, a scholarship or fellowship grant is treated as a qualified scholarship excludable under section 117 except to the extent—
(i) The scholarship or fellowship grant (or any portion thereof) may be applied, by its terms, to expenses other than qualified tuition and related expenses within the meaning of section 117(b)(2) (such as room and board) and the student reports the grant (or the appropriate portion thereof) as income on the student’s federal income tax return if the student is required to file a return; or
(ii) The scholarship or fellowship grant (or any portion thereof) must be applied, by its terms, to expenses other than qualified tuition and related expenses within the meaning of section 117(b)(2) (such as room and board) and the student reports the grant (or the appropriate portion thereof) as income on the student’s federal income tax return if the student is required to file a return.
(4) Examples. The following examples illustrate the rules of this paragraph (c). In each example, assume that all the requirements to claim an education tax credit are met. The examples are as follows:
(d) No double benefit. Qualified tuition and related expenses do not include any expense for which a deduction is allowed under section 162, section 222, or any other provision of chapter 1 of the Internal Revenue Code.
(e) Timing rules—(1) In general. Except as provided in paragraph (e)(2) of this section, an education tax credit is allowed only for payments of qualified tuition and related expenses for an academic period beginning in the same taxable year as the year the payment is made. Except for certain individuals who do not use the cash receipts and disbursements method of accounting, qualified tuition and related expenses are treated as paid in the year in which the expenses are actually paid. See § 1.461-1(a)(1).
(2) Prepayment rule—(i) In general. If qualified tuition and related expenses are paid during one taxable year for an academic period that begins during the first three months of the taxpayer’s next taxable year (i.e., in January, February, or March of the next taxable year for calendar year taxpayers), an education tax credit is allowed with respect to the qualified tuition and related expenses only in the taxable year in which the expenses are paid.
(ii) Example. The following example illustrates the rule of this paragraph (e)(2). In the example, assume that all the requirements to claim an education tax credit are met. The example is as follows:
(3) Expenses paid with loan proceeds. An education tax credit may be claimed for qualified tuition and related expenses paid with the proceeds of a loan only in the taxable year in which the expenses are paid, and may not be claimed in the taxable year in which the loan is repaid. Loan proceeds disbursed directly to an eligible educational institution will be treated as paid on the date the institution credits the proceeds to the student’s account. For example, in the case of any loan issued or guaranteed as part of a Federal student loan program under title IV of the Higher Education Act of 1965, loan proceeds will be treated as paid on the date of disbursement (as defined in 34 CFR 668.164(a), revised as of July 1, 2002) by the eligible educational institution. If a taxpayer does not know the date the institution credits the student’s account, the taxpayer must treat the qualified tuition and related expenses as paid on the last date for payment prescribed by the institution.
(4) Expenses paid through third party installment payment plans—(i) In general. A taxpayer, an eligible educational institution, and a third party installment payment company may enter into an agreement in which the company agrees to collect installment payments of qualified tuition and related expenses from the taxpayer and to remit the installment payments to the institution. If the third party installment payment company is the taxpayer’s agent for purposes of paying qualified tuition and related expenses to the eligible educational institution, the taxpayer is treated as paying the qualified expenses on the date the company pays the institution. However, if the third party installment payment company is the eligible educational institution’s agent for purposes of collecting payments of qualified tuition and related expenses from the taxpayer, the taxpayer is treated as paying the qualified expenses on the date the taxpayer pays the company.
(ii) Example. The following example illustrates the rule of this paragraph (e)(4). The example is as follows:
(f) Refund of qualified tuition and related expenses—(1) Payment and refund of qualified tuition and related expenses in the same taxable year. With respect to any student, the amount of qualified tuition and related expenses for a taxable year is calculated by adding all qualified tuition and related expenses paid for the taxable year, and subtracting any refund of such expenses received from the eligible educational institution during the same taxable year (including refunds of loan proceeds described in paragraph (f)(4) of this section).
(2) Payment of qualified tuition and related expenses in one taxable year and refund in subsequent taxable year before return filed for prior taxable year. If, in a taxable year, a taxpayer or someone other than the taxpayer receives a refund (including refunds of loan proceeds described in paragraph (f)(4) of this section) of qualified tuition and related expenses paid on behalf of a student in a prior taxable year and the refund is received before the taxpayer files a federal income tax return for the prior taxable year, the amount of the qualified tuition and related expenses for the prior taxable year is reduced by the amount of the refund.
(3) Payment of qualified tuition and related expenses in one taxable year and refund in subsequent taxable year—(i) In general. If, in a taxable year (refund year), a taxpayer or someone other than the taxpayer receives a refund (including refunds of loan proceeds described in paragraph (f)(4) of this section) of qualified tuition and related expenses paid on behalf of a student for which the taxpayer claimed an education tax credit in a prior taxable year, the tax imposed by chapter 1 of the Internal Revenue Code for the refund year is increased by the recapture amount.
(ii) Recapture amount. The recapture amount is the difference in tax liability for the prior taxable year (taking into account any redetermination of such tax liability by audit or amended return) that results when the tax liability for the prior year is calculated using the taxpayer’s redetermined credit. The redetermined credit is computed by reducing the amount of the qualified tuition and related expenses taken into account in determining any credit claimed in the prior taxable year by the amount of the refund of the qualified tuition and related expenses (redetermined qualified expenses), and computing the allowable credit using the redetermined qualified expenses and the relevant facts and circumstances of the prior taxable year, such as modified adjusted gross income (redetermined credit).
(4) Refund of loan proceeds treated as refund of qualified tuition and related expenses. If loan proceeds used to pay qualified tuition and related expenses (as described in paragraph (e)(3) of this section) during a taxable year are refunded by an eligible educational institution to a lender on behalf of the borrower, the refund is treated as a refund of qualified tuition and related expenses for purposes of paragraphs (f)(1), (2), and (3) of this section.
(5) Excludable educational assistance received in a subsequent taxable year treated as a refund. If, in a taxable year, a taxpayer or someone other than the taxpayer receives any excludable educational assistance (described in paragraph (c)(1) of this section) for the qualified tuition and related expenses paid on behalf of a student during a prior taxable year (or attributable to enrollment at an eligible educational institution during a prior taxable year), the educational assistance is treated as a refund of qualified tuition and related expenses for purposes of paragraphs (f)(2) and (3) of this section. If the excludable educational assistance is received before the taxpayer files a federal income tax return for the prior taxable year, the amount of the qualified tuition and related expenses for the prior taxable year is reduced by the amount of the excludable educational assistance as provided in paragraph (f)(2) of this section. If the excludable educational assistance is received after the taxpayer has filed a federal income tax return for the prior taxable year, any education tax credit claimed for the prior taxable year is subject to recapture as provided in paragraph (f)(3) of this section.
(6) Examples. The following examples illustrate the rules of this paragraph (f). In each example, assume that all the requirements to claim an education tax credit are met. The examples are as follows:
(i) Adding all qualified expenses paid during the taxable year ($2,000 + 1,000 = $3,000);
(ii) Adding all refunds of qualified tuition and related expenses received during the taxable year ($750 + $250 = $1,000); and, then
(iii) Subtracting paragraph (ii) of this Example 1 from paragraph (i) of this Example 1 ($3,000 −$1,000 = $2,000). Therefore, Student A’s qualified tuition and related expenses for 1998 are $2,000.
(ii) Student B calculates the increase in tax for 1999 by—
(A) Calculating the redetermined qualified expenses for 1998 ($2,000 − $500 = $1,500);
(B) Calculating the redetermined credit for the redetermined qualified expenses ($1,500 × .20 = $300); and
(C) Calculating the difference in tax liability for 1998 resulting from the redetermined credit. Because Student B’s tax liability for 1998 was reduced by the full amount of the $400 education tax credit claimed on her 1998 income tax return, the difference in tax liability can be determined by subtracting the redetermined credit from the credit claimed in 1998 ($400−$300 = $100).
(iii) Therefore, Student B must increase the tax on her 1999 federal income tax return by $100.
§ 1.25E-0 Table of contents.
This section lists the captions contained in §§ 1.25E-1 through 1.25E-3.
(a) In general.
(b) Definitions.
(1) Advance payment program.
(2) Credit transfer election.
(3) Dealer.
(4) Dealer tax compliance.
(5) Electing taxpayer.
(6) Eligible entity.
(7) Excessive payment.
(8) Incentive.
(i) For purposes of sale price.
(ii) For purposes of eligible entity requirements.
(9) Modified adjusted gross income.
(10) Placed in service.
(11) Previously-owned clean vehicle.
(12) Qualified buyer.
(13) Qualified manufacturer.
(14) Qualified sale.
(15) Registered dealer.
(16) Sale price.
(17) Section 25E regulations.
(18) Seller report.
(19) Time of sale.
(20) Vehicle history report.
(c) Limitation based on modified adjusted gross income.
(1) In general.
(2) Threshold amount.
(3) Special rule for change in filing status.
(d) Credit may be claimed on only one tax return.
(1) In general.
(2) Seller reporting.
(e) Examples.
(1) Example 1: First transfer since enactment of section 25E.
(2) Example 2: Multiple transfers since enactment of section 25E.
(3) Example 3: Multiple transfers; commercial purchaser.
(4) Example 4: Multiple transfers; buyer exceeds modified adjusted gross income limitation.
(5) Example 5: Multiple transfers; buyer elects to not take credit.
(6) Example 6: Multiple transfers; sale between dealers.
(f) Reliance on vehicle history report for purposes of determining whether sale is a qualified sale.
(g) Severability.
(h) Applicability date.
(a) In general.
(b) No double benefit.
(1) In general.
(2) Interaction between section 25E and 30D credits.
(c) Recapture.
(1) In general.
(i) Cancelled sale.
(ii) Vehicle return.
(iii) Resale.
(iv) Other returns and resales.
(2) Recapture rules in the case of a credit transfer election.
(3) Example: Vehicle return.
(d) Branded title.
(e) Seller registration.
(f) Requirement to file income tax return.
(g) Taxpayer reliance on manufacturer certifications and periodic written reports to IRS.
(h) Severability.
(i) Applicability date.
(a) In general.
(b) Definitions.
(1) Advance payment program.
(2) Credit transfer election.
(3) Dealer tax compliance.
(4) Electing taxpayer.
(5) Eligible entity.
(6) Registered dealer.
(7) Time of sale.
(c) Dealer registration.
(1) In general.
(2) Dealer tax compliance required.
(3) Suspension of registration.
(4) Revocation of registration.
(d) Credit transfer election by electing taxpayer.
(e) Federal income tax consequences of credit transfer election.
(1) Tax consequences for electing taxpayer.
(2) Tax consequences for eligible entity.
(3) Form of payment from eligible entity to electing taxpayer.
(4) Additional requirements.
(5) Examples.
(i) Example 1: Electing taxpayer’s regular tax liability less than amount of credit.
(A) Facts.
(B) Analysis.
(ii) Example 2: Non-cash payment by eligible entity to electing taxpayer.
(A) Facts.
(B) Analysis.
(iii) Example 3: Eligible entity is a partnership.
(A) Facts.
(B) Analysis.
(f) Advance payments received by eligible entities.
(1) In general.
(2) Requirements for a registered dealer to become an eligible entity.
(g) Increase in tax.
(1) Recapture if electing taxpayer exceeds modified adjusted gross income limitation.
(2) Excessive payments.
(i) In general.
(ii) Reasonable cause.
(iii) Excessive payment defined.
(iv) Special rule for cases in which electing taxpayer’s modified adjusted gross income exceeds the limitation.
(3) Examples.
(i) Example 1: Registered dealer is not an eligible entity.
(A) Facts.
(B) Analysis.
(ii) Example 2: Incorrect manufacturer certifications.
(A) Facts.
(B) Analysis.
(h) Return requirement.
(i) Two credit transfer elections per year.
(j) Severability.
(k) Applicability date.
§ 1.25E-1 Credit for previously-owned clean vehicles.
(a) In general. Section 25E(a) of the Internal Revenue Code (Code) allows as a credit against the tax imposed by chapter 1 of the Code (chapter 1) for the taxable year of a taxpayer an amount equal to the lesser of $4,000, or the amount equal to 30 percent of the sale price of a previously-owned clean vehicle, if that previously-owned clean vehicle is placed in service during the taxable year by a taxpayer that acquired the previously-owned clean vehicle in a qualified sale in which that taxpayer is a qualified buyer. This section provides definitions and generally applicable rules that apply for purposes of determining the credit under section 25E and the section 25E regulations (section 25E credit). Section 1.25E-2 provides special rules under section 25E(e) and other special rules with respect to the section 25E credit. Section 1.25E-3 provides rules under section 25E(f).
(b) Definitions. The definitions in this paragraph (b) apply for purposes of section 25E and the section 25E regulations.
(1) Advance payment program. Advance payment program means advance payment program as defined in § 1.25E-3(b)(1).
(2) Credit transfer election. Credit transfer election means credit transfer election as defined in § 1.25E-3(b)(2).
(3) Dealer. Dealer has the meaning provided in section 25E(c)(2)(A) by reference to section 30D(g)(8) of the Code, except that the term does not include persons licensed solely by a territory of the United States, and includes a dealer licensed by any jurisdiction described in section 30D(g)(8) (other than one licensed solely by a territory of the United States) that makes sales at sites outside of the jurisdiction in which it is licensed.
(4) Dealer tax compliance. Dealer tax compliance means dealer tax compliance as defined in § 1.25E-3(b)(3).
(5) Electing taxpayer. Electing taxpayer means electing taxpayer as defined in § 1.25E-3(b)(4).
(6) Eligible entity. Eligible entity means eligible entity as defined in § 1.25E-3(b)(5).
(7) Excessive payment. Excessive payment means excessive payment as defined in § 1.25E-3(g)(2)(iii).
(8) Incentive—(i) For purposes of sale price. For purposes of the definition of sale price in § 1.25E-1(b)(16), incentive means any reduction in price offered to and accepted by a taxpayer from the dealer or manufacturer, other than a reduction in the form of a partial payment or down payment for the purchase of a previously-owned clean vehicle pursuant to section 25E(f) and § 1.25E-3.
(ii) For purposes of eligible entity requirements. For purposes of the eligible entity requirements for a credit transfer election pursuant to sections 25E(f) and 30D(g)(2)(B) and (D), incentive means any reduction in price offered to the taxpayer by the dealer or manufacturer of the previously-owned clean vehicle, including in combination with other incentives, other than a reduction in the form of a partial payment or down payment for the purchase of a previously-owned clean vehicle pursuant to section 25E(f) and § 1.25E-3.
(9) Modified adjusted gross income. Modified adjusted gross income means adjusted gross income (as defined in section 62 of the Code) increased by any amount excluded from gross income under section 911, 931, or 933 of the Code.
(10) Placed in service. A previously-owned clean vehicle is considered to be placed in service on the date the taxpayer takes possession of the vehicle.
(11) Previously-owned clean vehicle. Previously-owned clean vehicle has the meaning provided in section 25E(c)(1). Vehicles that may qualify as previously-owned clean vehicles include battery electric vehicles, plug-in hybrid electric vehicles, fuel cell motor vehicles, and plug-in hybrid fuel cell motor vehicles.
(12) Qualified buyer. Qualified buyer means, with respect to a sale of a motor vehicle, a taxpayer—
(i) Who is an individual;
(ii) Who purchases such vehicle for use and not for resale;
(iii) With respect to whom no deduction is allowable to another taxpayer under section 151 of the Code; and
(iv) Who has not been allowed a credit under section 25E and this section for any sale during the three-year period beginning three years before the date of the sale of such vehicle and ending on the date of the sale of such vehicle.
(13) Qualified manufacturer. Qualified manufacturer means qualified manufacturer as defined in § 1.30D-2(b)(42).
(14) Qualified sale. Qualified sale means a sale of a motor vehicle—
(i) By a dealer;
(ii) For a sale price that does not exceed $25,000; and
(iii) That is a sale to a qualified buyer (other than the person with whom the original use of such vehicle commenced), and that is the first transfer of the motor vehicle since August 16, 2022 (other than a transfer to a dealer).
(15) Registered dealer. Registered dealer means registered dealer as defined in § 1.25E-3(b)(6).
(16) Sale price. The sale price of a previously-owned clean vehicle means the total price agreed upon by the taxpayer and dealer in a written contract at the time of sale, including any delivery charges and after the application of any incentives. The sale price of a previously-owned clean vehicle does not include separately stated taxes and fees required by State or local law. The sale price of a previously-owned clean vehicle is determined before the application of any trade-in value.
(17) Section 25E regulations. Section 25E regulations means this section and §§ 1.25E-2 and 1.25E-3.
(18) Seller report. Seller report means the report described in section 25E(c)(1)(D)(i) by reference to section 30D(d)(1)(H) that the seller of a previously-owned clean vehicle provides to the taxpayer and the IRS in the manner provided in, and containing the information described in, guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter). The seller report must be transmitted to the IRS electronically. The term seller report does not include a report rejected by the IRS due to the information contained therein not matching IRS records.
(19) Time of sale. Time of sale means time of sale as defined in § 1.25E-3(b)(7).
(20) Vehicle history report. Vehicle history report means a report that provides the ownership history of a motor vehicle. Vehicle history report includes a vehicle history report issued by a data provider approved by the National Motor Vehicle Title Information System.
(c) Limitation based on modified adjusted gross income—(1) In general. Under section 25E(b)(1), no section 25E credit is allowed for any taxable year if—
(i) The lesser of—
(A) The modified adjusted gross income of the taxpayer for such taxable year, or
(B) The modified adjusted gross income of the taxpayer for the preceding taxable year, exceeds
(ii) The threshold amount.
(2) Threshold amount. For purposes of section 25E(b)(1) and paragraph (c)(1) of this section, the threshold amount is determined based on the taxpayer’s return filing status for the taxable year, as set forth in paragraphs (c)(2)(i) through (iii) of this section. See section 25E(b)(2).
(i) In the case of a joint return or a surviving spouse (as defined in section 2(a) of the Code), the threshold amount is $150,000.
(ii) In the case of a head of household (as defined in section 2(b)), the threshold amount is $112,500.
(iii) In the case of a taxpayer not described in paragraph (c)(2)(i) or (ii) of this section, the threshold amount is $75,000.
(3) Special rule for change in filing status. If the taxpayer’s filing status for the taxable year differs from the taxpayer’s filing status in the preceding taxable year, then the taxpayer satisfies the limitation in section 25E(b)(1) and paragraph (c)(1) of this section if the taxpayer’s modified adjusted gross income does not exceed the threshold amount in either year based on the applicable filing status for that taxable year.
(d) Credit may be claimed on only one tax return—(1) In general. The amount of the section 25E credit attributable to a previously-owned clean vehicle may be claimed on only one Federal income tax return, including on a joint return for which one of the spouses is listed on the seller report. In the event a previously-owned clean vehicle is placed in service by multiple taxpayers who do not file a joint return, such as married individuals filing separate returns, no allocation or proration of the section 25E credit is available.
(2) Seller reporting. The name and taxpayer identification number of the taxpayer claiming the section 25E credit must be listed on the seller report pursuant to sections 25E(c)(1)(D)(i) and 30D(d)(1)(H). The credit will be allowed only on the Federal income tax return of the taxpayer listed in the seller report.
(e) Examples. The following examples illustrate the application of the rules in this section.
(1) Example 1: First transfer since enactment of section 25E. On August 1, 2022, a dealer sells a previously-owned vehicle that satisfies the requirements of section 25E(c)(1)(A), (B), and (D). On May 7, 2024, a dealer sells the vehicle to a qualified buyer, X, for a sale price of $24,000. X places the vehicle in service the same day. The May 7, 2024, sale to X is the first transfer of the vehicle since the enactment of section 25E.. The May 7, 2024, sale is a qualified sale pursuant to section 25E(c)(2) and paragraph (b)(14) of this section. As a result, the vehicle also satisfies the requirement of section 25E(c)(1)(C) and is a previously-owned clean vehicle as defined in section 25E(c)(1) and paragraph (b)(11) of this section.
(2) Example 2: Multiple transfers since enactment of section 25E. On July 1, 2023, a dealer sells a previously-owned vehicle that satisfies the requirements of section 25E(c)(1)(A), (B), and (D) to an individual, X, for a sale price of $30,000. X places the vehicle in service the same day. This is the first transfer of the vehicle since the enactment of section 25E. On May 7, 2024, a dealer sells the vehicle to an individual, Y, for a sale price of $24,500. The July 1, 2023, sale of the vehicle to X is not a qualified sale because the sale price exceeds the $25,000 limitation described in section 25E(c)(2)(B) and paragraph (b)(14) of this section. The May 7, 2024, sale to Y is not a qualified sale because it is not the first transfer since the enactment of section 25E.
(3) Example 3: Multiple transfers; commercial purchaser. The facts are the same as in paragraph (e)(2) of this section (Example 2), except that X is a partnership and the July 1, 2023, sale is for a sale price of $24,000. Although the vehicle is a previously-owned clean vehicle as defined in section 25E(c)(1) and paragraph (b)(11) of this section, no section 25E credit is allowed in relation to the sale because X is not a qualified buyer. The May 7, 2024, sale to Y is not a qualified sale because it is not the first transfer since enactment of section 25E.
(4) Example 4: Multiple transfers; buyer exceeds modified adjusted gross income limitation. The facts are the same as in paragraph (e)(2) of this section (Example 2), except the July 1, 2023, sale is for a sale price of $24,000 and X’s modified adjusted gross income exceeds the limitation described in section 25E(b)(2) and paragraph (c) of this section. No section 25E credit is allowed in relation to the July 1, 2023, sale to X because X’s modified adjusted gross income exceeds the limitation described in section 25E(b)(2) and paragraph (c) of this section. The May 7, 2024, sale to Y is not a qualified sale because it is not the first transfer since the enactment of section 25E.
(5) Example 5: Multiple transfers; buyer elects to not take credit. The facts are the same as in paragraph (e)(2) of this section (Example 2), except the July 1, 2023, sale is for a sale price of $24,000 and X elects to not claim the section 25E credit. The May 7, 2024, sale to Y is not a qualified sale because it is not the first transfer since the enactment of section 25E.
(6) Example 6: Multiple transfers; sale between dealers. On July 1, 2023, a dealer, D1, sells a previously-owned vehicle that satisfies the requirements of section 25E(c)(1)(A), (B), and (D) to another dealer, D2, for $18,000. D1 and D2 are not individuals. On August 1, 2024, D2 sells the vehicle to an individual, Y, for a sale price of $24,500. Y places the vehicle in service the same day. Y satisfies the modified adjusted gross income limitation in section 25E(b)(2) and paragraph (c) of this section. The July 1, 2023, sale to D2 is ignored because it is a transfer between dealers. Further, with regard to the July 1, 2023, sale, D2 is not a qualified buyer because D2 is not an individual. The May 7, 2024, sale to Y is a qualified sale because it is the first transfer that is regarded since the enactment of section 25E.
(f) Reliance on vehicle history report for purposes of determining whether sale is a qualified sale. A taxpayer may rely on a vehicle history report obtained on the date of sale or as part of the sale transaction to determine whether the requirements of section 25E(c)(2)(C) and paragraph (b)(14) of this section are satisfied, including in the case where there has been a prior sale and return or resale described in § 1.25E-2(c).
(g) 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 shall continue in effect.
(h) Applicability date. This section applies to previously-owned clean vehicles placed in service after December 31, 2022, in taxable years ending after October 10, 2023.
§ 1.25E-2 Special rules.
(a) In general. This section provides guidance under section 25E(e) of the Internal Revenue Code (Code), which incorporates rules similar to the rules of section 30D(f) of the Code, other than section 30D(f)(10) or 30D(f)(11). Unless otherwise provided in this section, the rules of section 30D(f) apply to section 25E and the section 25E regulations in the same manner by replacing, if applicable, any reference to section 30D or the section 30D credit with a reference to section 25E or the section 25E credit. This section also provides guidance regarding other special rules with respect to the section 25E credit.
(b) No double benefit—(1) In general. Under sections 25E(e) and 30D(f)(2), the amount of any deduction or other credit allowable under chapter 1 of the Code (chapter 1) for a vehicle for which a section 25E credit is allowable must be reduced by the amount of the section 25E credit allowed for such vehicle.
(2) Interaction between section 25E and section 30D credits. A section 30D credit that has been allowed with respect to a vehicle in a taxable year before the year in which a section 25E credit is allowable for that vehicle does not reduce the amount allowable under section 25E.
(c) Recapture—(1) In general. This paragraph (c) provides rules regarding the recapture of the section 25E credit.
(i) Cancelled sale. If the sale of a previously-owned clean vehicle between the taxpayer and dealer is cancelled before the taxpayer places the vehicle in service, then—
(A) The taxpayer may not claim the section 25E credit with respect to the vehicle;
(B) The sale will be treated as not having occurred (and no transfer of the vehicle is considered to have occurred by reason of the cancelled sale), and the vehicle will, therefore, still be eligible for the section 25E credit upon a subsequent sale meeting the requirements of section 25E and the section 25E regulations;
(C) The seller report must be rescinded by the seller in the manner set forth in guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter); and
(D) The taxpayer cannot make a credit transfer election under section 25E(f) and § 1.25E-3 with respect to the cancelled sale.
(ii) Vehicle return. If a taxpayer returns a previously-owned clean vehicle to the dealer within 30 days of placing such vehicle in service, then—
(A) The taxpayer cannot claim the section 25E credit with respect to the vehicle;
(B) The sale will be treated as having occurred (and a transfer of the vehicle is therefore considered to have occurred by reason of the sale), and the vehicle will not qualify for the section 25E credit upon a subsequent sale;
(C) The seller report must be updated by the seller; and
(D) A credit transfer election made pursuant to section 25E(f) and § 1.25E-3, if applicable, will be treated as nullified and any advance payment made pursuant to section 25E(f) and § 1.25E-3, if applicable, will be collected from the eligible entity as an excessive payment pursuant to § 1.25E-3(g)(2).
(iii) Resale. If a taxpayer resells a previously-owned clean vehicle within 30 days of placing the vehicle in service, then the taxpayer is treated as having purchased such vehicle with the intent to resell, and—
(A) The taxpayer cannot claim the section 25E credit with respect to the vehicle;
(B) The sale to the taxpayer will be treated as having occurred (and a transfer of the vehicle is therefore considered to have occurred by reason of the sale), and the vehicle will not qualify for the section 25E credit upon a subsequent sale;
(C) The seller report will not be updated;
(D) A credit transfer election made pursuant to section 25E(f) and § 1.25E-3, if applicable, will remain in effect and any advance payment made pursuant to section 25E(f) and § 1.25E-3 will not be collected from the eligible entity; and
(E) The amount of any transferred credit will be collected from the taxpayer as an increase in tax imposed by chapter 1 of the Code for the taxable year in which the vehicle was placed in service.
(iv) Other returns and resales. In the case of a vehicle return not described in paragraph (c)(1)(ii) of this section or a resale not described in paragraph (c)(1)(iii) of this section, the previously-owned clean vehicle will not be eligible for the section 25E credit upon a subsequent sale.
(2) Recapture rules in the case of a credit transfer election. For additional recapture rules that apply in the case of a credit transfer election, see § 1.25E-3(g)(1). For excessive payment rules that apply in the case of an advance payment made to an eligible entity, see § 1.25E-3(g)(2).
(3) Example: Vehicle return. On May 1, 2024, a dealer, D, sells a vehicle that satisfies the requirements of section 25E(c)(1) to a qualified buyer, X. X returns the vehicle to D within 30 days of placing the vehicle in service, and does not claim the section 25E credit. On July 9, 2024, D sells the vehicle to a qualified buyer, Y, for a sale price of $24,000. The vehicle history report obtained on July 9, 2024, reflects the May 1, 2024, sale and subsequent return of the vehicle. The July 9, 2024, sale of the vehicle is not a qualified sale because it is not the first transfer of the vehicle after the enactment of section 25E. Therefore, no section 25E credit is allowed in relation to that sale. It is irrelevant that X did not claim the section 25E credit with respect to the May 1, 2024, sale.
(d) Branded title. A title to a previously-owned clean vehicle indicating that such vehicle has been damaged, or is otherwise a branded title, does not impact the vehicle’s eligibility for a section 25E credit.
(e) Seller registration. A seller 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 purposes of filing seller reports (as defined in § 1.25E-1(b)(18)).
(f) Requirement to file income tax return. No section 25E credit is allowed unless the taxpayer claiming such credit files a Federal income tax return for the taxable year in which the previously-owned clean vehicle is placed in service. The 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 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.
(g) Taxpayer reliance on manufacturer certifications and periodic written reports to IRS. A taxpayer who acquires a previously-owned clean vehicle in a qualified sale and places it in service may rely on the manufacturer’s certification concerning the manufacturer’s status as a qualified manufacturer. A taxpayer also may rely on the information and certifications contained in the qualified manufacturer’s periodic written reports to the IRS for purposes of determining whether a vehicle is a previously-owned clean vehicle. The procedures for such written reports are established in guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter). To the extent a taxpayer relies on such certifications or information, the previously-owned clean vehicle the taxpayer acquires will be deemed to meet the requirements of section 25E(c)(1)(D) (except the section 30D(d)(1)(H) requirement cross-referenced in section 25E(c)(1)(D)(i), which must be satisfied separately), provided the certifications or information relied upon by the taxpayer support this result. See § 1.25E-3(g)(3)(ii) for an example that illustrates the interplay between the rule in this paragraph (g) and the excessive payment rule in § 1.25E-3(g)(2).
(h) 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 shall continue in effect.
(i) Applicability date. This section applies to previously-owned clean vehicles placed in service after December 31, 2022, in taxable years ending after October 10, 2023.
§ 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.
§ 1.28-0 Credit for clinical testing expenses for certain drugs for rare diseases or conditions; table of contents.
In order to facilitate use of § 1.28-1, this section lists the paragraphs, subparagraphs, and subdivisions contained in § 1.28-1.
(a) General rule.
(b) Qualified clinical testing expenses.
(1) In general.
(2) Modification of section 41(b).
(3) Exclusion for amounts funded by another person.
(i) In general.
(ii) Clinical testing in which taxpayer retains no rights.
(iii) Clinical testing in which taxpayer retains substantial rights.
(A) In general.
(B) Drug by drug determination.
(iv) Funding for qualified clinical testing expenses determinable only in subsequent taxable years.
(4) Special rule governing the application of section 41(b) beyond its expiration date.
(c) Clinical testing.
(1) In general.
(2) Definition of “human clinical testing”.
(3) Definition of “carried out under” section 505(i).
(d) Definition and special rules.
(1) Definition of “rare disease or condition”.
(i) In general.
(ii) Cost of developing and making available the designated drug.
(A) In general.
(B) Exclusion of costs funded by another person.
(C) Computation of cost.
(D) Allocation of common costs. Costs for developing and making available the designated drug for both the disease or condition for which it is designated and one or more other diseases or conditions.
(iii) Recovery from sales.
(iv) Recordkeeping requirements.
(2) Tax liability limitation.
(i) Taxable years beginning after December 31, 1986.
(ii) Taxable years beginning before January 1, 1987, and after December 31, 1983.
(iii) Taxable years beginning before January 1, 1984.
(3) Special limitations on foreign testing.
(i) Clinical testing conducted outside the United States—In general.
(ii) Insufficient testing population in the United States.
(A) In general.
(B) “Insufficient testing population”.
(C) “Unrelated to the taxpayer”.
(4) Special limitations for certain corporations.
(i) Corporations to which section 936 applies.
(ii) Corporations to which section 934(b) applies.
(5) Aggregation of expenditures.
(i) Controlled group of corporations: organizations under common control.
(A) In general.
(B) Definition of controlled group of corporations.
(C) Definition of organization.
(D) Determination of common control.
(ii) Tax accounting periods used.
(A) In general.
(B) Special rule where the timing of clinical testing is manipulated.
(iii) Membership during taxable year in more than one group.
(iv) Intra-group transactions.
(A) In general.
(B) In-house research expenses.
(C) Contract research expenses.
(D) Lease payments.
(E) Payments for supplies.
(6) Allocations.
(i) Pass-through in the case of an S corporation
(ii) Pass-through in the case of an estate or a trust.
(iii) Pass-through in the case of a partnership.
(A) In general.
(B) Certain partnership non-business expenditures.
(C) Apportionment.
(iv) Year in which taken into account.
(v) Credit allowed subject to limitation.
(7) Manner of making an election.
§ 1.28-1 Credit for clinical testing expenses for certain drugs for rare diseases or conditions.
(a) General rule. Section 28 provides a credit against the tax imposed by chapter 1 of the Internal Revenue Code. The amount of the credit is equal to 50 percent of the qualified clinical testing expenses (as defined in paragraph (b) of this section) for the taxable year. The credit applies to qualified clinical testing expenses paid or incurred by the taxpayer after December 31, 1982, and before January 1, 1991. The credit may not exceed the taxpayer’s tax liability for the taxable year (as determined under paragraph (d)(2) of this section).
(b) Qualified clinical testing expenses—(1) In general. Except as otherwise provided in paragraph (b)(3) of this section, the term “qualified clinical testing expenses” means the amounts which are paid or incurred during the taxable year which would constitute “qualified research expenses” within the meaning of section 41(b) (relating to the credit for increasing research activities) as modified by section 28(b)(1)(B) and paragraph (b)(2) of this section. For example, amounts paid or incurred for the acquisition of depreciable property used in the conduct of clinical testing (as defined in paragraph (c) of this section) are not qualified clinical testing expenses.
(2) Modification of section 41(b). For purposes of paragraph (b)(1) of this section, section 41(b) is modified by substituting “clinical testing” for “qualified research” each place it appears in paragraph (2) of section 41(b) (relating to in-house research expenses) and paragraph (3) of section 41(b) (relating to contract research expenses). In addition, “100 percent” is substituted for “65 percent” in paragraph (3)(A) of section 41(b).
(3) Exclusion for amounts funded by another person—(i) In general. The term “qualified clinical testing expenses” shall not include any amount which would otherwise constitute qualified clinical testing expenses, to the extent such amount is funded by a grant, contract, or otherwise by another person (or any governmental entity). The determination of the extent to which an amount is funded shall be made in light of all the facts and circumstances. For a special rule regarding funding between commonly controlled businesses, see paragraph (d)(5)(iv) of § 1.28-1.
(ii) Clinical testing in which taxpayer retains no rights. If a taxpayer conducting clinical testing with respect to the designated drug for another person retains no substantial rights in the clinical testing under the agreement providing for the clinical testing the taxpayer’s clinical testing expenses are treated as fully funded for purposes of section 28(b)(1)(C). Thus, for example, if the taxpayer incurs clinical testing expenses under an agreement that confers on another person the exclusive right to exploit the results of the clinical testing, those expenses do not constitute qualified clinical testing expenses because they are fully funded under this paragraph (b)(3)(ii). Incidental benefits to the taxpayer from the conduct of the clinical testing (for example, increased experience in the field of human clinical testing) do not constitute substantial rights in the clinical testing.
(iii) Clinical testing in which taxpayer retains substantial rights—(A) In general. If a taxpayer conducting clinical testing with respect to the designated drug for another person retains substantial rights in the clinical testing under the agreement providing for the clinical testing, the clinical testing expenses are funded to the extent of the payments (and fair market value of any property at the time of transfer) to which the taxpayer becomes entitled by conducting the clinical testing. The taxpayer shall reduce the amount paid or incurred by the taxpayer for the clinical testing expenses that would, but for section 28(b)(1)(C) constitute qualified clinical testing expenses of the taxpayer by the amount of the funding determined under the preceding sentence. Rights retained in the clinical testing are not treated as property for purposes of this paragraph (b)(3)(iii)(A). If the property that is transferred to the taxpayer is to be consumed in the clinical testing (for example, supplies), the taxpayer should exclude the value of that property from both the payments received and the expenses paid or incurred for the clinical testing.
(B) Drug by drug determination. The provisions of this paragraph (b)(3) shall be applied separately to each designated drug tested by the taxpayer.
(iv) Funding for qualified clinical testing expenses determinable only in subsequent taxable years. If, at the time the taxpayer files its return for a taxable year, it is impossible to determine to what extent some or all of the qualified clinical testing expenses may be funded, the taxpayer shall treat the clinical testing expenses as fully funded for purposes of that return. When the amount of funding for qualified clinical testing expenses is finally determined, the taxpayer should amend the return and any interim returns to reflect the amount of funding for qualified clinical testing expenses.
(4) Special rule governing the application of section 41(b) beyond its expiration date. For purposes of section 28 and this section, section 41(b), as amended, and the regulations thereunder shall be deemed to remain in effect after December 31, 1988.
(c) Clinical testing—(1) In general. The term “clinical testing” means any human clinical testing which—
(i) Is carried out under an exemption under section 505(i) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 355(i)) and the regulations relating thereto (21 CFR part 312) for the purpose of testing a drug for a rare disease or condition as defined in paragraph (d)(1) of this section,
(ii) Occurs after the date the drug is designated as a drug for a rare disease or condition under section 526 of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 360bb),
(iii) Occurs before the date on which an application for the designated drug is approved under section 505(b) of the Federal Food, Drug, and Cosmetic Act (21 U.S.C. 355(b)) or, if the drug is a biological product (other than a radioactive biological product intended for human use), before the date on which a license for such drug is issued under section 351 of the Public Health Services Act (42 U.S.C. 262), and
(iv) Is conducted by or on behalf of the taxpayer to whom the designation under section 526 of the Federal Food, Drug, and Cosmetic Act applies.
(2) Definition of “human clinical testing.” Testing is considered to be human clinical testing only to the extent that it uses human subjects to determine the effect of the designated drug on humans and is necessary for the designated drug either to be approved under section 505(b) of the Federal Food, Drug, and Cosmetic Act and the regulations thereunder (21 CFR part 314), or if the designated drug is a biological product (other than a radioactive biological product intended for human use), to be licensed under section 351 of the Public Health Services Act and the regulations thereunder (21 CFR part 601). For purposes of this paragraph (c)(2), a human subject is an individual who is a participant in research, either as a recipient of the drug or as a control. A subject may be either a healthy individual or a patient.
(3) Definition of “carried out under” section 505(i). Human clinical testing is not carried out under section 505(i) of the Federal Food, Drug, and Cosmetic Act and the regulations thereunder (21 CFR part 312) unless the primary purpose of the human clinical testing is to ascertain the data necessary to qualify the designated drug for sale in the United States, and not to ascertain data unrelated or only incidentally related to that needed to qualify the designated drug. Whether or not this primary purpose test is met shall be determined in light of all of the facts and circumstances.
(d) Definition and special rules—(1) Definition of “rare disease or condition”—(i) In general. The term “rare disease or condition” means any disease or condition which—
(A) Afflicts 200,000 or fewer persons in the United States, or
(B) Afflicts more than 200,000 persons in the United States but for which there is no reasonable expectation that the cost of developing and making available in the United States (as defined in section 7701(a)(9)) a drug for such disease or condition will be recovered from sales in the United States (as so defined) of such drug.
(ii) Cost of developing and making available the designated drug—(A) In general. Except as otherwise provided in this paragraph (d)(1)(ii), the taxpayer’s computation of the cost of developing and making available in the United States the designated drug shall include only the costs that the taxpayer (or any person whose right to make sales of the drug is directly or indirectly derived from the taxpayer, e.g., a licensee or transferee) has incurred or reasonably expects to incur in developing and making available in the United States the designated drug for the disease or condition for which it is designated. For example, if, prior to designation under section 526, the taxpayer incurred costs of $125,000 to test the drug for the rare disease or condition for which it is subsequently designated and incurred $500,000 to test the same drug for other diseases, and if, on the date of designation, the taxpayer expects to incur costs of $1.2 million to test the drug for the rare disease or condition for which it is designated, the taxpayer shall include in its cost computation both the $125,000 incurred prior to designation and the $1.2 million expected to be incurred after designation to test the drug for the rare disease or condition for which it is designated. The taxpayer shall not include the $500,000 incurred to test the drug for other diseases.
(B) Exclusion of costs funded by another person. In computing the cost of developing and making available in the United States the designated drug, the taxpayer shall not include any cost incurred or expected to be incurred by the taxpayer to the extent that the cost is funded or is reasonably expected to be funded (determined under the principles of paragraph (b)(3)) by a grant, contract, or otherwise by another person (or any governmental entity).
(C) Computation of cost. The cost computation shall use only reasonable costs incurred after the first indication of an orphan application for the designated drug. Such costs shall include the costs of obtaining data needed, and of meetings to be held, in connection with a request for FDA assistance under section 525 of the Federal, Food, Drug, and Cosmetic Act (21 U.S.C. 360aa) or a request for orphan designation under section 526 of that Act; costs of determining patentability of the drug; costs of screening, animal and clinical studies; costs associated with preparation of a Notice of Claimed Investigational Exemption for a New Drug (IND) and a New Drug Application (NDA); costs of possible distribution of drug under a “treatment” protocol; costs of development of a dosage form; manufacturing costs; distribution costs; promotion costs; costs to maintain required records and reports; and costs of the taxpayer in acquiring the right to market a drug from the owner of that right prior to designation. The taxpayer shall also include general overhead, depreciation costs and premiums for insurance against liability losses to the extent that the taxpayer can demonstrate that these costs are properly allocable to the designated drug under the established standards of financial accounting and reporting of research and development costs.
(D) Allocation of common costs. Costs for developing and making available the designated drug for both the disease or condition for which it is designated and one or more other diseases or conditions. In the case where the costs incurred or expected to be incurred in developing and making available the designated drug for the disease or condition for which it is designated are also incurred or expected to be incurred in developing and making available in the United States the same drug for one or more other diseases or conditions (whether or not they are also designated or expected to be designated), the costs shall be allocated between the cost of developing and making available the designated drug for the disease or condition for which the drug is designated and the cost of developing and making available the designated drug for the other diseases or conditions. The amount of the common costs to be allocated to the cost of developing and making available the designated drug for the disease or condition for which it is designated is determined by multiplying the common costs by a fraction the numerator of which is the sum of the expected amount of sales in the United States of the designated drug for the disease or condition for which the drug is designated and the denominator of which is the total expected amount of sales in the United States of the designated drug. For example, if prior to designation, the taxpayer incurs (among other costs) costs of $100,000 in testing the designated drug for its toxic effect on animals (without reference to any disease or condition), and if the taxpayer expects to recover $500,000 from sales in the United States of the designated drug for disease X, the disease for which the drug is designated, and further expects to recover another $1.5 million from the sales in the United States of the designated drug for disease Y, the taxpayer must allocate a proportionate amount of the common costs of $100,000 to the cost of developing and making available the designated drug for both disease X and disease Y. Since the ratio of the expected amount of sales in the United States of the designated drug for disease X to the total of both the expected amount of sales in the United States of the designated drug for disease X and the expected amount of sales in the United States of the designated drug for disease Y is $500,000/$2,000,000, 25% of the common costs of $100,000 (i.e., $25,000) is allocated to the cost of developing and making available the designated drug for disease X.
(iii) Recovery from sales. In determining whether the taxpayer’s cost described in paragraph (d)(1)(ii) of this section will be recovered from sales in the United States of the designated drug for the disease or condition for which the drug is designated, the taxpayer shall include anticipated sales by the taxpayer or any person whose right to make such sales is directly or indirectly derived from the taxpayer (such as a licensee or transferee). The anticipated sales shall be based upon the size of the anticipated patient population for which the designated drug would be useful, including the following factors: the degree of effectiveness and safety of the designated drug, if known: the projected fraction of the anticipated patient population expected to be given the designated drug and to continue to take it; other available agents and other types of therapy; the likelihood that superior agents will become available within a few years; and the number of years during which the designated drug would be exclusively available, e.g., under a patent.
(iv) Recordkeeping requirements. The taxpayer shall keep records sufficient to substantiate the cost and sales estimates made pursuant to this paragraph (d)(1). The records required by this paragraph (d)(1)(iv) shall be retained so long as the contents thereof may become material in the administration of section 28.
(2) Tax liability limitation—(i) Taxable years beginning after December 31, 1986. The credit allowed by section 28 shall not exceed the excess (if any) of—
(A) The taxpayer’s regular tax liability for the taxable year (as defined in section 26(b)), reduced by the sum of the credits allowable under—
(1) Section 21 (relating to expenses for household and dependent care services necessary for gainful employment),
(2) Section 22 (relating to the elderly and permanently and totally disabled),
(3) Section 23 (relating to residential energy),
(4) Section 25 (relating to interest on certain home mortgages), and
(5) Section 27 (relating to taxes on foreign countries and possessions of the United States), over
(B) The tentative minimum tax for the taxable year (as determined under section 55(b)(1)).
(ii) Taxable years beginning before January 1, 1987, and after December 31, 1983. The credit allowed by section 28 shall not exceed the taxpayer’s tax liability for the taxable year (as defined in section 26 (b) prior to its amendment by the Tax Reform Act of 1986 (Pub. L. 99-514)), reduced by the sum of the credits allowable under—
(A) Section 21 (relating to expenses for household dependent care services necessary for gainful employment),
(B) Section 22 (relating to the elderly and permanently and totally disabled),
(C) Section 23 (relating to residential energy),
(D) Section 24 (relating to contributions to candidates for public office),
(E) Section 25 (relating to interest on certain home mortgages), and
(F) Section 27 (relating to the taxes on foreign countries and possessions of the United States).
(iii) Taxable years beginning before January 1, 1984. The credit allowed by section 28 shall not exceed the amount of the tax imposed by chapter 1 of the Internal Revenue Code for the taxable year, reduced by the sum of the credits allowable under the following sections as designated prior to the enactment of the Tax Reform Act of 1984 (Pub. Law 98-369):
(A) Section 32 (relating to tax withheld at source on nonresident aliens and foreign corporations and on tax-free convenant bonds),
(B) Sections 33 (relating to taxes of foreign countries and possessions of the United States),
(C) Section 37 (relating to the retirement income),
(D) Section 38 (relating to investment in certain depreciable property),
(E) Section 40 (relating to expenses of work incentive programs).
(F) Section 41 (relating to contributions to candidates for public office).
(G) Section 44 (relating to purchase of new principal residence).
(H) Section 44A (relating to expenses for household and dependent care services necessary for gainful employment).
(I) Section 44B (relating to employment of certain new employees).
(J) Section 44C (relating to residential energy).
(K) Section 44D (relating to producing fuel from a nonconventional source).
(L) Section 44E (relating to alcohol used as fuel).
(M) Section 44F (relating to increasing research activities), and
(N) Section 44G (relating to employee stock ownership).
(3) Special limitations on foreign testing—(i) Clinical testing conducted outside of the United States—In general. Except as otherwise provided in this paragraph (d)(3), expenses paid or incurred with respect to clinical testing conducted outside the United States (as defined in section 7701(a)(9)) are not eligible for credit under this section. Thus, for example, wages paid an employee clinical investigator for clinical testing conducted in medical facilities in the United States and Mexico generally must be apportioned between the clinical testing conducted within the United States and the clinical testing conducted outside the United States, and only the wages apportioned to the clinical testing conducted within the United States are qualified clinical testing expenses.
(ii) Insufficient testing population in the United States—(A) In general. If clinical testing is conducted outside of the United States because there is an insufficient testing population in the United States, and if the clinical testing is conducted by a United States person (as defined in section 7701(a)(30)) or is conducted by any other person unrelated to the taxpayer to whom the designation under section 526 of the Federal Food, Drug, and Cosmetic Act applies, then the expenses paid or incurred for clinical testing conducted outside of the United States are eligible for the credit provided by section 28.
(B) “Insufficient testing population.” The testing population in the United States is insufficient if there are not within the United States the number of available and appropriate human subjects needed to produce reliable data from the clinical investigation.
(C) “Unrelated to the taxpayer.” For the purpose of determining whether a person is unrelated to the taxpayer to whom the designation under section 526 of the Federal Food, Drug, and Cosmetic Act and the regulations thereunder applies, the rules of section 613A(d)(3) shall apply except that the number “5” in section 613A(d)(3) (A), (B), and (C) shall be deleted and the number “10” inserted in lieu thereof.
(4) Special limitations for certain corporations—(i) Corporations to which section 936 applies. Expenses paid or incurred for clinical testing conducted either inside or outside the United States by a corporation to which section 936 (relating to Puerto Rico and possessions tax credit) applies are not eligible for the credit under section 28.
(ii) Corporations to which section 934(b) applies. For taxable years beginning before January 1, 1987, expenses paid or incurred for clinical testing conducted either inside or outside the United States by a corporation to which section 934(b) (relating to the limitation on reduction in income tax liability incurred to the Virgin Islands), as in effect prior to its amendment by the Tax Reform Act of 1986, applies are not eligible for the credit under section 28. For taxable years beginning after December 31, 1986, see section 1277(c)(1) of the Tax Reform Act of 1986 (100 Stat. 2600) which makes the rule set forth in the preceding sentence inapplicable with respect to corporations created or organized in the Virgin Islands only if (and so long as) an implementing agreement described in that section is in effect between the United States and the Virgin Islands.
(5) Aggregation of expenditures—(i) Controlled group of corporations; organizations under common control—(A) In general. In determining the amount of the credit allowable with respect to an organization that at the end of its taxable year is a member of a controlled group of corporations or a member of a group of organizations under common control, all members of the group are treated as a single taxpayer and the credit (if any) allowable to the member is determined on the basis of its proportionate share of the qualified clinical testing expenses of the aggregated group.
(B) Definition of controlled group of corporations. For purposes of this section, the term “controlled group of corporations” shall have the meaning given to the term by section 41(f)(5).
(C) Definition of organization. For purposes of this section, an organization is a sole proprietorship, a partnership, a trust, an estate, or a corporation, that is carrying on a trade or business (within the meaning of section 162). For purposes of this section, any corporation that is a member of a commonly controlled group shall be deemed to be carrying on a trade or business if any other member of that group is carrying on any trade or business.
(D) Determination of common control. Whether organizations are under common control shall be determined under the principles set forth in paragraphs (b) through (g) of 26 CFR 1.52-1.
(ii) Tax accounting periods used—(A) In general. The credit allowable to a member of a controlled group of corporations or a group of organizations under common control is that member’s share of the aggregate credit computed as of the end of such member’s taxable year.
(B) Special rule where the timing of clinical testing is manipulated. If the timing of clinical testing by members using different tax accounting periods is manipulated to generate a credit in excess of the amount that would be allowable if all members of the group used the same tax accounting period, the district director may require all members of the group to calculate the credit in the current taxable year and all future years by using the “conformed years” method. Each member computing a credit under the “conformed years” method shall compute the credit as if all members of the group had the same taxable year as the computing member.
(iii) Membership during taxable year in more than one group. An organization may be a member of only one group for a taxable year. If, without application of this paragraph (d)(5)(iii), an organization would be a member of more than one group at the end of its taxable year, the organization shall be treated as a member of the group in which it was included for its preceding taxable year. If the organization was not included for its preceding taxable year in any group in which it could be included as of the end of its taxable year, the organization shall designate in its timely filed return the group in which it is being included. If the return for a taxable year is due before May 1, 1985, the organization may designate its group membership through an amended return for that year filed on or before April 30, 1985. If the organization does not so designate, then the district director with audit jurisdiction of the return will determine the group in which the business is to be included.
(iv) Intra-group transactions—(A) In general. Because all members of a group under common control are treated as a single taxpayer for purposes of determining the credit, transactions between members of the group are generally disregarded.
(B) In-house research expenses. If one member of a group conducts clinical testing on behalf of another member, the member conducting the clinical testing shall include in its qualified clinical testing expenses any in-house research expenses for that work and shall not treat any amount received or accrued from the other member as funding the clinical testing. Conversely, the member for whom the clinical testing is conducted shall not treat any part of any amount paid or incurred as a contract research expense. For purposes of determining whether the in-house research for that work is clinical testing, the member performing the clinical testing shall be treated as carrying on any trade or business carried on by the member on whose behalf the clinical testing is performed.
(C) Contract research expenses. If a member of a group pays or incurs contract research expenses to a person outside the group in carrying on the member’s trade or business, that member shall include those expenses as qualified clinical testing expenses. However, if the expenses are not paid or incurred in carrying on any trade or business of that member, those expenses may be taken into account as contract research expenses by another member of the group provided that the other member—
(1) Reimburses the member paying or incurring the expenses, and
(2) Carries on a trade or business to which the clinical testing relates.
(D) Lease payments. Amounts paid or incurred to another member of the group for the lease of personal property owned by a person outside the group shall be taken into account as in-house research expenses for purposes of section 28 only to the extent of the lesser of—
(1) The amount paid or incurred to the other member, or
(2) The amount of the lease expense paid to a person outside the group.
The amount paid or incurred to another member of the group for the lease of personal property owned by a member of the group is not taken into account for purposes of section 28.
(E) Payment for supplies. Amounts paid or incurred to another member of the group for supplies shall be taken into account as in-house research expenses for purposes of section 28 only to the extent of the lesser of—
(1) The amount paid or incurred to the other member, or
(2) The amount of the other member’s basis in the supplies.
(6) Allocations—(i) Pass-through in the case of an S corporation. In the case of an S corporation (as defined in section 1361), the amount of the credit for qualified clinical testing expenses computed for the corporation for any taxable year shall be allocated among the persons who are shareholders of the corporation during the taxable year according to the provisions of section 1366 and section 1377.
(ii) Pass-through in the case of an estate or a trust. In the case of an estate or a trust, the amount of the credit for qualified clinical testing expenses computed for the estate or trust for any taxable year shall be apportioned between the estate or trust and the beneficiaries on the basis of the income of the estate or trust allocable to each.
(iii) Pass-through in the case of a partnership—(A) In general. In the case of a partnership, the credit for qualified clinical testing expenses computed for the partnership for any taxable year shall be apportioned among the persons who are partners during the taxable year in accordance with section 704 and the regulations thereunder.
(B) Certain partnership non-business expenditures. A partner’s share of an in-house research expense or contract research expense paid or incurred by a partnership other than in carrying on a trade or business of the partnership constitutes a qualified clinical testing expense of the partner if—
(1) The partner is entitled to make independent use of the result of the clinical testing, and
(2) The clinical testing expense paid or incurred in carrying on the clinical testing would have been paid or incurred by the partner in carrying on a trade or business of the partner if the partner had carried on the clinical testing that was in fact carried on by the partnership.
(C) Apportionment. Qualified clinical testing expenses to which paragraph (d)(6)(iii)(B) of this section applies shall be apportioned among the persons who are partners during the taxable year in accordance with section 704 and the regulations thereunder. For purposes of section 28, these expenses shall be treated as paid or incurred directly by the partners rather than by the partnership. Thus, the partnership shall disregard these expenses in computing the credit to be apportioned under paragraph (d)(6)(iii)(A) of this section, and each partner shall aggregate the portion of these expenses allocated to the partner with other qualified clinical testing expenses of the partner in making the computations under section 28.
(iv) Year in which taken into account. An amount apportioned to a person under paragraph (d)(6) of this section shall be taken into account by the person in the taxable year of such person in which or with which the taxable year of the corporation, estate, trust, or partnership (as the case may be) ends.
(v) Credit allowed subject to limitation. Any person to whom any amount has been apportioned under paragraph (d)(6)(i), (ii), or (iii) of this section is allowed, subject to the limitation provided in section 28(d)(2), a credit for that amount.
(7) Manner of making an election. To make an election to have section 28 apply for its taxable year, the taxpayer shall file Form 6765 (Credit for Increasing Research Activities (or for claiming the orphan drugs credit)) containing all the information required by that form.
Credits Against Tax
credits allowable under sections 30 through 45D
§ 1.30-1 Definition of qualified electric vehicle and recapture of credit for qualified electric vehicle.
(a) Definition of qualified electric vehicle. A qualified electric vehicle is a motor vehicle that meets the requirements of section 30(c). Accordingly, a qualified electric vehicle does not include any motor vehicle that has ever been used (for either personal or business use) as a non-electric vehicle.
(b) Recapture of credit for qualified electric vehicle—(1) In general—(i) Addition to tax. If a recapture event occurs with respect to a taxpayer’s qualified electric vehicle, the taxpayer must add the recapture amount to the amount of tax due in the taxable year in which the recapture event occurs. The recapture amount is not treated as income tax imposed on the taxpayer by chapter 1 of the Internal Revenue Code for purposes of computing the alternative minimum tax or determining the amount of any other allowable credits for the taxable year in which the recapture event occurs.
(ii) Reduction of carryover. If a recapture event occurs with respect to a taxpayer’s qualified electric vehicle, and if a portion of the section 30 credit for the cost of that vehicle was disallowed under section 30(b)(3)(B) and consequently added to the taxpayer’s minimum tax credit pursuant to section 53(d)(1)(B)(iii), the taxpayer must reduce its minimum tax credit carryover by an amount equal to the portion of any minimum tax credit carryover attributable to the disallowed section 30 credit, multiplied by the recapture percentage for the taxable year of recapture. Similarly, the taxpayer must reduce any other credit carryover amounts (such as under section 469) by the portion of the carryover attributable to section 30, multiplied by the recapture percentage.
(2) Recapture event—(i) In general. A recapture event occurs if, within 3 full years from the date a qualified electric vehicle is placed in service, the vehicle ceases to be a qualified electric vehicle. A vehicle ceases to be a qualified electric vehicle if—
(A) The vehicle is modified so that it is no longer primarily powered by electricity;
(B) The vehicle is used in a manner described in section 50(b); or
(C) The taxpayer receiving the credit under section 30 sells or disposes of the vehicle and knows or has reason to know that the vehicle will be used in a manner described in paragraph (b)(2)(i)(A) or (B) of this section.
(ii) Exception for disposition. Except as provided in paragraph (b)(2)(i)(C) of this section, a sale or other disposition (including a disposition by reason of an accident or other casualty) of a qualified electric vehicle is not a recapture event.
(3) Recapture amount. The recapture amount is equal to the recapture percentage times the decrease in the credits allowed under section 30 for all prior taxable years that would have resulted solely from reducing to zero the cost taken into account under section 30 with respect to such vehicle, including any credits allowed attributable to section 30 (such as under sections 53 and 469).
(4) Recapture date. The recapture date is the actual date of the recapture event unless a recapture event described in paragraph (b)(2)(i)(B) of this section occurs, in which case the recapture date is the first day of the recapture year.
(5) Recapture percentage. For purposes of this section, the recapture percentage is—
(i) 100, if the recapture date is within the first full year after the date the vehicle is placed in service;
(ii) 66
(iii) 33
(6) Basis adjustment. As of the first day of the taxable year in which the recapture event occurs, the basis of the qualified electric vehicle is increased by the recapture amount and the carryover reductions taken into account under paragraphs (b)(1)(i) and (ii) of this section, respectively. For a vehicle that is of a character that is subject to an allowance for depreciation, this increase in basis is recoverable over the remaining recovery period for the vehicle beginning as of the first day of the taxable year of recapture.
(7) Application of section 1245 for sales and other dispositions. For purposes of section 1245, the amount of the credit allowable under section 30(a) with respect to any qualified electric vehicle that is (or has been) of a character subject to an allowance for depreciation is treated as a deduction allowed for depreciation under section 167. Therefore, upon a sale or other disposition of a depreciable qualified electric vehicle, section 1245 will apply to any gain recognized to the extent the basis of the depreciable vehicle was reduced under section 30(d)(1) net of any basis increase described in paragraph (b)(6) of this section.
(8) Examples. The following examples illustrate the provisions of this section:
(c) Effective date. This section is effective on October 14, 1994. If the recapture date is before the effective date of this section, a taxpayer may use any reasonable method to recapture the benefit of any credit allowable under section 30(a) consistent with section 30 and its legislative history. For this purpose, the recapture date is defined in paragraph (b)(4) of this section.
§§ 1.30C-1–1.30C-2 [Reserved]
§ 1.30C-3 Rules relating to the increased credit amount for prevailing wage and apprenticeship.
(a) In general. If any qualified alternative fuel vehicle refueling project (as defined by section 30C(g)(1)(B)) placed in service during the taxable year satisfies the requirements in paragraph (b) of this section, the credit determined under section 30C(a) for any qualified alternative fuel vehicle refueling property of a character subject to an allowance for depreciation that is part of such project is multiplied by five.
(b) Qualified alternative fuel vehicle refueling project requirements. A qualified alternative fuel vehicle refueling project satisfies the requirements of this paragraph (b) if it is one of the following—
(1) A project the construction of which began prior to January 29, 2023; or
(2) A project that meets the prevailing wage requirements of section 45(b)(7) and § 1.45-7, the apprenticeship requirements of section 45(b)(8) and § 1.45-8, and the recordkeeping and reporting requirements of § 1.45-12, all with respect to the construction of any qualified alternative fuel refueling property within the meaning of section 30C before such project is placed in service.
(c) Applicability date. This section applies to qualified alternative fuel vehicle refueling projects placed in service in taxable years ending after June 25, 2024, and the construction of which begins after June 25, 2024. Taxpayers may apply this section to qualified alternative fuel vehicle refueling projects placed in service in taxable years ending on or before June 25, 2024, and qualified alternative fuel vehicle refueling projects placed in service in taxable years ending after June 25, 2024, the construction of which begins before June 25, 2024, provided that taxpayers follow this section in its entirety and in a consistent manner.
§ 1.30D-0 Table of contents.
This section lists the captions contained in §§ 1.30D-1 through 1.30D-6.
(a) In general.
(b) Application with other credits.
(1) Business credit treated as part of general business credit.
(2) Apportionment of section 30D credit.
(3) Personal credit limited based on tax liability.
(c) Severability.
(d) Applicability date.
(a) In general.
(b) Definitions.
(1) Advance payment program.
(2) Applicable critical mineral.
(i) In general.
(ii) Example: Form of applicable critical mineral.
(3) Assembly.
(4) Associated constituent material.
(5) Battery.
(6) Battery cell.
(7) Battery cell production facility.
(8) Battery component.
(9) Battery materials.
(10) Clean vehicle battery.
(11) Compliant-battery ledger.
(12) Constituent materials.
(13) Country with which the United States has a free trade agreement in effect.
(i) In general.
(ii) Free trade agreements in effect.
(iii) Updates.
(14) Credit transfer election.
(15) Dealer.
(16) Dealer tax compliance.
(17) Depreciable vehicle.
(18) Electing taxpayer.
(19) Eligible entity.
(20) Excessive payment.
(21) Extraction.
(22) FEOC-compliant.
(23) Final assembly.
(24) Foreign entity of concern.
(25) Impracticable-to-trace battery materials.
(i) In general.
(ii) Identified impracticable-to-trace battery materials.
(26) Incentive.
(27) Incremental value.
(28) Manufacturer.
(i) In general.
(ii) Modification of a new motor vehicle.
(29) Manufacturer’s suggested retail price.
(i) In general.
(ii) Retail price.
(iii) Retail delivered price.
(30) Manufacturing.
(31) Modified adjusted gross income.
(i) Individuals.
(ii) Estates and trusts.
(32) New clean vehicle.
(33) New qualified fuel cell motor vehicle.
(34) North America.
(35) North American battery component.
(36) Placed in service.
(37) Processing.
(38) Procurement chain.
(39) Qualifying battery component content.
(40) Qualifying critical mineral.
(41) Qualifying critical mineral content.
(42) Qualified manufacturer.
(43) Recycling.
(i) In general.
(ii) Example: Recycling of applicable critical mineral.
(44) Registered dealer.
(45) Section 30D regulations.
(46) Seller report.
(47) Time of sale.
(48) Total incremental value of battery components.
(49) Total incremental value of North American battery components.
(50) Total traced qualifying value.
(51) Total value of critical minerals.
(52) Total value of qualifying critical minerals.
(53) Traced qualifying value.
(54) Value.
(55) Value added.
(56) Vehicle classification.
(i) In general.
(ii) Van.
(iii) Sport utility vehicle.
(iv) Pickup truck.
(v) Other vehicle.
(c) Severability.
(d) Applicability date.
(a) Critical minerals requirement.
(1) In general.
(2) Applicable critical minerals percentage.
(i) In general.
(ii) Vehicles placed in service between April 18, 2023, and December 31, 2023.
(iii) Vehicles placed in service during calendar year 2024.
(iv) Vehicles placed in service during calendar year 2025.
(v) Vehicles placed in service during calendar year 2026.
(vi) Vehicles placed in service during calendar year 2027 and later.
(3) Determining qualifying critical mineral content.
(i) In general.
(ii) Separate determinations required for each procurement chain.
(iii) Time for determining value.
(iv) Application of qualifying critical mineral content to vehicles.
(4) Temporary safe harbor for determining qualifying critical mineral content for vehicles for which a qualified manufacturer submits a periodic written report on or after May 6, 2024 and before January 1, 2027.
(i) In general.
(ii) Separate determinations required for each procurement chain.
(iii) Time for determining value.
(iv) Application of qualifying critical mineral content to vehicles.
(v) Consistent determination required for all procurement chains.
(5) Rule for determining qualifying critical mineral content for vehicles for which a qualified manufacturer submitted a periodic written report before May 6, 2024.
(b) Battery components requirement.
(1) In general.
(2) Applicable battery components percentage.
(i) In general.
(ii) Vehicles placed in service between April 18, 2023, and December 31, 2023.
(iii) Vehicles placed in service during calendar year 2024 or 2025.
(iv) Vehicles placed in service during calendar year 2026.
(v) Vehicles placed in service during calendar year 2027.
(vi) Vehicles placed in service during calendar year 2028.
(vii) Vehicles placed in service in calendar year 2029 and later.
(3) Determining qualifying battery component content.
(i) In general.
(ii) Time for determining value.
(iii) Application of qualifying battery component content to vehicles.
(iv) End point for determination.
(c) Definitions.
(1) Certain terms relevant to the critical minerals requirement.
(i) Procurement chain.
(ii) Qualifying critical mineral.
(A) In general.
(B) Extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect.
(C) Recycled in North America.
(iii) Qualifying critical mineral content.
(iv) Total traced qualifying value.
(v) Total value of critical minerals.
(vi) Total value of qualifying critical minerals.
(vii) Traced qualifying value.
(A) Extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect.
(B) Recycled in North America.
(viii) Value added.
(2) Certain terms relevant to the battery components requirement.
(i) Incremental value.
(ii) North American battery component.
(iii) Qualifying battery component content.
(iv) Total incremental value of battery components.
(v) Total incremental value of North American battery components.
(d) Upfront review of critical minerals and battery components requirements.
(e) New qualified fuel cell motor vehicles.
(f) Examples.
(1) Example 1: Critical minerals requirement.
(i) Facts.
(ii) Analysis.
(2) Example 2: Critical minerals requirement temporary safe harbor.
(i) Facts.
(ii) Analysis.
(3) Example 3: Battery components requirement.
(i) Facts.
(ii) Analysis.
(g) Severability.
(h) Applicability date.
(1) In general.
(2) Upfront review and traced qualifying value.
(a) No double benefit.
(1) In general.
(2) Interaction between section 30D and section 25E credits.
(3) Interaction between section 30D and section 45W credits.
(b) Limitation based on modified adjusted gross income.
(1) In general.
(2) Threshold amount.
(3) Special rule for change in filing status.
(4) Application to estates and trusts.
(i) Estates and non-grantor trusts.
(ii) Grantor trusts.
(5) Application to passthrough entities.
(6) Other taxpayers.
(c) Credit may generally be claimed on only one tax return.
(1) In general.
(2) Exception for passthrough entities.
(3) Seller reporting.
(i) In general.
(ii) Passthrough entities.
(4) Example.
(d) Grantor trusts.
(e) Recapture rules.
(1) In general.
(i) Cancelled sale.
(ii) Vehicle return.
(iii) Resale.
(iv) Other vehicle returns and resales.
(2) Recapture rules in the case of a credit transfer election.
(3) Example: Demonstrator vehicle.
(f) Seller registration.
(g) Requirement to file return.
(h) Taxpayer reliance on manufacturer certifications and periodic written reports to the IRS.
(i) Severability.
(j) Applicability date.
(a) In general.
(b) Definitions.
(1) Advance payment program.
(2) Credit transfer election.
(3) Dealer.
(4) Dealer tax compliance.
(5) Electing taxpayer.
(6) Eligible entity.
(7) Incentive.
(8) Registered dealer.
(9) Sale price.
(10) Time of sale.
(c) Dealer registration.
(1) In general.
(2) Dealer tax compliance required.
(3) Suspension of registration.
(4) Revocation of registration.
(d) Credit transfer election by electing taxpayer.
(e) Federal income tax consequences of the credit transfer election.
(1) Tax consequences for electing taxpayer.
(2) Tax consequences for eligible entity.
(3) Form of payment from eligible entity to electing taxpayer.
(4) Additional requirements.
(5) Examples.
(i) Example 1: Electing taxpayer’s regular tax liability less than amount of credit.
(A) Facts.
(B) Analysis.
(ii) Example 2: Non-cash payment by eligible entity to electing taxpayer.
(A) Facts.
(B) Analysis.
(iii) Example 3: Eligible entity is a partnership.
(A) Facts.
(B) Analysis.
(f) Advance payments received by eligible entities.
(1) In general.
(2) Requirements for a registered dealer to become an eligible entity.
(3) Suspension of registered dealer eligibility.
(4) Revocation of registered dealer eligibility.
(g) Increase in tax.
(1) Recapture if electing taxpayer exceeds modified adjusted gross income limitation.
(2) Excessive payments.
(i) In general.
(ii) Reasonable cause.
(iii) Excessive payment defined.
(iv) Special rule for cases in which the electing taxpayer’s modified adjusted gross income exceeds the limitation.
(3) Examples.
(i) Example 1: Registered dealer is not an eligible entity.
(A) Facts.
(B) Analysis.
(ii) Example 2: Incorrect manufacturer certifications.
(A) Facts.
(B) Analysis.
(h) Return requirement.
(i) Two credit transfer elections per year.
(j) Severability.
(k) Applicability date.
(a) In general.
(b) Due diligence required.
(1) In general.
(2) Transition rule for impracticable-to-trace battery materials.
(c) FEOC compliance.
(1) In general.
(i) Step 1.
(ii) Step 2.
(iii) Step 3.
(2) FEOC-compliant batteries.
(3) FEOC-compliant battery cells.
(i) In general.
(ii) Allocation-based determination for applicable critical minerals and associated constituent materials of a battery cell.
(A) In general.
(B) Allocation limited to applicable critical minerals in the battery cell.
(C) Separate allocation required for each type of associated constituent material.
(1) In general.
(2) Example.
(D) Allocation within each product line of battery cells.
(E) Limitation on number of FEOC-compliant battery cells.
(iii) Transition rule for impracticable-to-trace battery materials.
(4) FEOC-compliant battery components and applicable critical minerals.
(i) In general.
(ii) Timing of determination of FEOC or FEOC-compliant status.
(iii) Example: Timing of FEOC compliance determination.
(5) Third-party manufacturers or suppliers.
(i) Due diligence required.
(ii) Provision of required information to qualified manufacturer.
(iii) Contractual obligations.
(iv) Additional requirements in case of multiple third-party manufacturers or suppliers.
(d) Compliant-battery ledger.
(1) In general.
(2) Determination of number of batteries.
(i) In general.
(ii) Upfront review.
(iii) Decrease or increase to compliant-battery ledger.
(3) Tracking FEOC-compliant batteries.
(4) Reconciliation of battery estimates.
(e) Rule for 2024.
(1) In general.
(2) Determination.
(f) Inaccurate attestations, certifications, or documentation.
(1) In general.
(2) Inadvertence.
(i) Inaccurate information may be cured by qualified manufacturer.
(ii) Consequences if errors not cured.
(3) Intentional disregard or fraud.
(i) All vehicles ineligible for credit.
(ii) Termination of written agreement.
(g) Rules inapplicable to new qualified fuel cell motor vehicles.
(h) Examples.
(1) Example 1: In general.
(i) Facts.
(ii) Analysis.
(2) Example 2: Rules for third-party suppliers.
(i) Facts.
(ii) Analysis.
(3) Example 3: Applicable critical minerals.
(i) Facts.
(ii) Analysis.
(4) Example 4: Comprehensive example.
(i) Facts.
(ii) Analysis.
(i) Severability.
(j) Applicability date.
§ 1.30D-1 Credit for new clean vehicles.
(a) In general. Section 30D(a) of the Internal Revenue Code (Code) allows as a credit against the tax imposed by chapter 1 of the Code (chapter 1) for the taxable year of a taxpayer an amount equal to the sum of the credit amounts determined under section 30D(b) with respect to each new clean vehicle purchased by the taxpayer that the taxpayer places in service during the taxable year. This section provides generally applicable rules that apply for purposes of determining the credit under section 30D and the section 30D regulations (section 30D credit). Section 1.30D-2 provides definitions that apply for purposes of section 30D and the section 30D regulations. Section 1.30D-3 provides rules regarding the critical minerals and battery components requirements of section 30D(e). Section 1.30D-4 provides guidance regarding the limitations and special rules in section 30D(f) as well as other special rules with respect to the section 30D credit. Section 1.30D-5 provides rules for the credit transfer election and advance payment program and for recapture. Section 1.30D-6 provides rules regarding the foreign entities of concern (FEOC) restriction of section 30D(d)(7).
(b) Application with other credits—(1) Business credit treated as part of general business credit. Section 30D(c)(1) requires that so much of the section 30D credit that would be allowed under section 30D(a) for any taxable year (determined without regard to section 30D(c) and this paragraph (b)) that is attributable to a depreciable vehicle must be treated as a general business credit under section 38 of the Code that is listed in section 38(b)(30) for such taxable year (and not allowed under section 30D(a)). In the case of a depreciable vehicle the use of which is 50 percent or more business use in the taxable year such vehicle is placed in service, the section 30D credit that would be allowed under section 30D(a) for that taxable year (determined without regard to section 30D(c) and this paragraph (b)) that is attributable to such depreciable vehicle must be treated as a general business credit under section 38(b)(30) for such taxable year (and not allowed under section 30D(a)). See paragraph (b)(2) of this section for rules applicable in the case of a depreciable vehicle the use of which is less than 50 percent business use in the taxable year such vehicle is placed in service. See paragraph (b)(3) of this section for rules applicable to a section 30D credit allowed under section 30D(a) pursuant to section 30D(c)(2) or paragraph (b)(2)(ii) or (b)(3) of this section.
(2) Apportionment of section 30D credit. Unless the taxpayer has elected to transfer the credit pursuant to section 30D(g) and § 1.30D-5(d), in the case of a depreciable vehicle the business use of which is less than 50 percent of a taxpayer’s total use of the vehicle for the taxable year in which the vehicle is placed in service, the taxpayer’s section 30D credit for that taxable year with respect to that vehicle must be apportioned as follows:
(i) The portion of the section 30D credit corresponding to the percentage of the taxpayer’s business use of the vehicle is treated as a general business credit under section 30D(c)(1) and paragraph (b)(1) of this section (and not allowed under section 30D(a) or paragraph (b)(3) of this section).
(ii) The portion of the section 30D credit corresponding to the percentage of the taxpayer’s personal use of the vehicle is treated as a section 30D credit allowed under section 30D(a) pursuant to section 30D(c)(2) and paragraph (b)(3) of this section.
(3) Personal credit limited based on tax liability. Section 26 of the Code limits the aggregate amount of credits allowed to a taxpayer by subpart A of part IV of subchapter A of chapter 1 (subpart A) based on the taxpayer’s tax liability. Under section 26(a), the aggregate amount of credits allowed to a taxpayer by subpart A cannot exceed the sum of the taxpayer’s regular tax liability (as defined in section 26(b)) for the taxable year reduced by the foreign tax credit allowable under section 27 of the Code, and the alternative minimum tax imposed by section 55(a) of the Code for the taxable year. Section 30D(c)(2) provides that the section 30D credit allowed under section 30D(a) for any taxable year (determined after application of section 30D(c)(1) and paragraphs (b)(1) and (2) of this section) is treated as a credit allowable under subpart A for such taxable year, and the section 30D credit allowed under section 30D(a) is therefore subject to the limitation imposed by section 26.
(c) 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 shall continue in effect.
(d) Applicability date. This section applies to taxable years ending after December 4, 2023.
§ 1.30D-2 Definitions for purposes of section 30D.
(a) In general. The definitions in this section apply for purposes of section 30D of the Internal Revenue Code (Code) and the section 30D regulations.
(b) Definitions—(1) Advance payment program. Advance payment program means advance payment program as defined in § 1.30D-5(b)(1).
(2) Applicable critical mineral—(i) In general. Applicable critical mineral means an applicable critical mineral as defined in section 45X(c)(6) of the Code. The requirements of §§ 1.30D-3(a) and 1.30D-6 with respect to an applicable critical mineral take into account each step of extraction, processing, or recycling through the step in which such mineral is processed or recycled into a constituent material, even if the mineral is not in a form listed in section 45X(c)(6) at every step of production. However, an applicable critical mineral is disregarded for purposes of the requirements of §§ 1.30D-3(a) and 1.30D-6 if it is fully consumed in the production of the constituent material or battery component and no longer remains in any form in the battery.
(ii) Example: Form of applicable critical mineral. Mineral Y is extracted and is intended to be incorporated into the battery of an electric vehicle. Mineral Y is not in a form listed in section 45X(c)(6) at the time of such extraction, but subsequently it is refined into an applicable critical mineral form listed in section 45X(c)(6). Both the extraction and processing are taken into account for purposes of the requirements of §§ 1.30D-3(a) and 1.30D-6.
(3) Assembly. Assembly, with respect to battery components, means the process of combining battery components into battery cells and battery modules.
(4) Associated constituent material. Associated constituent material, with respect to an applicable critical mineral, means a constituent material that has been processed or recycled from such mineral into the constituent material with which it is associated, even if that processing or recycling transformed such mineral into a form not listed in section 45X(c)(6).
(5) Battery. Battery, for purposes of a new clean vehicle, means a collection of one or more battery modules, each of which has two or more electrically configured battery cells in series or parallel, to create voltage or current. The term battery does not include items such as thermal management systems or other parts of a battery cell or module that do not directly contribute to the electrochemical storage of energy within the battery, such as battery cell cases, cans, or pouches.
(6) Battery cell. Battery cell means a combination of battery components (other than battery cells) capable of electrochemically storing energy from which the electric motor of a new clean vehicle draws electricity.
(7) Battery cell production facility. Battery cell production facility means a facility in which battery cells are manufactured or assembled.
(8) Battery component. Battery component means a component that forms part of a clean vehicle battery and that is manufactured or assembled from one or more components or battery materials that are combined through industrial, chemical, and physical assembly steps. Battery components may include, but are not limited to, a cathode electrode, anode electrode, solid metal electrode, coated separator, liquid electrolyte, solid state electrolyte, battery cell, and battery module.
(9) Battery materials. Battery materials means direct and indirect inputs to battery components that are produced through processing rather than through manufacturing or assembly. Battery materials are not considered a type of battery component, although battery materials may be manufactured or assembled into battery components. The three categories of battery materials are applicable critical minerals, constituent materials, and battery materials without applicable critical minerals. Examples of battery materials that may or may not contain applicable critical minerals include a separator base film (if not manufactured or assembled) and separator coating. Examples of battery materials without applicable critical minerals include conductive additives, copper foils prior to graphite deposition, and electrolyte solvents.
(10) Clean vehicle battery. Clean vehicle battery, with respect to a new clean vehicle, means the battery from which the electric motor of the vehicle draws electricity to propel such vehicle.
(11) Compliant-battery ledger. A compliant-battery ledger, for a qualified manufacturer for a calendar year, is a ledger established under the rules of § 1.30D-6(d) that tracks the number of available FEOC-compliant batteries for such calendar year.
(12) Constituent materials. Constituent materials means battery materials that contain applicable critical minerals. Constituent materials may include, but are not limited to, powders of cathode active materials, powders of anode active materials, foils, metals for solid electrodes, binders, electrolyte salts, and electrolyte additives, as required for a battery cell. Battery materials without applicable critical minerals are not constituent materials.
(13) Country with which the United States has a free trade agreement in effect—(i) In general. The term country with which the United States has a free trade agreement in effect means any of those countries identified in paragraph (b)(13)(ii) of this section or that the Secretary of the Treasury or her delegate (Secretary) may identify in the future. The criteria the Secretary will consider in determining whether to identify a country under this paragraph (b)(13) include whether an agreement between the United States and that country, as to the critical minerals contained in clean vehicle batteries or more generally, and in the context of the overall commercial and economic relationship between that country and the United States:
(A) Reduces or eliminates trade barriers on a preferential basis;
(B) Commits the parties to refrain from imposing new trade barriers;
(C) Establishes high-standard disciplines in key areas affecting trade (such as core labor and environmental protections); and/or
(D) Reduces or eliminates restrictions on exports or commits the parties to refrain from imposing such restrictions.
(ii) Free trade agreements in effect. The countries with which the United States currently has free trade agreements in effect are: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Japan, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Panama, Peru, and Singapore.
(iii) Updates. The list of countries in paragraph (b)(13)(ii) of this section may be revised and updated through guidance published in the
(14) Credit transfer election. Credit transfer election means credit transfer election as defined in § 1.30D-5(b)(2).
(15) Dealer. Dealer means dealer as defined in § 1.30D-5(b)(3).
(16) Dealer tax compliance. Dealer tax compliance means dealer tax compliance as defined in § 1.30D-5(b)(4).
(17) Depreciable vehicle. Depreciable vehicle means a vehicle of a character subject to an allowance for depreciation.
(18) Electing taxpayer. Electing taxpayer means electing taxpayer as defined in § 1.30D-5(b)(5).
(19) Eligible entity. Eligible entity means eligible entity as defined in § 1.30D-5(b)(6).
(20) Excessive payment. Excessive payment means excessive payment as defined in § 1.30D-5(g)(2)(iii).
(21) Extraction. Extraction means the activities performed to harvest minerals or natural resources from the ground or from a body of water. Extraction includes, but is not limited to, operating equipment to harvest minerals or natural resources from mines and wells and the physical processes involved in refining. Extraction also includes operating equipment to extract minerals or natural resources from the waste or residue of prior extraction, including crude oil extraction to the extent that processes applied to that crude oil yield an applicable critical mineral as a byproduct. Extraction concludes when activities are performed to convert raw mined or harvested products or raw well effluent to substances that can be readily transported or stored for direct use in critical mineral processing. Extraction does not include activities that begin with a recyclable commodity (as such activities are recycling). Extraction does not include the chemical and thermal processes involved in refining.
(22) FEOC-compliant. FEOC-compliant means in compliance with the applicable excluded entity requirement under section 30D(d)(7). In particular—
(i) A battery component (other than a battery cell), with respect to a new clean vehicle placed in service after December 31, 2023, is FEOC-compliant if it is not manufactured or assembled by a FEOC;
(ii) An applicable critical mineral, with respect to a new clean vehicle placed in service after December 31, 2024, is FEOC-compliant if it is not extracted, processed, or recycled by a FEOC;
(iii) A battery cell, with respect to a new clean vehicle placed in service after December 31, 2023, and before January 1, 2025, is FEOC-compliant if it is not manufactured or assembled by a FEOC and it contains only FEOC-compliant battery components;
(iv) A battery cell, with respect to a new clean vehicle placed in service after December 31, 2024, is FEOC-compliant if it is not manufactured or assembled by a FEOC and it contains only FEOC-compliant battery components and FEOC-compliant applicable critical minerals; and
(v) A clean vehicle battery, with respect to a new clean vehicle placed in service after December 31, 2023, is FEOC-compliant if it contains only FEOC-compliant battery components (other than battery cells) and FEOC-compliant battery cells (as described in paragraph (b)(22)(iii) or (iv) of this section, as applicable).
(23) Final assembly. Final assembly means the process by which a manufacturer produces a new clean vehicle at, or through the use of, a plant, factory, or other place from which the vehicle is delivered to a dealer or importer with all component parts necessary for the mechanical operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle. To establish where final assembly of a new clean vehicle occurred for purposes of the requirement in section 30D(d)(1)(G) that final assembly of a new clean vehicle occur within North America, the taxpayer may rely on the following information:
(i) The vehicle’s plant of manufacture as reported in the vehicle identification number pursuant to 49 CFR 565; or
(ii) The final assembly point reported on the label affixed to the vehicle as described in 49 CFR 583.5(a)(3).
(24) Foreign entity of concern. Foreign entity of concern (FEOC) has the meaning provided in section 40207(a)(5) of the Infrastructure Investment and Jobs Act (42 U.S.C. 18741(a)(5)) and guidance promulgated thereunder by the Department of Energy (DOE).
(25) Impracticable-to-trace battery materials—(i) In general. Impracticable-to-trace battery materials means specifically identified, low-value battery materials that originate from multiple sources and are commingled during refining, processing, or other production processes by suppliers to such a degree that the qualified manufacturer cannot, due to current industry practice, feasibly determine and attest to the origin of such battery materials. For this purpose, impracticable-to-trace battery materials are those that have low value compared to the total value of the clean vehicle battery.
(ii) Identified impracticable-to-trace battery materials. Identified impracticable-to-trace battery materials means applicable critical minerals in the following circumstances: graphite contained in anode materials, and applicable critical minerals contained in electrolyte salts, electrolyte binders, or electrolyte additives.
(26) Incentive. Incentive means incentive as defined in § 1.30D-5(b)(7).
(27) Incremental value. Incremental value means incremental value as defined in § 1.30D-3(c)(2)(i).
(28) Manufacturer—(i) In general. A manufacturer means any manufacturer within the meaning of the regulations prescribed by the Administrator of the Environmental Protection Agency (EPA) for purposes of the administration of title II of the Clean Air Act (42 U.S.C. 7521 et seq.) and as defined in 42 U.S.C. 7550(1). Except as provided in paragraph (b)(28)(ii) of this section, if multiple manufacturers are involved in the production of a vehicle, the requirements of section 30D(d)(3) must be met by the manufacturer that satisfies the reporting requirements of the greenhouse gas emissions standards set by the EPA under the Clean Air Act (42 U.S.C. 7521 et seq.) for the subject vehicle.
(ii) Modification of a new motor vehicle—(A) If a manufacturer modifies a new motor vehicle (as defined in 42 U.S.C. 7550(3)) that does not satisfy the requirements of section 30D(d)(1)(F) or (d)(6) so that the new motor vehicle, after modification, does satisfy such requirements, then such manufacturer may satisfy the requirements of section 30D(d)(3) if the modification occurred prior to the new motor vehicle being placed in service.
(B) If a manufacturer modifies a new motor vehicle (as defined in 42 U.S.C. 7550(3)) that does not satisfy the requirements of 45W(c)(3) so that the new motor vehicle, after modification, does satisfy such requirements, then such manufacturer may satisfy the requirements of 30D(d)(3) if the modification occurred prior to the new motor vehicle being placed in service.
(29) Manufacturer’s suggested retail price—(i) In general. Manufacturer’s suggested retail price means the sum of the retail price and the retail delivered price (as defined in paragraphs (b)(29)(ii) and (iii) of this section) as reported on the label that is affixed to the windshield or side window of the vehicle, as described in 15 U.S.C. 1232.
(ii) Retail price. Retail price, for purposes of paragraph (b)(29)(i) of this section, means the retail price of the automobile suggested by the manufacturer as described in 15 U.S.C. 1232(f)(1).
(iii) Retail delivered price. Retail delivered price, for purposes of paragraph (b)(29)(i) of this section, means the retail delivered price suggested by the manufacturer for each accessory or item of optional equipment physically attached to such automobile at the time of its delivery to the dealer that is not included within the price of such automobile as stated pursuant to 15 U.S.C. 1232(f)(1), as described in 15 U.S.C. 1232(f)(2).
(30) Manufacturing. Manufacturing, with respect to a battery component, means the industrial and chemical steps taken to produce a battery component.
(31) Modified adjusted gross income—(i) Individuals. Modified adjusted gross income, in the case of an individual, means adjusted gross income (as defined in section 62 of the Code) increased by any amount excluded from gross income under section 911, 931, or 933 of the Code.
(ii) Estates and trusts. Modified adjusted gross income, in the case of an estate or non-grantor trust, means adjusted gross income (as defined in section 67(e) of the Code).
(32) New clean vehicle. New clean vehicle means a vehicle that meets the requirements described in section 30D(d). Vehicles that may qualify as new clean vehicles include battery electric vehicles, plug-in hybrid electric vehicles, fuel cell motor vehicles, and plug-in hybrid fuel cell motor vehicles. A vehicle does not meet the requirements of section 30D(d) if—
(i) The qualified manufacturer fails to provide a periodic written report for such vehicle prior to the vehicle being placed in service reporting the vehicle identification number of such vehicle and certifying compliance with the requirement of section 30D(d);
(ii) The qualified manufacturer provides incorrect information with respect to the periodic written report for such vehicle;
(iii) The qualified manufacturer fails to update its periodic written report in the event of a material change with respect to such vehicle; or
(iv) For new clean vehicles placed in service after December 31, 2024, the qualified manufacturer fails to meet the requirements of § 1.30D-6(d).
(33) New qualified fuel cell motor vehicle. New qualified fuel cell motor vehicle means any new qualified fuel cell motor vehicle (as defined in section 30B(b)(3)) that meets the requirements under section 30D(d)(1)(G) (that is, the final assembly in North America requirement) and (H) (that is, the seller report requirement), and that does not have a clean vehicle battery.
(34) North America. North America means the territory of the United States, Canada, and Mexico as defined in 19 CFR part 182, Appendix A, § 1(1).
(35) North American battery component. North American battery component means North American battery component as defined in § 1.30D-3(c)(2)(ii).
(36) Placed in service. A new clean vehicle is considered to be placed in service on the date the taxpayer takes possession of the vehicle.
(37) Processing. Processing means the non-physical processes involved in the refining of non-recycled substances or materials, including the treating, baking, and coating processes used to convert such substances and materials into constituent materials. Processing includes the chemical or thermal processes involved in refining. Processing does not include the physical processes involved in refining.
(38) Procurement chain. Procurement chain means procurement chain as defined in § 1.30D-3(c)(1)(i).
(39) Qualifying battery component content. Qualifying battery component content means qualifying battery component content as defined in § 1.30D-3(c)(2)(iii).
(40) Qualifying critical mineral. Qualifying critical mineral means qualifying critical mineral as defined in § 1.30D-3(c)(1)(ii).
(41) Qualifying critical mineral content. Qualifying critical mineral content means qualifying critical mineral content as defined in § 1.30D-3(c)(1)(iii).
(42) Qualified manufacturer. A qualified manufacturer means a manufacturer that meets the requirements described in section 30D(d)(3) at the time the manufacturer submits a periodic written report to the IRS under a written agreement described in section 30D(d)(3). The term qualified manufacturer does not include any manufacturer whose qualified manufacturer status has been terminated by the IRS. The IRS may terminate qualified manufacturer status for fraud, intentional disregard, or gross negligence with respect to any requirements of section 30D, the section 30D regulations, or any guidance under section 30D, including with respect to the periodic written reports described in section 30D(d)(3) and paragraph (b)(32) of this section and any attestations, documentation, or certifications described in §§ 1.30D-3(d) and 1.30D-6(d), at the time and in the manner provided in the Internal Revenue Bulletin (see § 601.601 of this chapter). See § 1.30D-6(f) for additional rules regarding inaccurate determinations and documentation. The IRS may also terminate qualified manufacturer status for fraud, intentional disregard, or gross negligence with respect to any requirement of section 25E or section 45W or any regulations thereunder.
(43) Recycling—(i) In general. Recycling means the series of activities during which recyclable materials containing critical minerals are transformed into specification-grade commodities and consumed in lieu of virgin materials to create new constituent materials; such activities result in new constituent materials contained in the clean vehicle battery. All physical, chemical, and thermal treatments or modifications that convert recycled feedstocks to specification grade constituent materials are included in recycling. However, recycled applicable critical minerals and associated constituent materials are only subject to the requirements under §§ 1.30D-3(a) and 1.30D-6 if the recyclable material contains an applicable critical mineral, contains material that was transformed from an applicable critical mineral, or if the recyclable material is used to produce an applicable critical mineral at any point during the recycling process. The requirements under §§ 1.30D-3(a) and 1.30D-6 only take into account activities that occurred during the recycling process.
(ii) Example: Recycling of applicable critical mineral. Mineral Z, an applicable critical mineral in a form listed in section 45X(c)(6), was processed by A in a prior production process. Mineral Z subsequently was derived from recyclable material in a form not listed in section 45X(c)(6). Mineral Z was recycled by B. The requirements under §§ 1.30D-3 and 1.30D-6 only take into account the activities conducted by B.
(44) Registered dealer. Registered dealer means registered dealer as defined in § 1.30D-5(b)(8).
(45) Section 30D regulations. Section 30D regulations means § 1.30D-1, this section, and §§ 1.30D-3 through 1.30D-6.
(46) Seller report. Seller report means the report described in section 30D(d)(1)(H) that the seller of a new clean vehicle provides to the taxpayer and the IRS in the manner provided in, and containing the information described in, guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter). The seller report must be transmitted to the IRS electronically. The term seller report does not include a report rejected by the IRS due to the information contained therein not matching IRS records.
(47) Time of sale. Time of sale means time of sale as defined in § 1.30D-5(b)(9).
(48) Total incremental value of battery components. Total incremental value of battery components means total incremental value of battery components as defined in § 1.30D-3(c)(2)(iv).
(49) Total incremental value of North American battery components. Total incremental value of North American battery components means total incremental value of North American battery components as defined in § 1.30D-3(c)(2)(v).
(50) Total traced qualifying value. Total traced qualifying value means total traced qualifying value as defined in § 1.30D-3(c)(1)(iv).
(51) Total value of critical minerals. Total value of critical minerals means total value of critical minerals as defined in § 1.30D-3(c)(1)(v).
(52) Total value of qualifying critical minerals. Total value of qualifying critical minerals means total value of qualifying critical minerals as defined in § 1.30D-3(c)(1)(vi).
(53) Traced qualifying value. Traced qualifying value means traced qualifying value as defined in § 1.30D-3(c)(1)(vii).
(54) Value. Value, with respect to property, means the arm’s-length price that was paid or would be paid for the property by an unrelated purchaser determined in accordance with the principles of section 482 of the Code and regulations thereunder.
(55) Value added. Value added means value added as defined in § 1.30D-3(c)(1)(viii).
(56) Vehicle classification—(i) In general. Vehicle classification means the vehicle classification of a new clean vehicle determined consistent with the rules and definitions provided in 40 CFR 600.315-08 and this paragraph (b)(56) for vans, sport utility vehicles, pickup trucks, and other vehicles.
(ii) Van. Van means a vehicle classified as a van or minivan under 40 CFR 600.315-08(a)(2)(iii) and (iv), or otherwise so classified by the Administrator of the EPA pursuant to 40 CFR 600.315-08(a).
(iii) Sport utility vehicle. Sport utility vehicle means a vehicle classified as a small sport utility vehicle or standard sport utility vehicle under 40 CFR 600.315-08(a)(2)(v) and (vi), or otherwise so classified by the Administrator of the EPA pursuant to 40 CFR 600.315-08(a).
(iv) Pickup truck. Pickup truck means a vehicle classified as a small pickup truck or standard pickup truck under 40 CFR 600.315-08(a)(2)(i) and (ii), or otherwise so classified by the Administrator of the EPA pursuant to 40 CFR 600.315-08(a).
(v) Other vehicle. Other vehicle means any vehicle classified in one of the classes of passenger automobiles listed in 40 CFR 600.315-08(a)(1), or otherwise so classified by the Administrator of the EPA pursuant to 40 CFR 600.315-08(a).
(c) 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 shall continue in effect.
(d) Applicability date. This section applies to taxable years ending after December 4, 2023.
§ 1.30D-3 Critical minerals and battery components requirements.
(a) Critical minerals requirement—(1) In general. The critical minerals requirement described in section 30D(e)(1)(A) of the Internal Revenue Code (Code), with respect to a clean vehicle battery, is met if the qualifying critical mineral content of such battery is equal to or greater than the applicable critical minerals percentage (as defined in paragraph (a)(2) of this section), as certified by the qualified manufacturer, in such form or manner as prescribed by the Secretary of the Treasury or her delegate (Secretary).
(2) Applicable critical minerals percentage—(i) In general. For purposes of paragraph (a)(1) of this section, the applicable critical minerals percentage, which is based on the year in which a vehicle is placed in service by the taxpayer, is set forth in paragraphs (a)(2)(ii) through (vi) of this section. See section 30D(e)(1)(B).
(ii) Vehicles placed in service between April 18, 2023, and December 31, 2023. In the case of a vehicle placed in service after April 17, 2023, and before January 1, 2024, the applicable critical minerals percentage is 40 percent.
(iii) Vehicles placed in service during calendar year 2024. In the case of a vehicle placed in service during calendar year 2024, the applicable critical minerals percentage is 50 percent.
(iv) Vehicles placed in service during calendar year 2025. In the case of a vehicle placed in service during calendar year 2025, the applicable critical minerals percentage is 60 percent.
(v) Vehicles placed in service during calendar year 2026. In the case of a vehicle placed in service during calendar year 2026, the applicable critical minerals percentage is 70 percent.
(vi) Vehicles placed in service during calendar year 2027 and later. In the case of a vehicle placed in service after December 31, 2026, the applicable critical minerals percentage is 80 percent.
(3) Determining qualifying critical mineral content—(i) In general. Qualifying critical mineral content with respect to a clean vehicle battery is calculated as the percentage that results from dividing:
(A) The total traced qualifying value, by
(B) The total value of critical minerals.
(ii) Separate determinations required for each procurement chain. The traced qualifying value of an applicable critical mineral, including the percentage or percentages necessary to determine the traced qualifying value, must be determined separately for each procurement chain.
(iii) Time for determining value. A qualified manufacturer must select a date for determining the values described in paragraphs (a)(3)(i)(A) and (B) of this section. Such date must be after the final processing or recycling step for the applicable critical minerals relevant to the certification described in section 30D(e)(1)(A).
(iv) Application of qualifying critical mineral content to vehicles. A qualified manufacturer may determine qualifying critical mineral content based on the value of the applicable critical minerals actually contained in the clean vehicle battery of a specific vehicle. Alternatively, for purposes of calculating the qualifying critical mineral content for clean vehicle batteries in a group of vehicles, a qualified manufacturer may average the qualifying critical mineral content under this paragraph (a)(3)(iv) over a period of time (for example, a year, a calendar quarter, or a month) with respect to vehicles from the same model line, plant, class, or some combination thereof, with final assembly (as defined in section 30D(d)(5) of the Code and § 1.30D-2(b)(23)) within North America.
(4) Temporary safe harbor for determining qualifying critical mineral content for vehicles for which a qualified manufacturer submits a periodic written report on or after May 6, 2024 and before January 1, 2027—(i) In general. For vehicles for which a qualified manufacturer submits a periodic written report on or after May 6, 2024 and before January 1, 2027, qualifying critical mineral content with respect to a clean vehicle battery may be calculated as the percentage that results from dividing:
(A) The total value of qualifying critical minerals, by
(B) The total value of critical minerals.
(ii) Separate determinations required for each procurement chain. The portion of an applicable critical mineral that is a qualifying critical mineral must be determined separately for each procurement chain.
(iii) Time for determining value. A qualified manufacturer must select a date for determining the values described in paragraphs (a)(4)(i)(A) and (B) of this section. Such date must be after the final processing or recycling step for the applicable critical minerals relevant to the certification described in section 30D(e)(1)(A).
(iv) Application of qualifying critical mineral content to vehicles. A qualified manufacturer may determine qualifying critical mineral content based on the value of the applicable critical minerals actually contained in the clean vehicle battery of a specific vehicle. Alternatively, for purposes of calculating the qualifying critical mineral content for clean vehicle batteries in a group of vehicles, a qualified manufacturer may average the qualifying critical mineral content calculation over a period of time (for example, a year, quarter, or month) with respect to vehicles from the same model line, plant, class, or some combination of thereof, with final assembly (as defined in section 30D(d)(5) of the Code and § 1.30D-2(b)(23)) within North America.
(v) Consistent determination required for all procurement chains. A qualified manufacturer that makes a determination under this paragraph (a)(4) must use the rules of this paragraph for all procurement chains of the clean vehicle battery. If a qualified manufacturer averages qualifying critical mineral content as described in paragraph (a)(4)(iv) of this section, the qualified manufacturer must use the rules of such paragraph for all procurement chains for all clean vehicle batteries in the group of vehicles. Therefore, the qualified manufacturer may not use the rules of paragraph (a)(3) for some procurement chains and the rules of paragraph (a)(4) for other procurement chains for the same clean vehicle battery or clean vehicle batteries in the group of vehicles, as applicable.
(5) Rule for determining qualifying critical mineral content for vehicles for which a qualified manufacturer submitted a periodic written report before May 6, 2024. For vehicles for which a qualified manufacturer submitted a periodic written report before May 6, 2024, qualifying critical mineral content with respect to a clean vehicle battery must be calculated using the method described in paragraph (a)(4) of this section.
(b) Battery components requirement—(1) In general. The battery components requirement described in section 30D(e)(2)(A), with respect to a clean vehicle battery, is met if the qualifying battery component content of such battery is equal to or greater than the applicable battery components percentage (as defined in paragraph (b)(2) of this section), as certified by the qualified manufacturer, in such form or manner as prescribed by the Secretary.
(2) Applicable battery components percentage—(i) In general. For purposes of paragraph (b)(1) of this section, section 30D(e)(2)(B) provides the applicable battery components percentage, which is based on the year in which a vehicle is placed in service by the taxpayer as set forth in paragraphs (b)(2)(ii) through (vii) of this section.
(ii) Vehicles placed in service between April 18, 2023, and December 31, 2023. In the case of a vehicle placed in service after April 17, 2023, and before January 1, 2024, the applicable battery components percentage is 50 percent.
(iii) Vehicles placed in service during calendar year 2024 or 2025. In the case of a vehicle placed in service during calendar year 2024 or 2025, the applicable battery components percentage is 60 percent.
(iv) Vehicles placed in service during calendar year 2026. In the case of a vehicle placed in service during calendar year 2026, the applicable battery components percentage is 70 percent.
(v) Vehicles placed in service during calendar year 2027. In the case of a vehicle placed in service during calendar year 2027, the applicable battery components percentage is 80 percent.
(vi) Vehicles placed in service during calendar year 2028. In the case of a vehicle placed in service during calendar year 2028, the applicable battery components percentage is 90 percent.
(vii) Vehicles placed in service in calendar year 2029 and later. In the case of a vehicle placed in service after December 31, 2028, the applicable battery components percentage is 100 percent.
(3) Determining qualifying battery component content—(i) In general. Qualifying battery component content with respect to a clean vehicle battery of the vehicle is calculated as the percentage that results from dividing—
(A) The total incremental value of North American battery components, by
(B) The total incremental value of battery components.
(ii) Time for determining value. A qualified manufacturer must select a date for determining the incremental values described in paragraphs (b)(3)(i)(A) and (B) of this section. Such date must be after the last manufacturing or assembly step for the battery components relevant to the certification described in section 30D(e)(2)(A).
(iii) Application of qualifying battery component content to vehicles. A qualified manufacturer may determine qualifying battery component content based on the incremental values of the battery components actually contained in the clean vehicle battery of a specific vehicle. Alternatively, for purposes of calculating the qualifying battery component content for clean vehicle batteries in a group of vehicles, a qualified manufacturer may average the qualifying battery component content calculation over a period of time (for example, a year, quarter, or month) with respect to vehicles from the same model line, plant, class, or some combination of thereof, with final assembly (as defined in section 30D(d)(5) of the Code and § 1.30D-2(b)(23)) within North America.
(iv) End point for determination. For a clean vehicle battery that contains a battery module or modules containing battery cells, the calculation under this paragraph (b) takes into account the value of the module and battery components contained in the module. In the case of a clean vehicle battery that contains battery cells but no battery modules, the calculation under this paragraph (b) takes into account the value of the battery cells and battery components contained in the battery cells.
(c) Definitions—(1) Certain terms relevant to the critical minerals requirement. The following definitions apply for purposes of the rules of section 30D(e)(1) and paragraph (a) of this section:
(i) Procurement chain. Procurement chain means a common sequence of extraction, processing, or recycling activities that occur in a common set of locations with respect to an applicable critical mineral, concluding in the production of constituent materials. Sources of a single applicable critical mineral may have multiple procurement chains if, for example, one source of the applicable critical mineral undergoes the same extraction, processing, or recycling process in different locations.
(ii) Qualifying critical mineral—(A) In general. Qualifying critical mineral means an applicable critical mineral that is extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or that is recycled in North America.
(B) Extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect. An applicable critical mineral is extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, if:
(1) Fifty percent or more of the value added to the applicable critical mineral by extraction is derived from extraction that occurred in the United States or in any country with which the United States has a free trade agreement in effect; or
(2) Fifty percent or more of the value added to the applicable critical mineral by processing is derived from processing that occurred in the United States or in any country with which the United States has a free trade agreement in effect.
(C) Recycled in North America. An applicable critical mineral is recycled in North America if 50 percent or more of the value added to the applicable critical mineral by recycling is derived from recycling that occurred in North America.
(iii) Qualifying critical mineral content. Qualifying critical mineral content means the percentage of the value of the applicable critical minerals contained in a clean vehicle battery that is extracted or processed in the United States, or in any country with which the United States has a free trade agreement in effect, or that is recycled in North America.
(iv) Total traced qualifying value. Total traced qualifying value means the sum of the traced qualifying values of all applicable critical minerals contained in a clean vehicle battery.
(v) Total value of critical minerals. Total value of critical minerals means the sum of the values of all applicable critical minerals contained in a clean vehicle battery.
(vi) Total value of qualifying critical minerals. Total value of qualifying critical minerals means the sum of the values of all the qualifying critical minerals contained in a clean vehicle battery.
(vii) Traced qualifying value—(A) Extracted or processed in the United States or in any country with which the United States has a free trade agreement in effect. Traced qualifying value means, with respect to an applicable critical mineral that is extracted and processed into a constituent material, the value of the applicable critical mineral multiplied by the greater of:
(1) The value added to the applicable critical mineral by extraction that occurred in the United States or in any country with which the United States has a free trade agreement in effect, divided by the total value added by from extraction of the applicable critical mineral; or
(2) The value added to the applicable critical mineral by processing that occurred in the United States or in any country with which the United States has a free trade agreement in effect, divided by the total value added by processing of the applicable critical mineral.
(B) Recycled in North America. Traced qualifying value means, with respect to an applicable critical mineral that is recycled into a constituent material, the value of the applicable critical mineral multiplied by the percentage obtained by dividing the value added to the applicable critical mineral by recycling that occurred in North America by the total value added by recycling of the applicable critical mineral.
(viii) Value added. Value added, with respect to recycling, extraction, or processing of an applicable critical mineral, means the increase in the value of the applicable critical mineral attributable to the relevant activity. In the case of multiple applicable critical mineral procurement chains that are part of the same processing or recycling activity, value added should be allocated to each procurement chain based on relative mass.
(2) Certain terms relevant to the battery components requirement. The following definitions apply for purposes of the rules of section 30D(e)(2) and paragraph (b) of this section:
(i) Incremental value. Incremental value, with respect to a battery component, means the value determined by subtracting from the value of that battery component the value of the manufactured or assembled battery components, if any, that are contained in that battery component.
(ii) North American battery component. North American battery component means a battery component substantially all of the manufacturing or assembly of which occurs in North America, without regard to the location of the manufacturing or assembly activities of any components that make up the particular battery component.
(iii) Qualifying battery component content. Qualifying battery component content means the percentage of the value of the battery components contained in a clean vehicle battery that were manufactured or assembled in North America.
(iv) Total incremental value of battery components. Total incremental value of battery components means the sum of the incremental values of each battery component contained in a clean vehicle battery.
(v) Total incremental value of North American battery components. Total incremental value of North American battery components means the sum of the incremental values of each North American battery component contained in a clean vehicle battery.
(d) Upfront review of critical minerals and battery components requirements. For new clean vehicles anticipated to be placed in service after December 31, 2024, the qualified manufacturer must provide attestations, certifications, and documentation demonstrating compliance with the requirements of section 30D(e), at the time and in the manner provided in the Internal Revenue Bulletin (see § 601.601 of this chapter). The IRS, with analytical assistance from the Department of Energy, will review the attestations, certifications, and documentation.
(e) New qualified fuel cell motor vehicles. The requirements of section 30D(e) and this section are deemed to be satisfied with respect to new qualified fuel cell motor vehicles. The amount of the credit with respect to such vehicles, under section 30D(b), is $7,500.
(f) Examples. The following examples illustrate the rules of this section.
(1) Example 1: Critical minerals requirement—(i) Facts. In 2028, Company A uses a clean vehicle battery that contains three applicable critical minerals, which are used for the clean vehicle batteries of the same group of vehicles for the purposes of averaging qualifying critical mineral content under paragraph (a)(3)(iv) of this section.
(A) Applicable critical mineral 1 (ACM-1) has a value of $100. ACM-1 has one procurement chain; in this procurement chain, extraction accounts for 20% ($20) of the total value added of ACM-1 and processing accounts for 80% ($80) of the total value added of ACM-1. Of the value added by extraction, 100% ($20) is in the United States or in a country with which the United States has a free trade agreement in effect. Of the value added by processing, 100% ($80) is in the United States or in a country with which the United States has a free trade agreement in effect.
(B) Applicable critical mineral 2 (ACM-2) has a value of $200. ACM-2 has two procurement chains. The value of ACM-2 is $100 per procurement chain. In the first procurement chain for ACM-2, extraction accounts for 50% ($50) of the value added, while processing accounts for 50% ($50). Of the value added by extraction, 50% ($25) is in United States or in a country with which the United States has a free trade agreement in effect. Of the value added by processing, 25% ($12.50) is in the United States or in a country with which the United States has a free trade agreement in effect. In the second procurement chain for ACM-2, extraction accounts for 50% ($50) of the value added, and processing accounts for 50% ($50) of the value added. Of the value added by extraction, 75% ($37.50) is in the United States or in a country with which the United States has a free trade agreement in effect. Of the value added by processing, 100% ($50) is in the United States or in a country with which the United States has a free trade agreement in effect.
(C) Applicable critical mineral 3 (ACM-3) has a value of $100. ACM-3 has one procurement chain. Extraction accounts for 10% ($10) of the value added and processing accounts for 90% ($90) of the value added. Of the value added by extraction, 50% ($5) is in the United States or in a country with which the United States has a free trade agreement in effect. Of the value added by processing, 75% ($67.50) is in the United States or in a country with which the United States has a free trade agreement in effect.
(ii) Analysis—(A) First, Company A determines each procurement chain. ACM-1 has one procurement chain. ACM-2 has two procurement chains. ACM-3 has one procurement chain.
(B) Second, Company A determines, for each procurement chain, the traced qualifying value, and then determines the total traced qualifying value.
(1) With respect to ACM-1, Company A divides the value added by extraction that is in the United States or in any country with which the United States has a free trade agreement in effect by the total value added from extraction of the applicable critical mineral: $20/$20, which equals 100%. Company A divides the value added by processing that is in the United States or in any country with which the United States has a free trade agreement in effect by the total value added from processing of the applicable critical mineral: $80/$80, which equals 100%. Because the percentages for extraction and processing are equal, that percentage (100%) is used to determine traced qualifying value. Therefore, Company A multiplies 100% by the total value of the applicable critical mineral ($100) to obtain $100 as the traced qualifying value for the procurement chain of ACM-1.
(2) With respect to the first procurement chain of ACM-2, Company A divides the value added by extraction that is in the United States or a country with which the United States has a free trade agreement in effect by the total value added from extraction of the applicable critical mineral: $25/$50, which equals 50%. Company A divides the value added by processing that is in the United States or a country with which the United States has a free trade agreement in effect by the total value added from processing of the applicable critical mineral: $12.50/$50, which equals 25%. Of these percentages, the one for extraction is greater (50%). Therefore, Company A multiplies 50% by the total value of the applicable critical minerals ($100) to obtain $50 as the traced qualifying value for the first procurement chain of ACM-2.
(3) With respect to the second procurement chain of ACM-2, Company A divides the value added by extraction that is in the United States or a country with which the United States has a free trade agreement in effect by the total value added from extraction of the applicable critical mineral: $37.50/$50, which equals 75%. Company A divides the value added by processing that is in the United States or a country with which the United States has a free trade agreement in effect by the total value added from processing of the applicable critical mineral: $50/$50, which equals 100%. Of these percentages, the one for processing is greater (100%). Therefore, Company A multiplies 100% by the total value of the applicable critical mineral ($100) to obtain $100 as the traced qualifying value for the second procurement chain of ACM-2.
(4) With respect to ACM-3, Company A divides the value added by extraction that is in the United States or a country with which the United States has a free trade agreement in effect by the total value added from extraction of the applicable critical mineral: $5/$10, which equals 50%. Company A divides the value added by processing that is in the United States or a country with which the United States has a free trade agreement in effect by the total value added from processing of the applicable critical mineral: $67.50/$90, which equals 75%. Of these percentages, the one for processing is greater (75%). Company A therefore multiplies 75% by the total value of the applicable critical mineral ($100) to obtain $75 as the traced qualifying value for the procurement chain of ACM-3.
(5) The total traced qualifying value is the sum of the traced qualifying values of all applicable critical minerals contained in the clean vehicle battery of the vehicle, or $325 ($100 + $50 + $100 + $75).
(C) Third, Company A determines the qualifying critical mineral content by taking the total traced qualifying value ($325, determined in step 2) divided by the total value of the critical minerals in the battery ($400). The qualifying critical mineral content is therefore 81.25%. Company A uses this percentage to calculate the average qualifying critical mineral content for the clean vehicle batteries of a group of vehicles and compares that average percentage to the applicable critical minerals percentage of section 30D(e)(2) and § 1.30D-3(a)(2).
(2) Example 2: Critical minerals requirement temporary safe harbor—(i) Facts. The facts are the same as in paragraph (f)(1)(i) of this section (facts of Example 1). However, Company A is eligible to apply the temporary safe harbor of § 1.30D-3(a)(4) to determine its qualifying critical mineral content and chooses to do so. The applicable critical minerals are used for the clean vehicle batteries of the same group of vehicles for the purposes of averaging qualifying critical mineral content under paragraph (a)(4)(iv) of this section.
(ii) Analysis—(A) First, Company A determines each procurement chain, as in paragraph (f)(1) of this section (Example 1).
(B) Second, Company A determines whether ACM-1, ACM-2, and ACM-3 are qualifying critical minerals. ACM-1 is a qualifying critical mineral because, for both extraction and processing, 100% of the value added is derived from extraction and processing that occurs in the United States or in a country with which the United States has a free trade agreement in effect. With respect to its first procurement chain, ACM-2 is a qualifying critical mineral because 50% of the value added from extraction is derived from extraction that occurs in the United States or a country with which the United States has a free trade agreement in effect. With respect to its second procurement chain, ACM-2 is a qualifying critical mineral because 75% of the value added from extraction, and 100% of the value added from processing are derived from extraction and processing, respectively, that occur in the United States or in a country with which the United States has a free trade agreement in effect. ACM-3 is a qualifying critical mineral because 50% of the value added for extraction, and 75% of the value added for processing, are derived from extraction and processing, respectively, that occur in the United States or in a country with which the United States has a free trade agreement in effect. The total value of the qualifying critical minerals is the sum of the value of all of the qualifying critical minerals contained in the clean vehicle battery of the vehicle, or $400 ($100 + $100 + $100 + $100).
(C) Third, Company A determines qualifying critical mineral content by taking the total value of qualifying critical minerals ($400, determined in step 2) and dividing by the total value of critical minerals in the battery ($400). The qualifying critical mineral content of the battery is 100%. Company A uses this percentage to calculate average qualifying critical mineral content for the clean vehicle batteries of a group of vehicles and compares that average percentage to the applicable critical minerals percentage of section 30D(e)(2) and § 1.30D-3(a)(2).
(3) Example 3: Battery components requirement—(i) Facts. Company B uses a battery cell comprised of a cathode electrode, anode electrode, separator, and electrolyte. The cathode electrode has a value of $4,000 and is manufactured in North America. The anode electrode has a value of $1,000 and is manufactured outside of North America. The separator has a value of $1,000 and is manufactured in North America. The electrolyte has a value of $800 and is manufactured in North America. The battery cell has a value of $7,500 and is manufactured in North America. The battery components are used for the clean vehicle batteries of the same group of vehicles for the purposes of averaging qualifying critical mineral content under paragraph (b)(3)(iii) of this section.
(ii) Analysis—(A) First, Company B determines whether each battery component in a battery is a North American battery component. The cathode electrode, separator, and battery cell are North American battery components.
(B) Second, Company B determines the total incremental value of North American battery components. The incremental value of the battery cell ($700) is determined by subtracting from the value of the battery cell ($7,500) the total value of its battery components ($6,800). The incremental value of the cathode electrode is $4,000. The incremental value of the separator is $1,000. The incremental value of the electrolyte is $800. The total incremental value of North American battery components is $6,500 ($700 + $4,000 + $1,000 + $800).
(C) Third, Company B determines the total incremental value of battery components. The anode electrode is not a North American battery component because it is manufactured outside of North America. The incremental value of the anode electrode is $1,000. The total incremental value of battery components is $6,500 plus $1,000 or $7,500.
(D) Fourth, Company B determines the qualifying battery component content by taking the total incremental value of North American battery components ($6,500, determined in Step 2) divided by the total incremental value of battery components ($7,500, determined in Step 3). The qualifying battery component content is therefore 86.7%. Company B uses this percentage to calculate the average battery component content for the clean vehicle batteries of a group of vehicles and compares that average percentage to the applicable battery components percentage of section 30D(e)(2) and § 1.30D-3(b)(2).
(g) 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 shall continue in effect.
(h) Applicability date—(1) In general. Except as provided in paragraph (h)(2) of this section, this section applies to new clean vehicles placed in service after April 17, 2023, in taxable years ending after April 17, 2023.
(2) Upfront review and traced qualifying value. Paragraphs (a)(3) and (4) (relating to traced qualifying value test) and (d) (relating to upfront review of critical minerals and battery components requirements) of this section apply to taxable years ending after May 6, 2024.
§ 1.30D-4 Special rules.
(a) No double benefit—(1) In general. Under section 30D(f)(2) of the Internal Revenue Code (Code), the amount of any deduction or other credit allowable under chapter 1 of the Code for a vehicle for which a credit is allowable under section 30D(a) must be reduced by the amount of the section 30D credit allowed for such vehicle (determined without regard to section 30D(c)).
(2) Interaction between section 30D and section 25E credits. A section 30D credit that has been allowed with respect to a vehicle in a taxable year before the year in which a credit under section 25E of the Code is allowable for that vehicle does not reduce the amount allowable under section 25E.
(3) Interaction between section 30D and section 45W credits. Pursuant to section 45W(d)(3) of the Code, no credit is allowed under section 45W with respect to any vehicle for which a credit was allowed under section 30D.
(b) Limitation based on modified adjusted gross income—(1) In general. Under section 30D(f)(10)(A), no credit is allowed under section 30D(a) for any taxable year if—
(i) The lesser of—
(A) The modified adjusted gross income of the taxpayer for such taxable year, or
(B) The modified adjusted gross income of the taxpayer for the preceding taxable year, exceeds
(ii) The threshold amount.
(2) Threshold amount. For purposes of section 30D(f)(10)(A) and paragraph (b)(1) of this section, the threshold amount applies to taxpayers based on the return filing status for the taxable year, as set forth in paragraphs (b)(2)(i) through (iii) of this section. See section 30D(f)(10)(B).
(i) In the case of a joint return or a surviving spouse (as defined in section 2(a) of the Code), the threshold amount is $300,000,
(ii) In the case of a head of household (as defined in section 2(b)), the threshold amount is $225,000.
(iii) In the case of a taxpayer not described in paragraph (b)(2)(i) or (ii) of this section, the threshold amount is $150,000.
(3) Special rule for change in filing status. If the taxpayer’s filing status for the taxable year differs from the taxpayer’s filing status in the preceding taxable year, then the taxpayer satisfies the limitation described in section 30D(f)(10) and paragraph (b)(1) of this section if the taxpayer’s modified adjusted gross income does not exceed the threshold amount in either year based on the applicable filing status for that taxable year.
(4) Application to estates and trusts—(i) Estates and non-grantor trusts. In the case of a new clean vehicle placed in service by an estate or a non-grantor trust, the threshold amount of paragraph (b)(2)(iii) of this section applies for purposes of the modified adjusted gross income limitation of section 30D(f)(10) and this paragraph (b). For purposes of the modified adjusted gross income limitation, an estate or non-grantor trust is treated as having modified adjusted gross income above the threshold amount for any year in which the estate or non-grantor trust is not in existence.
(ii) Grantor trusts. In the case of a new clean vehicle placed in service by a grantor trust, the modified adjusted gross income limitation of section 30D(f)(10) and this paragraph (b) applies based on the modified adjusted gross income of the grantor or other deemed owner of the trust, and not the modified adjusted gross income of the trust or any beneficiary of the trust other than the grantor or other deemed owner.
(5) Application to passthrough entities. In the case of a new clean vehicle placed in service by a partnership or an S corporation, if the section 30D credit is claimed by individuals, non-grantor trusts, or estates who are direct or indirect partners of that partnership or shareholders of that S corporation, the modified gross income limitation of section 30D(f)(10) and this paragraph (b) applies at the partner or shareholder level in accordance with the rules of this paragraph (b).
(6) Other taxpayers. The modified adjusted gross income limitation of this paragraph (b) does not apply in the case of a new clean vehicle placed in service by a corporation or by a taxpayer that is not an individual, estate, trust, or entity as provided in paragraph (b)(4) or (b)(5) of this section.
(c) Credit may generally be claimed on only one tax return—(1) In general. Except as provided in paragraph (c)(2) of this section, the amount of the section 30D credit attributable to a new clean vehicle may be claimed on only one Federal income tax return, including on a joint return in which one of the spouses is listed on the seller report. In the event a new clean vehicle is placed in service by multiple taxpayers who do not file a joint tax return (for example, in the case of married individuals filing separate returns), no allocation or proration of the section 30D credit is available.
(2) Exception for passthrough entities. In the case of a new clean vehicle placed in service by a partnership or an S corporation, the section 30D credit is allocated among the partners of the partnership under § 1.704-1(b)(4)(ii), or among the shareholder(s) of the S corporation under sections 1366(a) and 1377(a) of the Code, and claimed on the Federal income tax returns of the individual partners or S corporation shareholder(s).
(3) Seller reporting—(i) In general. The name and taxpayer identification number of the taxpayer claiming the section 30D credit must be listed on the seller report pursuant to section 30D(d)(1)(H). The credit will be allowed only on the Federal income tax return of the taxpayer listed in the seller report.
(ii) Passthrough entities. In the case of a new clean vehicle placed in service by a partnership or S corporation, the name and tax identification number of the partnership or S corporation that placed the new clean vehicle in service must be listed on the seller report pursuant to section 30D(d)(1)(H).
(4) Example. A married couple jointly purchases and places in service a new clean vehicle that qualifies for the section 30D credit and puts both of their names on the title. The couple files separate Federal income tax returns by using the married filing separately filing status. Only one spouse may claim the section 30D credit with respect to the new clean vehicle on that spouse’s respective return, and the other spouse may not claim any amount of the section 30D credit with respect to that new clean vehicle. The spouse that claims the section 30D credit must be the same spouse listed on the seller report.
(d) Grantor trusts. To the extent that the grantor or another person is treated as owning all or part of a trust under sections 671 through 679 of the Code, the section 30D credit is allocated to such grantor or other person in accordance with § 1.671-3(a)(1).
(e) Recapture rules—(1) In general. This paragraph (e) provides rules under section 30D(f)(5) regarding the recapture of the section 30D credit.
(i) Cancelled sale. If the sale of a vehicle between the taxpayer and seller is cancelled before the taxpayer places the vehicle in service, then—
(A) The taxpayer may not claim the section 30D credit with respect to the vehicle;
(B) The sale will be treated as not having occurred and the vehicle will be considered available for original use by another taxpayer (regardless of the cancelled sale), and the vehicle will, therefore, still be eligible for the section 30D credit upon a subsequent sale that meets the requirements of section 30D and the section 30D regulations;
(C) The seller report must be rescinded by the seller in the manner set forth in guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter); and
(D) The taxpayer cannot make a credit transfer election under section 30D(g) and § 1.30D-5(d) with respect to the cancelled sale.
(ii) Vehicle return. If a taxpayer returns to the seller a vehicle within 30 days of placing such vehicle in service, then—
(A) The taxpayer cannot claim the section 30D credit with respect to the vehicle;
(B) The vehicle will no longer be considered available for original use by another taxpayer, and, therefore, the vehicle will no longer be eligible for the section 30D credit;
(C) The seller report must be updated by the seller in the manner set forth in guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter); and
(D) A credit transfer election under 30D(g) and § 1.30D-5(d), if applicable, will be treated as nullified and any advance payment made pursuant to section 30D(g) and § 1.30D-5(f), if applicable, will be collected from the eligible entity as an excessive payment pursuant to § 1.30D-5(g)(2).
(iii) Resale. If a taxpayer resells a vehicle within 30 days of placing the vehicle in service, then the taxpayer is treated as having purchased such vehicle with the intent to resell, and—
(A) The taxpayer cannot claim the section 30D credit with respect to the vehicle;
(B) The vehicle will no longer be considered available for original use by another taxpayer, and, therefore, the vehicle will no longer be eligible for the section 30D credit;
(C) The seller report will not be updated;
(D) A credit transfer election under 30D(g) and § 1.30D-5(d), if applicable, will remain in effect and any advance payment made pursuant to section 30D(g) and § 1.30D-5(f) will not be collected from the eligible entity; and
(E) The value of any transferred credit will be collected from the taxpayer as an increase in tax imposed by chapter 1 of the Code for the taxable year in which the vehicle is placed in service.
(iv) Other vehicle returns and resales. In the case of a return of a new clean vehicle not described in paragraph (e)(1)(ii) of this section or a resale not described in paragraph (e)(1)(iii) of this section, the vehicle will no longer be considered available for original use by another taxpayer, and, therefore, will no longer be eligible for the section 30D credit upon a subsequent sale.
(2) Recapture rules in the case of a credit transfer election. For additional recapture rules that apply in the case of a credit transfer election, see § 1.30D-5(g)(1). For excessive payment rules that apply in the case of an advance payment made to an eligible entity, see § 1.30D-5(g)(2).
(3) Example: Demonstrator vehicle. A dealer purchases, registers, and titles a vehicle in its name and uses it as a demonstrator vehicle for customers. The dealer resells the vehicle more than 30 days after placing the vehicle in service. The dealer claimed the section 30D credit on its Federal tax return for the tax year the vehicle is placed in service. The credit recapture provision in § 1.30D-4(e)(1)(iii) does not apply because the vehicle was resold more than 30 days after being placed in service.
(f) Seller registration. A seller 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 purposes of filing seller reports (as defined in § 1.30D-2(b)(46)).
(g) Requirement to file return. No section 30D credit is allowed unless the taxpayer claiming such credit files a Federal income tax return or information return, as appropriate, for the taxable year in which the new clean vehicle is placed in service. The 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 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.
(h) Taxpayer reliance on manufacturer certifications and periodic written reports to the IRS. A taxpayer that acquires a new clean vehicle and places it in service may rely on the manufacturer’s certification concerning the manufacturer’s status as a qualified manufacturer. A taxpayer also may rely on the information and certifications contained in the qualified manufacturer’s written reports to the IRS. The procedures for such periodic written reports are established in guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter). To the extent a taxpayer relies on certifications or attestations from the qualified manufacturer regarding certain section 30D requirements, the new clean vehicle the taxpayer acquires will be deemed to meet the requirements of section 30D(d)(1)(C) through (F), (d)(7), and (e). See § 1.30D-5(g)(3)(ii) for an example that illustrates the interplay between the rule in this paragraph (h) and the excessive payment rule in § 1.30D-3(g)(2).
(i) 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 shall continue in effect.
(j) Applicability date. This section applies to taxable years ending after December 4, 2023.
§ 1.30D-5 Transfer of credit.
(a) In general. This section provides rules related to the transfer and advance payment of the section 30D credit pursuant to section 30D(g) of the Internal Revenue Code (Code). Under the rules of section 30D(g) and this section, a taxpayer may elect to transfer a section 30D 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 30D 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 30D(g) and this section. See § 1.30D-2(b) for definitions that are generally applicable to section 30D and the section 30D 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 section 30D(g) and paragraph (d) of this section.
(3) Dealer. Dealer has the meaning provided in section 30D(g)(8), except that, for purposes of this section, the term does not include persons licensed solely by a territory of the United States, and includes a dealer licensed by any jurisdiction (other than one licensed solely by a territory of the United States) that makes sales at sites outside of the jurisdiction in which it is licensed.
(4) Dealer tax compliance. Dealer tax compliance means 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 filing obligations) is treated as in dealer tax compliance.
(5) Electing taxpayer. Electing taxpayer means an individual who purchases and places in service a new clean vehicle and elects to transfer the section 30D credit that would otherwise be allowable to such individual to an eligible entity pursuant to section 30D(g) 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 30D(b)(1) and § 1.30D-4(b) and that the taxpayer will use the vehicle predominantly for personal use.
(6) Eligible entity. Eligible entity has the meaning provided in section 30D(g)(2) and paragraph (f)(2) of this section.
(7) Incentive. For purposes of the eligible entity requirements of section 30D(g)(2)(B)(ii) and (D), incentive means any reduction in price available to the taxpayer from the dealer or manufacturer, including in combination with other incentives, other than a reduction in the form of a partial payment or down payment for the purchase of a new clean vehicle pursuant to section 30D(g)(2)(C).
(8) Registered dealer. Registered dealer means a dealer that has completed registration with the IRS as provided in paragraph (c) of this section.
(9) Sale price. The sale price of a new clean vehicle means the total price agreed upon by the taxpayer and dealer in a written contract at the time of sale, including any delivery charges and after the application of any incentives. The sale price of a new clean vehicle does not include separately stated taxes and fees required by State or local law. The sale price of a new clean vehicle is determined before the application of any trade-in value.
(10) Time of sale. Time of sale means the date the new clean vehicle is placed in service, as defined in § 1.30D-2(b)(36).
(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 30D(g) 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 and paragraph (d) of this section. 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 30D 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 30D(g) and this section are met, the dealer will then be allowed to receive transferred section 30D 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) Credit transfer election by electing taxpayer. For a new clean vehicle placed in service after December 31, 2023, an electing taxpayer may elect to apply the rules of section 30D(g) and this section to make a credit transfer election with respect to the vehicle so that the section 30D credit with respect to the vehicle 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 30D 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. No credit transfer election may be made to transfer an amount of credit that would otherwise be allowed to the electing taxpayer under section 38.
(e) Federal income tax consequences of the 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 credit amount under section 30D that the electing taxpayer elects to transfer to the eligible entity under section 30D(g) 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) and paragraph (d) of this section to an electing taxpayer pursuant to the credit transfer election is not includible in the gross income of the electing taxpayer; and
(iii) The payment made by an eligible entity to an electing taxpayer under section 30D(g)(2)(C) 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 new clean vehicle. Thus, the repayment by the electing taxpayer is included in the electing taxpayer’s basis in the new clean vehicle prior to the application of the basis reduction rule in section 30D(f)(1).
(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 30D credit with respect to the new clean vehicle and may receive an advance payment pursuant to section 30D(g)(7) 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) 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 an electing taxpayer under section 30D(g)(2)(C) 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 new 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 30D credit allowed that is transferred to the eligible entity;
(B) Such section 30D 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 new clean vehicle, or as a reduction in sale price (without the payment of cash) of the new 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) 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 30D credit, regardless of the credit transfer election);
(ii) Section 30D(f)(6) (regarding the election not to take the credit) 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) 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 tax return for the taxable year in which the vehicle is placed in service. See section 6213(g)(2)(T) 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 new clean sport utility 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 30D credit to D. D is a registered dealer and satisfies the requirements to be an eligible entity. The sale price of the vehicle is $57,500. The section 30D credit otherwise allowable to T is $7,500. D makes the payment required to be made to T in the form of a cash payment of $7,500. T uses the $7,500 as a partial payment for the vehicle. T pays D an additional $50,000 from other funds. T’s regular tax liability for the year is less than $7,500.
(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 $7,500, and no amount of the credit will be recaptured from T on the basis that the allowable credit exceeds T’s regular tax liability. D’s $7,500 payment to T is not included in T’s gross income, and the sale price of the vehicle is $57,500 (including both the $7,500 payment and the additional $50,000 paid by T from other funds), prior to the application of the basis reduction rule of section 30D(f)(1). After application of the basis reduction rule, T’s basis in the vehicle is $50,000. D is eligible to receive an advance payment of $7,500 for the transferred section 30D credit as provided in section 30D(g)(7) and paragraph (f) of this section. Under paragraph (e)(2) of this section, D may receive the advance payment irrespective of the fact that D’s regular tax liability is less than $7,500. 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 $7,500 payment to T is not deductible, and D’s amount realized is $57,500 upon the sale of the vehicle (including both the $7,500 payment from D to T that T uses as a partial payment, and the additional $50,000 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 30D 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) 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 30D credit transferred pursuant to section 30D(g) and paragraph (d) of this section. An eligible entity receiving a transferred section 30D 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 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 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 30D(f)(10) and § 1.30D-4(b), then the income tax imposed on such taxpayer under chapter 1 of the Code (chapter 1) for the taxable year in which such 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 return described in paragraph (h) of this section.
(2) Excessive payments—(i) In general. This paragraph provides rules under 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 new 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 section 30D(g)(2) and 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 new clean vehicle to the extent the payment exceeds the amount of the credit that, without application of section 30D(g) 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 the 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 30D(f)(10) and § 1.30D-4(b) is not an excessive payment. Instead, the amount of the advance payment is recaptured from the electing taxpayer under section 30D(g)(10) 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 $7,500 with respect to a credit transferred under section 30D(g)(1) and paragraph (d) of this section for a new clean vehicle V. In 2025, the IRS determines that D was not an eligible entity with respect to new clean vehicle V at the time of the receipt of the advance payment in 2024, because D failed to satisfy one of the requirements of section 30D(g)(2) 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 $7,500 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) 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 $9,000 in 2025 (the taxable year of the IRS determination). This is comprised of the $7,500 value of the credit plus the $1,500 penalty, calculated as a 20% penalty on such $7,500 (20% × $7,500 = $1,500). 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 credit under section 30D(g)(1) and paragraph (d) of this section to E, a registered dealer, for a new clean vehicle V. M, the manufacturer of such vehicle, certified to the IRS that vehicle V was eligible for a $7,500 credit because it met both the critical minerals and the battery components requirements. T transfers the $7,500 credit to E. Subsequent to T’s purchase and election to transfer the $7,500 credit to E, M reports to the IRS that vehicle V was only eligible for a $3,750 credit because it did not meet the critical minerals requirement.
(B) Analysis. Under § 1.30D-4(h), T may rely on the information and certifications provided in M’s written report to the IRS regarding vehicle V’s eligibility for the section 30D credit. 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 $7,500, and T transferred the $7,500 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 or information return, as appropriate, 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 a completed Form 8936, Clean Vehicle Credits, or successor form, and a completed Schedule A (Form 8936), Clean Vehicle Credit Amount, or successor form or schedule, including the vehicle identification number of the new clean vehicle and such other information as provided in forms and instructions.
(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 election to transfer a 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 new clean vehicles placed in service after December 31, 2023, in taxable years ending after December 31, 2023.
§ 1.30D-6 Foreign entity of concern restriction.
(a) In general. This section provides rules related to the excluded entities provision of section 30D(d)(7) of the Internal Revenue Code (Code), which imposes certain restrictions on the extraction, processing, or recycling of applicable critical minerals, and the manufacturing or assembly of battery components contained in a clean vehicle battery by a foreign entity of concern (FEOC). Specifically, section 30D(d)(7) provides that the term new clean vehicle does not include any vehicle placed in service after December 31, 2023, with respect to which any of the battery components in the clean vehicle battery were manufactured or assembled by a FEOC, or any vehicle placed in service after December 31, 2024, with respect to which any of the applicable critical minerals contained in the clean vehicle battery were extracted, processed, or recycled by a FEOC (FEOC restriction). See § 1.30D-2(b) for definitions applicable to section 30D(d)(7) and this section.
(b) Due diligence required—(1) In general. The qualified manufacturer must conduct due diligence with respect to all battery components and applicable critical minerals (and associated constituent materials) that are relevant to determining whether such components or minerals are FEOC-compliant. Such due diligence must comply with standards of tracing for battery materials available in the industry at the time of the attestation or certification that enables the qualified manufacturer to know with reasonable certainty the provenance of applicable critical minerals, associated constituent materials, and battery components. Reasonable reliance on a supplier attestation or certification will be considered due diligence if the qualified manufacturer, or any third-party manufacturer or supplier, does not know or have reason to know that such supplier attestation or certification is incorrect. See paragraph (c)(5) of this section for rules related to third-party manufacturers and suppliers. The qualified manufacturer must conduct due diligence prior to the qualified manufacturer determining the information necessary to establish any compliant-battery ledger under paragraph (d) of this section, and the qualified manufacturer must continue to conduct due diligence on an ongoing basis.
(2) Transition rule for impracticable-to-trace battery materials. For any new clean vehicles for which the qualified manufacturer provides a periodic written report before January 1, 2027, the due diligence requirement of paragraph (b)(1) of this section may be satisfied by excluding identified impracticable-to-trace battery materials. To use this transition rule, a qualified manufacturer must submit a report during the up-front review process described in paragraph (d)(2)(ii) of this section demonstrating how the qualified manufacturer will comply with the FEOC restriction of section 30D(d)(7) and this section, including information about efforts made to date to secure a FEOC-compliant supply of these battery materials once the transition rule is no longer in effect.
(c) FEOC compliance—(1) In general. In the case of any new clean vehicle placed in service after December 31, 2023, the clean vehicle battery or batteries of the vehicle must be FEOC-compliant. A serial number or other identification system must be used to physically track FEOC-compliant batteries to specific new clean vehicles. The determination that a clean vehicle battery is FEOC-compliant is made as follows:
(i) Step 1. The qualified manufacturer determines whether battery components and applicable critical minerals (and associated constituent materials) are FEOC-compliant, in accordance with paragraph (c)(4) of this section.
(ii) Step 2. The FEOC-compliant battery components and FEOC-compliant applicable critical minerals (and associated constituent materials) are physically tracked to specific battery cells, in accordance with paragraph (c)(3)(i) of this section. Alternatively, FEOC-compliant applicable critical minerals and associated constituent materials (but not battery components) may be allocated to battery cells, without physical tracking, in accordance with paragraph (c)(3)(ii) of this section. In addition, the determination of whether a battery cell is FEOC-compliant may be made by applying the transition rule for impracticable-to-trace battery materials, in accordance with paragraph (c)(3)(iii) of this section.
(iii) Step 3. The battery components, including battery cells, are physically tracked to specific clean vehicle batteries, in accordance with paragraph (c)(2) of this section.
(2) FEOC-compliant batteries. The determination that a clean vehicle battery is FEOC-compliant must be made by physically tracking FEOC-compliant battery components (including battery cells) to such battery. With respect to battery cells, a serial number or other identification system must be used to physically track FEOC-compliant battery cells to such batteries.
(3) FEOC-compliant battery cells—(i) In general. Except as provided in paragraph (c)(3)(ii) of this section, the determination that a battery cell contains FEOC-compliant battery components and FEOC-compliant applicable critical minerals and their associated constituent materials must be made by physically tracking FEOC-compliant battery components to specific battery cells, and by physically tracking the mass of FEOC-compliant applicable critical minerals and their associated constituent materials to specific battery cells.
(ii) Allocation-based determination for applicable critical minerals and associated constituent materials of a battery cell—(A) In general. The determination that a battery cell is FEOC-compliant may be based on an allocation of available mass, procured or contracted for, of applicable critical minerals and their associated constituent materials to specific battery cells manufactured or assembled in a battery cell production facility, without the physical tracking of mass of applicable critical minerals and associated constituent materials to specific battery cells.
(B) Allocation limited to applicable critical minerals in the battery cell. The rules of this paragraph (c)(3)(ii) are limited to applicable critical minerals and their associated constituent materials that are incorporated into a battery cell or its battery components. Battery components must be physically tracked.
(C) Separate allocation required for each type of associated constituent material—(1) In general. Any allocation under this paragraph (c)(3)(ii) with respect to the mass of an applicable critical mineral must be made within the type of associated constituent material (such as powders of cathode active materials, powders of anode active materials, or foils) in which such applicable critical mineral is contained. Masses of an applicable critical mineral may not be aggregated across constituent materials with which such applicable critical mineral is not associated, and an allocation of a mass of an applicable critical mineral may not be made from one type of constituent material to another.
(2) Example. M, a qualified manufacturer, operates a battery cell production facility. M manufactures a line of battery cells that contains applicable critical mineral Z (ACM-Z) in constituent material 1 and in constituent material 2. With respect to constituent material 1, M procures 20,000,000 kilograms (kg) of ACM-Z for the battery cell production facility, of which 4,000,000 kg are FEOC-compliant and 16,000,000 kg are not FEOC-compliant. With respect to constituent material 2, M procures another 15,000,000 kg of ACM-Z for the battery cell production facility, of which 7,500,000 kg are FEOC-compliant and 7,500,000 kg are not FEOC-compliant. M determines which battery cells are FEOC-compliant through an allocation-based determination with respect to battery cells manufactured or assembled in the battery cell production facility. Under this paragraph (c)(3)(ii)(C), any allocation with respect to the mass of ACM-Z must be made within the type of constituent material in which ACM-Z is contained. Thus, M may not aggregate the 4,000,000 kg of FEOC-compliant ACM-Z contained in constituent material 1 with the 7,500,000 kg of FEOC-compliant ACM-Z contained in constituent material 2, and allocations may not be made from constituent material 1 to constituent material 2. As a result, overall FEOC compliance is constrained by the 20% of constituent material 1 that is FEOC-compliant due to having 4,000,000 kg of ACM-Z, even though 33% (4,000,000 + 7,500,000)/(20,000,000 + 15,000,000) of the total mass of ACM-Z is FEOC-compliant.
(D) Allocation within each product line of battery cells. Any allocation under this paragraph (c)(3)(ii) with respect to applicable critical minerals and their associated constituent materials must be allocated within one or more specific battery cell product lines of the battery cell production facility.
(E) Limitation on number of FEOC-compliant battery cells. If a qualified manufacturer uses an allocation-based determination described in this paragraph (c)(3)(ii), the number of FEOC-compliant battery cells that can be produced from such allocation may not exceed the total number of battery cells for which there is enough of every FEOC-compliant applicable critical mineral. That number will necessarily be limited by the applicable critical mineral that has the lowest percentage of FEOC-compliant supply. For example, if a qualified manufacturer allocates applicable critical mineral A, which is 20 percent FEOC-compliant, and applicable critical mineral B, which is 60 percent FEOC-compliant, to a battery cell product line, no more than 20 percent of the battery cells in that battery cell product line will be treated as FEOC-compliant.
(iii) Transition rule for impracticable-to-trace battery materials. For any new clean vehicles for which the qualified manufacturer provides a periodic written report before January 1, 2027, the qualified manufacturer’s determination of whether a battery cell is FEOC-compliant under this paragraph (c)(3) may be satisfied by excluding identified impracticable-to-trace battery materials (and associated constituent materials).
(4) FEOC-compliant battery components and applicable critical minerals—(i) In general. The determination of whether battery components and applicable critical minerals (and their associated constituent materials) are FEOC-compliant must be made prior to any determination under paragraphs (c)(2) and (3) of this section.
(ii) Timing of determination of FEOC or FEOC-compliant status. Whether an entity is a FEOC is determined at the time of the entity’s performance of the relevant activity, which for applicable critical minerals is the time of extraction, processing, or recycling, and for battery components is the time of manufacturing or assembly. The determination of whether an applicable critical mineral is FEOC-compliant is determined at the end of processing or recycling the applicable critical mineral into a constituent material, taking into account all applicable steps through and including final processing or recycling.
(iii) Example: Timing of FEOC compliance determination. Mineral X, an applicable critical mineral, was not extracted by a FEOC but was later processed by a FEOC. Mineral X is not FEOC-compliant because one step of the extraction and processing was performed by a FEOC. Therefore, any battery containing Mineral X is not FEOC-compliant.
(5) Third-party manufacturers or suppliers. The determinations under paragraphs (c)(2) through (4) of this section, which are generally made by the qualified manufacturer, may be made by a third-party manufacturer or supplier that operates a battery cell production facility, provided the third-party manufacturer satisfies the requirements of paragraph (c)(5)(i) through (iii) of this section, and paragraph (c)(5)(iv) of this section, if applicable.
(i) Due diligence required. The third-party manufacturer or supplier must perform the due diligence described in paragraph (b) of this section.
(ii) Provision of required information to qualified manufacturer. The third-party manufacturer or supplier must provide the qualified manufacturer of the new clean vehicle information sufficient to establish a basis for the determinations under paragraphs (c)(2) through (4) of this section, including information related to the due diligence described in paragraph (c)(5)(i) of this section.
(iii) Contractual obligations. The third-party manufacturer or supplier must be contractually required to provide the information in paragraph (c)(5)(ii) of this section to the qualified manufacturer and must be contractually required to inform the qualified manufacturer of any change in the supply chain that affects the determinations of FEOC compliance under paragraph (c)(2) through (4) of this section.
(iv) Additional requirements in case of multiple third-party manufacturers or suppliers. If there are multiple third-party manufacturers or suppliers (such as a case in which a qualified manufacturer contracts with a battery manufacturer, that, in turn, contracts with a battery cell manufacturer or supplier that operates a battery cell production facility), the due diligence and information requirements of this paragraph (c) must be satisfied by each third-party manufacturer or supplier, either by providing all required information directly to the qualified manufacturer or indirectly through contractual relationships.
(d) Compliant-battery ledger—(1) In general. For new clean vehicles placed in service after December 31, 2024, the qualified manufacturer must determine and provide information to the IRS to establish a compliant-battery ledger for each calendar year, as described in paragraphs (d)(2)(i) and (ii) of this section. The qualified manufacturer may establish one compliant-battery ledger for all vehicles for a calendar year, or separate ledgers for specific models or classes of vehicles to account for different battery cell chemistries or differing quantities of cells in each clean vehicle battery.
(2) Determination of number of batteries—(i) In general. To establish a compliant-battery ledger for a calendar year, the qualified manufacturer must determine the number of clean vehicle batteries, with respect to new clean vehicles for which the qualified manufacturer anticipates providing a periodic written report during the calendar year, that it knows or reasonably anticipates will be FEOC-compliant, pursuant to the requirements of paragraphs (b) and (c) of this section. The determination is based on the battery components and applicable critical minerals (and associated constituent materials) that are procured or contracted for the calendar year and that are known or reasonably anticipated to be FEOC-compliant battery components or FEOC-compliant applicable critical minerals, as applicable.
(ii) Upfront review. The qualified manufacturer must attest to the number of FEOC-compliant clean vehicle batteries determined under paragraph (d)(2)(i) of this section and provide the basis for the determination, including attestations, certifications and documentation demonstrating compliance with paragraphs (b) and (c) of this section, at the time and in the manner provided in the Internal Revenue Bulletin (see § 601.601 of this chapter). The IRS, with analytical assistance from the Department of Energy (DOE), will review the attestations, certifications, and documentation. Once the IRS determines that the qualified manufacturer provided the required attestations, certifications, and documentation, the IRS will approve or reject the determined number of FEOC-compliant batteries. The IRS may approve the determined number in whole or part. The approved number is the initial balance in the compliant-battery ledger.
(iii) Decrease or increase to compliant-battery ledger—(A) Once the compliant-battery ledger is established with respect to a calendar year, the qualified manufacturer must determine and take into account any decrease in the number of FEOC-compliant batteries for such calendar year and any of the prior three calendar years for which the qualified manufacturer had a compliant-battery ledger, within 30 days of discovery. In addition, the qualified manufacturer may determine and take into account any increase in the number of FEOC-compliant batteries. Such determinations, and any supporting attestations, certifications, and documentation, must be provided on a periodic basis, in accordance with paragraph (d)(2)(ii) of this section and the manner provided in the Internal Revenue Bulletin (see § 601.601 of this chapter).
(B) The decrease described in paragraph (d)(2)(iii)(A) of this section may decrease the compliant-battery ledger below zero, creating a negative balance in the compliant-battery ledger.
(C) If any decrease described in paragraph (d)(2)(iii)(A) of this section is determined subsequent to the calendar year to which it relates, the decrease must be taken into account in the year in which the change is discovered.
(D) Any remaining balance in the compliant-battery ledger at the end of the calendar year, whether positive or negative, will be included in the compliant-battery ledger for the subsequent calendar year. If a qualified manufacturer has multiple negative compliant-battery accounts, any negative balance will first be included in the compliant-battery ledger for the same model or class of vehicles for the subsequent calendar year. However, if there is no ledger for the same model or class of vehicles in the subsequent calendar year, the IRS can account for such negative balance in the ledger of a different model or class of vehicles of the qualified manufacturer.
(3) Tracking FEOC-compliant batteries. The compliant-battery ledger for a calendar year must be updated to track the qualified manufacturer’s available FEOC-compliant batteries, by reducing the balance in the ledger as the qualified manufacturer submits periodic written reports reporting the vehicle identification numbers of new clean vehicles as eligible for the credit under section 30D, at the time and in the manner provided in the Internal Revenue Bulletin (see § 601.601 of this chapter). If the balance in the compliant-battery ledger of the qualified manufacturer for a calendar year is zero or less than zero, the qualified manufacturer may not submit additional periodic written reports with respect to section 30D until the number of available FEOC-compliant batteries is increased as described in paragraph (d)(2)(iii)(A) of this section.
(4) Reconciliation of battery estimates. After the end of any calendar year for which a compliant-battery ledger is established, the IRS may require a qualified manufacturer to provide attestations, certifications, and documentation to support the accuracy of the number of the qualified manufacturer’s FEOC-compliant batteries for such calendar year, including with respect to any changes described in paragraph (d)(2)(iii) of this section, at the time and in the manner provided in the Internal Revenue Bulletin (see § 601.601 of this chapter).
(e) Rule for 2024—(1) In general. For new clean vehicles that are placed in service after December 31, 2023, and prior to January 1, 2025, the qualified manufacturer must determine whether the battery components contained in the vehicles satisfy the requirements of section 30D(d)(7)(B), and whether batteries contained in the vehicles are FEOC-compliant under the rules of paragraphs (b) and (c) of this section. The qualified manufacturer must make an attestation with respect to such determinations at the time and in the manner provided in the Internal Revenue Bulletin (see § 601.601 of this chapter). However, for any new clean vehicles for which the qualified manufacturer provides a periodic written report before June 5, 2024, provided that the qualified manufacturer has determined that its supply chains for each battery component with respect such vehicles contain only FEOC-compliant battery components:
(i) For purposes of paragraphs (c)(2) and (3) of this section, the determination of which battery cells or clean vehicle batteries, as applicable, contain FEOC-compliant battery components may be made without physical tracking;
(ii) For purposes of paragraph (c)(2) of this section, the determination of which clean vehicle batteries contain FEOC-compliant battery cells may be made without physical tracking (and without the use of a serial number or other identification system); and
(iii) For purposes of paragraph (c)(1) of this section, the determination of which vehicles contain FEOC-compliant batteries may be made without physical tracking (and without the use of a serial number or other identification system).
(2) Determination. The determination that a qualified manufacturer’s supply chains of each battery component contain only FEOC-compliant battery components may be made with respect to specific models or classes of vehicles.
(f) Inaccurate attestations, certifications, or documentation—(1) In general. If the IRS determines, with analytical assistance from the DOE and after review of the attestations, certification, and documentation described in paragraph (d) of this section, that a qualified manufacturer has provided attestations, certifications, or documentation that contain inaccurate information, the IRS may take appropriate action, as described in paragraphs (f)(2) and (3) of this section. Such action would affect vehicles and qualified manufacturers on a prospective basis.
(2) Inadvertence—(i) Inaccurate information may be cured by qualified manufacturer. If the IRS determines that the qualified manufacturer’s attestations, certifications, or documentation for a specific new clean vehicle contain inaccurate information due to inadvertence, the qualified manufacturer may, within a reasonable period of time after discovery of the inaccurate information, cure the errors, including by a decrease in the compliant-battery ledger as described in paragraph (d)(2)(iii) of this section. If the qualified manufacturer has multiple compliant-battery ledgers, the IRS may determine which ledger is to be decreased.
(ii) Consequences if errors not cured. If the qualified manufacturer does not cure the errors, the IRS may take any of the following actions:
(A) In the case of a new clean vehicle that has not been placed in service but for which the qualified manufacturer has submitted a periodic written report certifying compliance with the requirements of section 30D(d), the IRS may determine that such vehicle is no longer considered a new clean vehicle eligible for the section 30D credit.
(B) In the case of a new clean vehicle that has not been placed in service and for which the qualified manufacturer has not submitted a periodic written report certifying compliance with the requirements of section 30D(d), the qualified manufacturer may not submit such periodic written report.
(C) In the case of a new clean vehicle that has been placed in service, the IRS may require a decrease in the qualified manufacturer’s compliant-battery ledger as described in paragraph (d)(2)(iii) of this section. If the qualified manufacturer has multiple compliant-battery ledgers, the IRS may determine which ledger is to be decreased.
(3) Intentional disregard or fraud. If the IRS determines that a qualified manufacturer intentionally disregarded attestation, certification, or documentation requirements, or reported information fraudulently or with intentional disregard, the IRS may take any of the actions described in paragraph (f)(3)(i) or (ii) of this section.
(i) All vehicles ineligible for credit. The IRS may determine that all vehicles manufactured by the qualified manufacturer that have not been placed in service are no longer considered new clean vehicles eligible for the section 30D credit.
(ii) Termination of written agreement. The IRS may terminate the written agreement between the IRS and the manufacturer, thereby terminating the manufacturer’s status as a qualified manufacturer. In such instance, the manufacturer would be required to submit a new written agreement to reestablish qualified manufacturer status at the time and in the manner provided in the Internal Revenue Bulletin (see § 601.601 of this chapter).
(g) Rules inapplicable to new qualified fuel cell motor vehicles. The requirements of section 30D(d)(7) and this section do not apply to new qualified fuel cell motor vehicles.
(h) Examples. The following examples illustrate the rules under paragraphs (b) through (e) of this section:
(1) Example 1: In general—(i) Facts. M is a manufacturer of new clean vehicles and batteries. M also manufactures and assembles battery cells at its own battery cell production facility. M manufactures a line of new clean vehicles that it anticipates will be placed in service in calendar year 2025. Each vehicle contains one clean vehicle battery, and each clean vehicle battery contains 1,000 battery cells. All battery cells are produced at the same battery cell production facility. The battery cells are not manufactured or assembled by a FEOC. Each battery cell contains 10 units of battery component A. M has procured or is under contract to procure 10,000,000 units of battery component A for the battery cell production facility, of which 6,000,000 units are from supplier 1 and 4,000,000 units are from supplier 2.
(ii) Analysis—(A) Under paragraph (b) of this section, M must conduct due diligence on all battery components and applicable critical minerals (and associated constituent materials) that are contained in the clean vehicle batteries to determine whether such components or minerals are FEOC-compliant.
(B) Under paragraph (c)(4) of this section, M must first determine whether the battery components and applicable critical minerals (and associated constituent materials) are FEOC-compliant. From its due diligence, M determines that, of the 10,000,000 units of battery component A, the 6,000,000 units from supplier 1 are FEOC-compliant while the 4,000,000 units from supplier 2 are not FEOC-compliant. M determines that all other battery components and applicable critical minerals (and associated constituent materials) of the battery cells are FEOC-compliant, that the battery cell is not manufactured or assembled by a FEOC, and that all battery components (excluding components of the battery cell) of the clean vehicle batteries are FEOC-compliant.
(C) Under paragraph (c)(3) of this section, M must determine which battery cells are FEOC-compliant through the physical tracking of the 6,000,000 units of FEOC-compliant battery component A to determine which 600,000 (6,000,000/10) battery cells are FEOC-compliant. Under paragraph (c)(2) of this section, M must use a serial number or other identification system to track the 600,000 FEOC-compliant battery cells to 600 (600,000/1,000) specific clean vehicle batteries.
(D) Under paragraph (d)(1) of this section, a compliant-battery ledger must be established for calendar year 2025. For purposes of paragraph (d)(2)(i) of this section, M determines that it will manufacture 600 batteries for calendar year 2025 that are FEOC-compliant. Under paragraph (d)(2)(ii) of this section, M attests to the 600 FEOC-compliant batteries and provides the basis for the determination, including attestations, certifications, and documentation demonstrating compliance with paragraphs (b) and (c) of this section. Once the IRS, with analytical assistance from the DOE, approves the number, a compliant-battery ledger is established with a balance of 600 FEOC-compliant batteries.
(E) M manufactures 100 vehicles that it anticipates will be placed in service in 2025, for which it provides periodic written reports providing the vehicle identification numbers of the vehicles and indicating that such vehicles qualify for the section 30D credit. Under paragraph (d)(3) of this section, the compliant-battery ledger is updated to track the number of FEOC-compliant batteries. The number of FEOC-compliant batteries contained in the compliant-battery ledger is reduced from 600 to 500. Assuming all of the other requirements of section 30D and the regulations thereunder are met, the 100 vehicles are new clean vehicles for purposes of section 30D.
(2) Example 2: Rules for third-party suppliers—(i) Facts. The facts are the same as in paragraph (h)(1)(i) of this section (facts of Example 1), except that M contracts with a battery manufacturer, BM, for the provision of clean vehicle batteries, and BM contracts with a battery cell supplier, BCS, that operates a battery cell production facility, for the provision of battery cells.
(ii) Analysis. Under paragraph (c)(5) of this section, BCS may make the determination in paragraphs (c)(2) through (4) of this section, provided that M, BM, and BCS perform due diligence as described in paragraph (b) of this section. In addition, BM and BCS must provide M with information sufficient to establish a basis for the determinations under paragraphs (c)(2) through (4) of this section, including information related to due diligence. Finally, BM and BCS must be contractually required to provide the required information to M, and must also be required to inform the qualified manufacturer of any change in supply chains that affects the determinations of FEOC compliance under paragraphs (c)(2) and (4) of this section. The contractual requirement may be satisfied if BM and BCS each have the contractual obligation to M. Alternatively, it may be satisfied if BCS has a contractual obligation to BM and BM, in turn, has a contractual obligation to M.
(3) Example 3: Applicable critical minerals—(i) Facts. The facts are the same as in paragraph (h)(1)(i) of this section (facts of Example 1). In addition, each battery cell contains 20 kilograms (kg) of applicable critical mineral Z (ACM-Z) contained in a constituent material. M has procured or is under contract to procure 20,000,000 kg of ACM-Z for the battery cell production facility, of which 4,000,000 kg are from supplier 3 and 16,000,000 kg are from supplier 4.
(ii) Analysis. The analysis is the same as in paragraph (h)(1)(ii) of this section (analysis of Example 1). In addition, from its due diligence, M determines that of the 20,000,000 kg of ACM-Z, the 4,000,000 kg from supplier 3 is FEOC-compliant while the 16,000,000 kg from supplier 4 is not FEOC-compliant. Under paragraph (c)(3) of this section, M may determine which battery cells are FEOC-compliant through the physical tracking of the 4,000,000 kg of FEOC-compliant ACM-Z to 200,000 (4,000,000/20) of the battery cells that also contain battery component A, in order to determine which 200,000 battery cells are FEOC-compliant. Alternatively, M may determine which 200,000 battery cells are FEOC-compliant through an allocation of ACM-Z (but not battery component A) to battery cells, without physical tracking, under paragraph (c)(3)(ii) of this section. Under paragraph (c)(2) of this section, M must use a serial number or other identification system to track the 200,000 FEOC-compliant battery cells to 200 (200,000/1,000) specific clean vehicle batteries.
(4) Example 4: Comprehensive example—(i) Facts. M is a manufacturer of new clean vehicles and batteries. M also manufactures or assembles battery cells at its own battery cell production facility. M manufactures a line of new clean vehicles. Each vehicle contains one battery. All battery cells are produced at the same battery cell production facility. The battery cells are not manufactured or assembled by a FEOC. Each battery contains 1,000 NMC 811 battery cells. M anticipates manufacturing 1,000,000 such battery cells for a line of new clean vehicles that it anticipates will be placed in service in calendar year 2025.
(A) Each battery cell contains 1 cathode electrode, 1 anode electrode, 1 separator, and 1 liquid electrolyte. Thus, M procures 1,000,000 units of each battery component for the battery cell production facility.
(B) In addition, each NMC 811 cathode incorporates cathode active material (a constituent material) produced using 2.5 kg of applicable critical minerals, consisting of 0.5 kg of lithium hydroxide, 1.6 kg of nickel sulfate, 0.2 kg of cobalt sulfate, and 0.2 kg of manganese sulfate. Thus, M procures 2,500 metric tons (2.5 kg × 1,000,000/1,000) of applicable critical minerals for the battery cell production facility, resulting in purchase agreements for 500 metric tons of lithium, 1,600 metric tons of nickel, 200 metric tons of cobalt, and 200 metric tons of manganese.
(ii) Analysis—(A) Under paragraph (b) of this section, M must conduct due diligence on all battery components and applicable critical minerals (and associated constituent materials) that are contained in the clean vehicle batteries to determine whether such components or minerals are FEOC-compliant.
(B) Under paragraph (c)(4) of this section, M must first determine whether the battery components and applicable critical minerals (and associated constituent materials) are FEOC-compliant. From its due diligence M determines that, of the cathode electrodes, 600,000 are not manufactured by a FEOC and are therefore FEOC-compliant; 400,000 are manufactured by a FEOC and are therefore non-compliant. Because each battery cell contains 1 cathode electrode, a maximum of 600,000 battery cells would be FEOC-compliant. Of the critical minerals that M has procured, M determines that 250 metric tons of lithium hydroxide, 1,200 metric tons of nickel sulfate, and all of the cobalt sulfate and manganese sulfate are FEOC-compliant. M determines that all other battery components and applicable critical minerals of the battery cells are FEOC-compliant.
(C) Under paragraph (c)(3) of this section, M must determine which battery cells are FEOC-compliant through the physical tracking of battery components. M may determine which battery cells are FEOC-compliant through the physical tracking of applicable critical minerals. Alternatively, M may determine which battery cells are FEOC-compliant through an allocation of applicable critical minerals (and associated constituent materials) but not battery components.
(D) Under an allocation-based determination, M has procured 500 metric tons of lithium hydroxide incorporated into a constituent material for the battery cell production facility, of which 50% (250/500 metric tons) is FEOC-compliant. M has procured 1,600 metric tons of nickel sulfate incorporated into a constituent material for the battery cell production facility, of which 75% (1,200/1,600 metric tons) is FEOC-compliant. Because the lithium hydroxide is the least compliant applicable critical mineral or component, M allocates the FEOC-compliant lithium hydroxide mass to 50% or 500,000 (50% × 1,000,000) of the total battery cells, and to battery cells that contain FEOC-compliant cathode electrodes and have been allocated FEOC-compliant nickel sulfate. Under paragraph (c)(3)(ii)(E) of this section, the quantity of FEOC-compliant battery cells is limited by the applicable critical mineral (lithium hydroxide) that has the lowest percentage (50%) of FEOC-compliant supply.
(E) Under paragraph (c)(2) of this section, M must use a serial number or other identification system to track the 500,000 FEOC-compliant battery cells to 500 (500,000/1,000) specific clean vehicle batteries.
(F) Under paragraph (d)(1) of this section, a compliant-battery ledger must be established for calendar year 2025. For purposes of paragraph (d)(2)(i) of this section, M determines that it will manufacture 500 batteries for calendar year 2025 that are FEOC-compliant, allocating its FEOC-compliant applicable critical minerals to the cells containing FEOC-compliant battery components. Under paragraph (d)(2)(ii) of this section, M attests to the 500 FEOC-compliant batteries and provides the basis for the determination, including attestations, certifications, and documentation demonstrating compliance with paragraphs (b) and (c) of this section. Once the IRS, with analytical assistance from the DOE, has approved the number, a compliant-battery ledger is established with a balance of 500 FEOC-compliant batteries.
(i) 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.
(j) Applicability date. This section applies to new clean vehicles placed in service after December 31, 2023, in taxable years ending after December 31, 2023.
§ 1.31-1 Credit for tax withheld on wages.
(a) The tax deducted and withheld at the source upon wages under chapter 24 of the Internal Revenue Code of 1954 (or in the case of amounts withheld in 1954, under subchapter D, chapter 9 of the Internal Revenue Code of 1939) is allowable as a credit against the tax imposed by Subtitle A of the Internal Revenue Code of 1954, upon the recipient of the income. If the tax has actually been withheld at the source, credit or refund shall be made to the recipient of the income even though such tax has not been paid over to the Government by the employer. For the purpose of the credit, the recipient of the income is the person subject to tax imposed under Subtitle A upon the wages from which the tax was withheld. For instance, if a husband and wife domiciled in a State recognized as a community property State for Federal tax purposes make separate returns, each reporting for income tax purposes one- half of the wages received by the husband, each spouse is entitled to one-half of the credit allowable for the tax withheld at source with respect to such wages.
(b) The tax withheld during any calendar year shall be allowed as a credit against the tax imposed by Subtitle A for the taxable year of the recipient of the income which begins in that calendar year. If such recipient has more than one taxable year beginning in that calendar year, the credit shall be allowed against the tax for the last taxable year so beginning.
(a) In general. (1) In the case of an employee receiving wages from more than one employer during the calendar year, amounts may be deducted and withheld as employee social security tax with respect to more than $3,600 of wages received during the calendar year 1954, and with respect to more than $4,200 of wages received during a calendar year after 1954. For example, employee social security tax may be deducted and withheld on $5,000 of wages received by an employee during a particular calendar year if the employee is paid wages in such year in the amount of $3,000 by one employer and in the amount of $2,000 by another employer. Section 6413(c) (as amended by section 202 of the Social Security Amendments of 1954 (68 Stat. 1089)), permits, under certain conditions, a so-called “special refund” of the amount of employee social security tax deducted and withheld with respect to wages paid to an employee in a calendar year after 1954 in excess of $4,200 ($3,600 for the calendar year 1954) by reason of the employee receiving wages from more than one employer during the calendar year. For provisions relating to the imposition of the employee tax and the limitation on wages, see with respect to the calendar year 1954, sections 1400 and 1426(a)(1) of the Internal Revenue Code of 1939 and, with respect to calendar years after 1954, sections 3101 and 3121(a)(1) of the Internal Revenue Code of 1954, as amended by sections 208(b) and 204(a), respectively, of the Social Security Amendments of 1954 (68 Stat. 1094, 1091).
(2) An employee who is entitled to a special refund of employee tax with respect to wages received during a calendar year and who is also required to file an income tax return for such calendar year (or for his last taxable year beginning in such calendar year) may obtain the benefits of such special refund only by claiming credit for such special refund in the same manner as if such special refund were an amount deducted and withheld as income tax at the source. For provisions for claiming special refunds for 1955 and subsequent years in the case of employees not required to file income tax returns, see section 6413(c) and the regulations thereunder. For provisions relating to such refunds for 1954, see 26 CFR (1939) 408.802 (regulations 128).
(3) The amount of the special refund allowed as a credit shall be considered as an amount deducted and withheld as income tax at the source under chapter 24 of the Internal Revenue Code of 1954 (or, in the case of a special refund for 1954, subchapter D, chapter 9 of the Internal Revenue Code of 1939). If the amount of such special refund when added to amounts deducted and withheld as income tax exceeds the taxes imposed by subtitle A of the Internal Revenue Code of 1954, the amount of the excess constitutes an overpayment of income tax under Subtitle A, and interest on such overpayment is allowed to the extent provided under section 6611 upon an overpayment of income tax resulting from a credit for income tax withheld at source. See section 6401(b).
(b) Federal and State employees and employees of certain foreign corporations. The provisions of this section shall apply to the amount of a special refund allowable to an employee of a Federal agency or a wholly owned instrumentality of the United States, to the amount of a special refund allowable to an employee of any State or political subdivision thereof (or any instrumentality of any one or more of the foregoing), and to the amount of a special refund allowable to employees of certain foreign corporations. See, with respect to such special refunds for 1954, section 1401(d)(4) of the Internal Revenue Code of 1939, and with respect to such special refunds for 1955 and subsequent years, section 6413(c)(2) of the Internal Revenue Code of 1954, as amended by section 202 of the Social Security amendments of 1954.
§ 1.32-2 Earned income credit for taxable years beginning after December 31, 1978.
(a) [Reserved]
(b) Limitations. (1) [Reserved]
(2) Married individuals. No credit is allowed by section 32 in the case of an eligible individual who is married (within the meaning of section 7703 and the regulations thereunder) unless the individual and spouse file a single return jointly (a joint return) for the taxable year (see section 6013 and the regulations thereunder relating to joint returns of income tax by husband and wife). The requirements of the preceding sentence do not apply to an eligible individual who is not considered as married under section 7703(b) and the regulations thereunder (relating to certain married individuals living apart).
(3) Length of taxable year. No credit is allowed by section 32 in the case of a taxable year covering a period of less than 12 months. However, the rule of the preceding sentence does not apply to a taxable year closed by reason of the death of the eligible individual.
(c) Definitions. (1) [Reserved]
(2) Earned income. For purposes of this section, earned income is computed without regard to any community property laws which may otherwise be applicable. Earned income is reduced by any net loss in earnings from self-employment. Earned income does not include amounts received as a pension, an annuity, unemployment compensation, or workmen’s compensation, or an amount to which section 871(a) and the regulations thereunder apply (relating to income of nonresident alien individuals not connected with United States business).
(d) [Reserved]
(e) Coordination of credit with advance payments—(1) Recapture of excess advance payments. If any advance payment of earned income credit under section 3507 is made to an individual by an employer during any calendar year, then the total amount of these advance payments to the individual in that calendar year is treated as an additional amount of tax imposed (by chapter 1 of the Code) upon the individual on the tax return for the individual’s last taxable year beginning in that calendar year.
(2) Reconciliation of payments advanced and credit allowed. Any additional amount of tax under paragraph (e)(1) of this section is not treated as a tax imposed by chapter 1 of the Internal Revenue Code for purposes of determining the amount of any credit (other than the earned income credit) allowable under part IV, subchapter A, chapter 1 of the Internal Revenue Code.
§ 1.32-3 Eligibility requirements after denial of the earned income credit.
(a) In general. A taxpayer who has been denied the earned income credit (EIC), in whole or in part, as a result of the deficiency procedures under subchapter B of chapter 63 (deficiency procedures) is ineligible to file a return claiming the EIC subsequent to the denial until the taxpayer demonstrates eligibility for the EIC in accordance with paragraph (c) of this section. If a taxpayer demonstrates eligibility for a taxable year in accordance with paragraph (c) of this section, the taxpayer need not comply with those requirements for any subsequent taxable year unless the Service again denies the EIC as a result of the deficiency procedures.
(b) Denial of the EIC as a result of the deficiency procedures. For purposes of this section, denial of the EIC as a result of the deficiency procedures occurs when a tax on account of the EIC is assessed as a deficiency (other than as a mathematical or clerical error under section 6213(b)(1)).
(c) Demonstration of eligibility. In the case of a taxpayer to whom paragraph (a) of this section applies, and except as otherwise provided by the Commissioner in the instructions for Form 8862, “Information To Claim Earned Income Credit After Disallowance,” no claim for the EIC filed subsequent to the denial is allowed unless the taxpayer properly completes Form 8862, demonstrating eligibility for the EIC, and otherwise is eligible for the EIC. If any item of information on Form 8862 is incorrect or inconsistent with any item on the return, the taxpayer will be treated as not demonstrating eligibility for the EIC. The taxpayer must follow the instructions for Form 8862 to determine the income tax return to which Form 8862 must be attached. If the taxpayer attaches Form 8862 to an incorrect tax return, the taxpayer will not be relieved of the requirement that the taxpayer attach Form 8862 to the correct tax return and will, therefore, not be treated as meeting the taxpayer’s obligation under paragraph (a) of this section.
(d) Failure to demonstrate eligibility. If a taxpayer to whom paragraph (a) of this section applies fails to satisfy the requirements of paragraph (c) of this section with respect to a particular taxable year, the IRS can deny the EIC as a mathematical or clerical error under section 6213(g)(2)(K).
(e) Special rule where one spouse denied EIC. The eligibility requirements set forth in this section apply to taxpayers filing a joint return where one spouse was denied the EIC for a taxable year prior to marriage and has not established eligibility as either an unmarried or married taxpayer for a subsequent taxable year.
(f) Effective date. This section applies to returns claiming the EIC for taxable years beginning after December 31, 1997, where the EIC was denied for a taxable year beginning after December 31, 1996.
§ 1.34-1 Special rule for owners of certain business entities.
Amounts payable under sections 6420, 6421, and 6427 to a business entity that is treated as separate from its owner under § 1.1361-4(a)(8) (relating to certain qualified subchapter S subsidiaries) or § 301.7701-2(c)(2)(v) of this chapter (relating to certain wholly-owned entities) are, for purposes of section 34, treated as payable to the owner of that entity.
§ 1.35-1 Partially tax-exempt interest received by individuals.
(a) The credit against tax under section 35 shall be allowed only to individuals and if the requirements of both paragraphs (1) and (2) of section 35(a) are met. Where the alternative tax on capital gains is imposed under section 1201(b), the taxable income for such taxable year is the taxable income as defined in section 63, which includes 50 percent of the excess of net long-term capital gain over net short-term capital loss.
(b) For the treatment of partially tax-exempt interest in the case of amounts not allocable to any beneficiary of an estate or trust, see section 642(a)(1), and for treatment of amounts allocable to a beneficiary, see sections 652 and 662. For treatment of partially tax-exempt interest received by a partnership, see section 702(a)(7). For treatment of such interest received by a common trust fund, see section 584(c)(2).
(c) The application of section 35 may be illustrated by the following example:
Partially tax-exempt interest | $4,500 | |
Credit computed under section 35(a); 3 percent of $4,500 | 135 | |
Tax imposed by chapter 1 | 840 | |
Less: | ||
Credit allowed under section 33 | $610 | |
Credit allowed under section 34 | 120 | |
____ | $730 | |
Limitation on credit under section 35(b)(1) | 110 | |
Taxable income | 4,000 | |
Limitation on credit under section 35(b)(2); 3 percent of $4,000 | 120 |
§ 1.35-2 Taxpayers not entitled to credit.
For taxable years beginning after December 31, 1957, no credit shall be allowed under section 35 to a nonresident alien individual with respect to whom a tax is imposed for such taxable year under section 871(a).
§ 1.36B-0 Table of contents.
This section lists the captions contained in §§ 1.36B-1 through 1.36B-6.
(A) Plans other than health reimbursement arrangements (HRAs) or other account-based group health plans described in paragraph (c)(3)(i)(B) of this section.
(B) HRAs and other account-based group health plans integrated with individual health insurance coverage.
(5) Affordable HRA or other account-based group health plan.
(i) In general.
(ii) Required HRA contribution.
(iii) Monthly amounts.
(A) Monthly lowest cost silver plan premium.
(B) Monthly HRA amount.
(iv) Employee safe harbor.
(v) Amounts used for affordability determination.
(vi) Affordability for part-year period.
(vii) Related individual not allowed as a personal exemption deduction.
(viii) Post-employment coverage.
(ix) Examples.
(A) In general.
(B) Individuals enrolled by a taxpayer and claimed by another taxpayer.
(C) Responsibility for advance credit payments for an individual not reported on any taxpayer’s return.
(a) In general.
(1) Employees.
(2) Related individuals
(i) In general.
(ii) Plans providing MV to employees.
(b) MV standard population.
(c) MV percentage.
(1) In general.
(2) Wellness program incentives.
(i) In general.
(ii) Example.
(3) Employer contributions to health savings accounts.
(4) Employer contributions to health reimbursement arrangements.
(5) Expected spending adjustments for health savings accounts and health reimbursement arrangements.
(d) Methods for determining MV.
(e) Scope of essential health benefits and adjustment for benefits not included in MV Calculator.
(f) Actuarial certification.
(1) In general.
(2) Membership in American Academy of Actuaries.
(3) Actuarial analysis.
(4) Use of MV Calculator.
(g) Effective/applicability date.
(1) In general.
(2) Exceptions.
§ 1.36B-1 Premium tax credit definitions.
(a) In general. Section 36B allows a refundable premium tax credit for taxable years ending after December 31, 2013. The definitions in this section apply to this section and §§ 1.36B-2 through 1.36B-5.
(b) Affordable Care Act. The term Affordable Care Act refers to the Patient Protection and Affordable Care Act, Public Law 111-148 (124 Stat. 119 (2010)), and the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), as amended by the Medicare and Medicaid Extenders Act of 2010, Public Law 111-309 (124 Stat. 3285 (2010)), the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, Public Law 112-9 (125 Stat. 36 (2011)), the Department of Defense and Full-Year Continuing Appropriations Act, 2011, Public Law 112-10 (125 Stat. 38 (2011)), and the 3% Withholding Repeal and Job Creation Act, Public Law 112-56 (125 Stat. 711 (2011)).
(c) Qualified health plan. The term qualified health plan has the same meaning as in section 1301(a) of the Affordable Care Act (42 U.S.C. 18021(a)) but does not include a catastrophic plan described in section 1302(e) of the Affordable Care Act (42 U.S.C. 18022(e)).
(d) Family and family size—(1) In general. A taxpayer’s family means the individuals for whom a taxpayer properly claims a deduction for a personal exemption under section 151 for the taxable year. Family size means the number of individuals in the family. Family and family size may include individuals who are not subject to or are exempt from the penalty under section 5000A for failing to maintain minimum essential coverage.
(2) Special rule for tax years to which section 151(d)(5) applies. For taxable years to which section 151(d)(5) applies, a taxpayer’s family means the taxpayer, including both spouses in the case of a joint return, except for individuals who qualify as a dependent of another taxpayer under section 152, and any other individual for whom the taxpayer is allowed a personal exemption deduction and whom the taxpayer properly reports on the taxpayer’s income tax return for the taxable year. For purposes of this paragraph (d)(2), an individual is reported on the taxpayer’s income tax return if the individual’s name and taxpayer identification number (TIN) are listed on the taxpayer’s Form 1040 series return. See § 601.602 of this chapter.
(e) Household income—(1) In general. Household income means the sum of—
(i) A taxpayer’s modified adjusted gross income (including the modified adjusted gross income of a child for whom an election under section 1(g)(7) is made for the taxable year);
(ii) The aggregate modified adjusted gross income of all other individuals who—
(A) Are included in the taxpayer’s family under paragraph (d) of this section; and
(B) Are required to file a return of tax imposed by section 1 for the taxable year.
(2) Modified adjusted gross income. Modified adjusted gross income means adjusted gross income (within the meaning of section 62) increased by—
(i) Amounts excluded from gross income under section 911;
(ii) Tax-exempt interest the taxpayer receives or accrues during the taxable year; and
(iii) Social security benefits (within the meaning of section 86(d)) not included in gross income under section 86.
(f) Dependent. Dependent has the same meaning as in section 152.
(g) Lawfully present. Lawfully present has the same meaning as in 45 CFR 155.20.
(h) Federal poverty line. The Federal poverty line means the most recently published poverty guidelines (updated periodically in the
(i) [Reserved]
(j) Advance credit payment. Advance credit payment means an advance payment of the premium tax credit as provided in section 1412 of the Affordable Care Act (42 U.S.C. 18082).
(k) Exchange. Exchange has the same meaning as in 45 CFR 155.20.
(l) Self-only coverage. Self-only coverage means health insurance that covers one individual and provides coverage for the essential health benefits as defined in section 1302(b)(1) of the Affordable Care Act (42 U.S.C. 18022).
(m) Family coverage. Family coverage means health insurance that covers more than one individual and provides coverage for the essential health benefits as defined in section 1302(b)(1) of the Affordable Care Act (42 U.S.C. 18022).
(n) Rating area. The term rating area has the same meaning as used in section 2701(a)(2) of the Public Health Service Act (42 U.S.C. 300gg(a)(2)) and 45 CFR 147.102(b).
(o) Applicability dates. (1) Except for paragraphs (d)(2), (l), and (m) of this section, this section applies to taxable years ending after December 31, 2013.
(2) Paragraph (d)(2) of this section applies to taxable years ending on or after December 31, 2020.
(3) Paragraphs (l) and (m) of this section apply to taxable years beginning after December 31, 2018. Paragraphs (l) and (m) of § 1.36B-1 as contained in 26 CFR part 1 edition revised as of April 1, 2016, apply to taxable years ending after December 31, 2013, and beginning before January 1, 2019.
(a) In general. An applicable taxpayer (within the meaning of paragraph (b) of this section) is allowed a premium assistance amount only for any month that one or more members of the applicable taxpayer’s family (the applicable taxpayer or the applicable taxpayer’s spouse or dependent)—
(1) Is enrolled in one or more qualified health plans through an Exchange; and
(2) Is not eligible for minimum essential coverage (within the meaning of paragraph (c) of this section) other than coverage described in section 5000A(f)(1)(C) (relating to coverage in the individual market).
(b) Applicable taxpayer—(1) In general. Except as otherwise provided in this paragraph (b), an applicable taxpayer is a taxpayer whose household income is at least 100 percent but not more than 400 percent of the Federal poverty line for the taxpayer’s family size for the taxable year.
(2) Married taxpayers must file joint return—(i) In general. Except as provided in paragraph (b)(2)(ii) of this section, a taxpayer who is married (within the meaning of section 7703) at the close of the taxable year is an applicable taxpayer only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year.
(ii) Victims of domestic abuse and abandonment. Except as provided in paragraph (b)(2)(v) of this section, a married taxpayer satisfies the joint filing requirement of paragraph (b)(2)(i) of this section if the taxpayer files a tax return using a filing status of married filing separately and the taxpayer—
(A) Is living apart from the taxpayer’s spouse at the time the taxpayer files the tax return;
(B) Is unable to file a joint return because the taxpayer is a victim of domestic abuse, as described in paragraph (b)(2)(iii) of this section, or spousal abandonment, as described in paragraph (b)(2)(iv) of this section; and
(C) Certifies on the return, in accordance with the relevant instructions, that the taxpayer meets the criteria of this paragraph (b)(2)(ii).
(iii) Domestic abuse. For purposes of paragraph (b)(2)(ii) of this section, domestic abuse includes physical, psychological, sexual, or emotional abuse, including efforts to control, isolate, humiliate, and intimidate, or to undermine the victim’s ability to reason independently. All the facts and circumstances are considered in determining whether an individual is abused, including the effects of alcohol or drug abuse by the victim’s spouse. Depending on the facts and circumstances, abuse of the victim’s child or another family member living in the household may constitute abuse of the victim.
(iv) Abandonment. For purposes of paragraph (b)(2)(ii) of this section, a taxpayer is a victim of spousal abandonment for a taxable year if, taking into account all facts and circumstances, the taxpayer is unable to locate his or her spouse after reasonable diligence.
(v) Three-year rule. Paragraph (b)(2)(ii) of this section does not apply if the taxpayer met the requirements of paragraph (b)(2)(ii) of this section for each of the three preceding taxable years.
(3) Dependents. An individual is not an applicable taxpayer if another taxpayer may claim a deduction under section 151 for the individual for a taxable year beginning in the calendar year in which the individual’s taxable year begins.
(4) Individuals not lawfully present or incarcerated. An individual who is not lawfully present in the United States or is incarcerated (other than incarceration pending disposition of charges) is not eligible to enroll in a qualified health plan through an Exchange. However, the individual may be an applicable taxpayer if a family member is eligible to enroll in a qualified health plan. See sections 1312(f)(1)(B) and 1312(f)(3) of the Affordable Care Act (42 U.S.C. 18032(f)(1)(B) and (f)(3)) and § 1.36B-3(b)(2).
(5) Individuals lawfully present. If a taxpayer’s household income is less than 100 percent of the Federal poverty line for the taxpayer’s family size and the taxpayer or a member of the taxpayer’s family is an alien lawfully present in the United States, the taxpayer is treated as an applicable taxpayer if—
(i) The lawfully present taxpayer or family member is not eligible for the Medicaid program; and
(ii) The taxpayer would be an applicable taxpayer if the taxpayer’s household income for the taxable year was between 100 and 400 percent of the Federal poverty line for the taxpayer’s family size.
(6) Special rule for taxpayers with household income below 100 percent of the Federal poverty line for the taxable year—(i) In general. A taxpayer (other than a taxpayer described in paragraph (b)(5) of this section) whose household income for a taxable year is less than 100 percent of the Federal poverty line for the taxpayer’s family size is treated as an applicable taxpayer for the taxable year if—
(A) The taxpayer or a family member enrolls in a qualified health plan through an Exchange for one or more months during the taxable year;
(B) An Exchange estimates at the time of enrollment that the taxpayer’s household income will be at least 100 percent but not more than 400 percent of the Federal poverty line for the taxable year;
(C) Advance credit payments are authorized and paid for one or more months during the taxable year; and
(D) The taxpayer would be an applicable taxpayer if the taxpayer’s household income for the taxable year was at least 100 but not more than 400 percent of the Federal poverty line for the taxpayer’s family size.
(ii) Exceptions. This paragraph (b)(6) does not apply for an individual who, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange for the year of coverage. A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. A disregard of the facts is intentional if the taxpayer knows the information provided to the Exchange is inaccurate.
(iii) Advance credit payments are authorized and paid for one or more months during the taxable year; and
(iv) The taxpayer would be an applicable taxpayer if the taxpayer’s household income for the taxable year was between 100 and 400 percent of the Federal poverty line for the taxpayer’s family size.
(7) Computation of premium assistance amounts for taxpayers with household income below 100 percent of the Federal poverty line. If a taxpayer is treated as an applicable taxpayer under paragraph (b)(5) or (b)(6) of this section, the taxpayer’s actual household income for the taxable year is used to compute the premium assistance amounts under § 1.36B-3(d).
(c) Minimum essential coverage—(1) In general. Minimum essential coverage is defined in section 5000A(f) and regulations issued under that section. As described in section 5000A(f), government-sponsored programs, eligible employer-sponsored plans, grandfathered health plans, and certain other health benefits coverage are minimum essential coverage.
(2) Government-sponsored minimum essential coverage—(i) In general. An individual is eligible for government-sponsored minimum essential coverage if the individual meets the criteria for coverage under a government-sponsored program described in section 5000A(f)(1)(A) as of the first day of the first full month the individual may receive benefits under the program, subject to the limitation in paragraph (c)(2)(ii) of this section. The Commissioner may define eligibility for specific government-sponsored programs further in additional published guidance, see § 601.601(d)(2) of this chapter.
(ii) Obligation to complete administrative requirements to obtain coverage. An individual who meets the criteria for eligibility for government-sponsored minimum essential coverage must complete the requirements necessary to receive benefits. An individual who fails by the last day of the third full calendar month following the event that establishes eligibility under paragraph (c)(2)(i) of this section to complete the requirements to obtain government-sponsored minimum essential coverage (other than a veteran’s health care program) is treated as eligible for government-sponsored minimum essential coverage as of the first day of the fourth calendar month following the event that establishes eligibility.
(iii) Special rule for coverage for veterans and other individuals under chapter 17 or 18 of title 38, U.S.C. An individual is eligible for minimum essential coverage under a health care program under chapter 17 or 18 of title 38, U.S.C. only if the individual is enrolled in a health care program under chapter 17 or 18 of title 38, U.S.C. identified as minimum essential coverage in regulations issued under section 5000A.
(iv) Retroactive effect of eligibility determination. If an individual receiving advance credit payments is determined to be eligible for government-sponsored minimum essential coverage that is effective retroactively (such as Medicaid), the individual is treated as eligible for minimum essential coverage under that program no earlier than the first day of the first calendar month beginning after the approval.
(v) Determination of Medicaid or Children’s Health Insurance Program (CHIP) ineligibility. An individual is treated as not eligible for Medicaid, CHIP, or a similar program such as a Basic Health Program, for a period of coverage under a qualified health plan if, when the individual enrolls in the qualified health plan, an Exchange conducts an eligibility determination or, if applicable, eligibility assessment (within the meaning of 45 CFR 155.302(b)) for Medicaid, CHIP, or a similar program and determines or assesses the individual to be not eligible for coverage under the program. This paragraph (c)(2)(v) does not apply for an individual who, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange for the year of coverage. A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. A disregard of the facts is intentional if the taxpayer knows that information provided to the Exchange is inaccurate.
(vi) Examples. The following examples illustrate the provisions of this paragraph (c)(2):
(3) Employer-sponsored minimum essential coverage—(i)(A) Plans other than health reimbursement arrangements (HRAs) or other account-based group health plans described in paragraph (c)(3)(i)(B) of this section. For purposes of section 36B, an employee who may enroll in an eligible employer-sponsored plan (as defined in section 5000A(f)(2) and the regulations under that section) that is minimum essential coverage, and an individual who may enroll in the plan because of a relationship to the employee (a related individual), are eligible for minimum essential coverage under the plan for any month only if the plan is affordable and provides minimum value. Except for the Nonappropriated Fund Health Benefits Program of the Department of Defense, established under section 349 of the National Defense Authorization Act for Fiscal Year 1995 (Public Law 103-337; 10 U.S.C. 1587 note), government-sponsored minimum essential coverage is not an eligible employer-sponsored plan. The Nonappropriated Fund Health Benefits Program of the Department of Defense is considered eligible employer-sponsored coverage, but not government-sponsored coverage, for purposes of determining if an individual is eligible for minimum essential coverage under this section.
(B) HRAs and other account-based group health plans integrated with individual health insurance coverage. An employee who is offered an HRA or other account-based group health plan that would be integrated with individual health insurance coverage (or Medicare Part A and B or Medicare Part C), within the meaning of §§ 54.9802-4 and 54.9815-2711(d)(4) of this chapter, if the employee enrolls in individual health insurance coverage (or Medicare Part A and B or Medicare Part C), and an individual who is offered the HRA or other account-based group health plan because of a relationship to the employee (a related HRA individual), are eligible for minimum essential coverage under an eligible employer-sponsored plan for any month for which the HRA or other account-based group health plan is offered if the HRA or other account-based group health plan is affordable for the month under paragraph (c)(5) of this section or if the employee does not opt out of and waive future reimbursements from the HRA or other account-based group health plan. An HRA or other account-based group health plan described in this paragraph (c)(3)(i)(B) that is affordable for a month under paragraph (c)(5) of this section is treated as providing minimum value for the month. For purposes of paragraphs (c)(3) and (5) of this section, the definitions under § 54.9815-2711(d)(6) of this chapter apply.
(ii) Plan year. For purposes of this paragraph (c)(3), a plan year is an eligible employer-sponsored plan’s regular 12-month coverage period (or the remainder of a 12-month coverage period for a new employee or an individual who enrolls during a special enrollment period). The plan year for an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is the plan’s 12-month coverage period (or the remainder of the 12-month coverage period for a newly eligible individual or an individual who enrolls during a special enrollment period).
(iii) Eligibility for months during a plan year—(A) Failure to enroll in plan. An employee or related individual may be eligible for minimum essential coverage under an eligible employer-sponsored plan for a month during a plan year if the employee or related individual could have enrolled in the plan for that month during an open or special enrollment period for the plan year. If an enrollment period relates to coverage for not only the upcoming plan year (or the current plan year in the case of an enrollment period other than an open enrollment period), but also coverage in one or more succeeding plan years, this paragraph (c)(3)(iii)(A) applies only to eligibility for the coverage in the upcoming plan year (or the current plan year in the case of an enrollment period other than an open enrollment period).
(B) Waiting periods. An employee or related individual is not eligible for minimum essential coverage under an eligible employer-sponsored plan during a required waiting period before the coverage becomes effective.
(C) Example. The following example illustrates the provisions of this paragraph (c)(3)(iii):
(ii) B could have enrolled in X’s plan during the August 1 to September 15 enrollment period. Therefore, unless X’s plan is not affordable for B or does not provide minimum value, B is eligible for minimum essential coverage under X’s plan for the months that B is enrolled in the qualified health plan during X’s plan year (January through September 2015).
(iv) Post-employment coverage. A former employee (including a retiree), or an individual related (within the meaning of paragraph (c)(3)(i) of this section) to a former employee, who may enroll in eligible employer-sponsored coverage or in continuation coverage required under Federal law or a State law that provides comparable continuation coverage is eligible for minimum essential coverage under this coverage only for months that the former employee or related individual is enrolled in the coverage.
(v) Affordable coverage—(A) In general—(1) Affordability for employee. Except as provided in paragraph (c)(3)(v)(A)(3) of this section, an eligible employer-sponsored plan is affordable for an employee if the portion of the annual premium the employee must pay, whether by salary reduction or otherwise (required contribution), for self-only coverage does not exceed the required contribution percentage (as defined in paragraph (c)(3)(v)(C) of this section) of the applicable taxpayer’s household income for the taxable year. See paragraph (c)(5) of this section for rules for when an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is affordable for an employee for a month.
(2) Affordability for related individual.
Except as provided in paragraph (c)(3)(v)(A)(3) of this section, an eligible employer-sponsored plan is affordable for a related individual if the employee’s required contribution for family coverage under the plan does not exceed the required contribution percentage, as defined in paragraph (c)(3)(v)(C) of this section, of the applicable taxpayer’s household income for the taxable year. For purposes of this paragraph (c)(3)(v)(A)(2), an employee’s required contribution for family coverage is the portion of the annual premium the employee must pay for coverage of the employee and all other individuals included in the employee’s family, as defined in § 1.36B-1(d), who are offered coverage under the eligible employer-sponsored plan.
(3) Employee safe harbor. An eligible employer-sponsored plan is not affordable for an employee or a related individual for a plan year if, when the employee or a related individual enrolls in a qualified health plan for a period coinciding with the plan year (in whole or in part), an Exchange determines that the eligible employer-sponsored plan is not affordable for that plan year. This paragraph (c)(3)(v)(A)(3) does not apply to a determination made as part of the redetermination process described in 45 CFR 155.335 unless the individual receiving an Exchange redetermination notification affirmatively responds and provides current information about affordability. This paragraph (c)(3)(v)(A)(3) does not apply for an individual who, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange concerning the portion of the annual premium for coverage for the employee or related individual under the plan. A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. A disregard of the facts is intentional if the taxpayer knows that the information provided to the Exchange is inaccurate. See paragraph (c)(5) of this section for an employee safe harbor that applies when an Exchange determines that an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is not affordable for an employee or a related HRA individual for the period of enrollment in a qualified health plan.
(4) Wellness program incentives. Nondiscriminatory wellness program incentives offered by an eligible employer-sponsored plan that affect premiums are treated as earned in determining an employee’s required contribution for purposes of affordability of an eligible employer-sponsored plan to the extent the incentives relate exclusively to tobacco use. Wellness program incentives that do not relate to tobacco use or that include a component unrelated to tobacco use are treated as not earned for this purpose. For purposes of this section, the term wellness program incentive has the same meaning as the term reward in § 54.9802-1(f)(1)(i) of this chapter.
(5) Employer contributions to HRAs integrated with eligible employer-sponsored plans. Amounts newly made available for the current plan year under an HRA that an employee may use to pay premiums, or may use to pay cost-sharing or benefits not covered by the primary plan in addition to premiums, reduce the employee’s required contribution if the HRA would be integrated, within the meaning of § 54.9815-2711(d)(2) of this chapter, with an eligible employer-sponsored plan for an employee enrolled in the plan. The eligible employer-sponsored plan and the HRA must be offered by the same employer. Employer contributions to an HRA described in this paragraph (c)(3)(v)(A)(5) reduce an employee’s required contribution only to the extent the amount of the annual contribution is required under the terms of the plan or otherwise determinable within a reasonable time before the employee must decide whether to enroll in the eligible employer-sponsored plan.
(6) Employer contributions to cafeteria plans. Amounts made available for the current plan year under a cafeteria plan, within the meaning of section 125, reduce an employee’s or a related individual’s required contribution if—
(i) The employee may not opt to receive the amount as a taxable benefit;
(ii) The employee may use the amount to pay for minimum essential coverage; and
(iii) The employee may use the amount exclusively to pay for medical care, within the meaning of section 213.
(7) Opt-out arrangements. [Reserved]
(8) Multiple offers of coverage. An individual who has offers of coverage under eligible employer-sponsored plans from multiple employers, either as an employee or a related individual, has an offer of affordable coverage if at least one of the offers of coverage is affordable under paragraph (c)(3)(v)(A)(1) or (2) of this section.
(B) Affordability for part-year period. Affordability under paragraph (c)(3)(v)(A) of this section is determined separately for each employment period that is less than a full calendar year or for the portions of an employer’s plan year that fall in different taxable years of an applicable taxpayer (a part-year period). Coverage under an eligible employer-sponsored plan is affordable for a part-year period if the annualized required contribution for self-only coverage, in the case of an employee, or family coverage, in the case of a related individual, under the plan for the part-year period does not exceed the required contribution percentage of the applicable taxpayer’s household income for the taxable year. The employee’s annualized required contribution is the employee’s required contribution for the part-year period times a fraction, the numerator of which is 12 and the denominator of which is the number of months in the part-year period during the applicable taxpayer’s taxable year. Only full calendar months are included in the computation under this paragraph (c)(3)(v)(B).
(C) Required contribution percentage. The required contribution percentage is 9.5 percent. For plan years beginning in a calendar year after 2014, the percentage will be adjusted by the ratio of premium growth to income growth for the preceding calendar year and may be further adjusted to reflect changes to the data used to compute the ratio of premium growth to income growth for the 2014 calendar year or the data sources used to compute the ratio of premium growth to income growth. Premium growth and income growth will be determined under published guidance, see § 601.601(d)(2) of this chapter. In addition, the percentage may be adjusted for plan years beginning in a calendar year after 2018 to reflect rates of premium growth relative to growth in the consumer price index.
(D) Examples. The following examples illustrate the provisions of this paragraph (c)(3)(v). Unless stated otherwise, in each example the taxpayer is single and has no dependents, the employer’s plan is an eligible employer-sponsored plan and provides minimum value, the employee is not eligible for other minimum essential coverage, and the taxpayer, related individual, and employer-sponsored plan have a calendar taxable year:
(1) Example 1: Basic determination of affordability. For all of 2023, taxpayer C works for an employer, X, that offers its employees and their spouses a health insurance plan under which, to enroll in self-only coverage, C must contribute an amount for 2023 that does not exceed the required contribution percentage of C’s 2023 household income. Because C’s required contribution for self-only coverage does not exceed the required contribution percentage of C’s household income, under paragraph (c)(3)(v)(A)(1) of this section, X’s plan is affordable for C, and C is eligible for minimum essential coverage for all months in 2023.
(2) Example 2: Basic determination of affordability for a related individual. (i) The facts are the same as in paragraph (c)(3)(v)(D)(1) of this section (Example 1), except that C is married to J, they file a joint return, and to enroll C and J, X’s plan requires C to contribute an amount for coverage for C and J for 2023 that exceeds the required contribution percentage of C’s and J’s household income. J does not work for an employer that offers employer-sponsored coverage.
(ii) J is a member of C’s family as defined in § 1.36B-1(d). Because C’s required contribution for coverage of C and J exceeds the required contribution percentage of C’s and J’s household income, under paragraph (c)(3)(v)(A)(2) of this section, X’s plan is unaffordable for J. Accordingly, J is not eligible for minimum essential coverage for 2023. However, under paragraph (c)(3)(v)(A)(1) of this section, X’s plan is affordable for C, and C is eligible for minimum essential coverage for all months in 2023.
(3) Example 3: Multiple offers of coverage. The facts are the same as in paragraph (c)(3)(v)(D)(2) of this section (Example 2), except that J works all year for an employer that offers employer-sponsored coverage to employees. J’s required contribution for the cost of self-only coverage from J’s employer does not exceed the required contribution percentage of C’s and J’s household income. Although the coverage offered by C’s employer for C and J is unaffordable for J, the coverage offered by J’s employer is affordable for J. Consequently, under paragraphs (c)(3)(v)(A)(1) and (8) of this section, J is eligible for minimum essential coverage for all months in 2023.
(4) Example 4: Cost of covering individuals not part of taxpayer’s family. (i) D and E are married, file a joint return, and have two children, F and G, under age 26. F is a dependent of D and E, but G is not. D works all year for an employer that offers employer-sponsored coverage to employees, their spouses, and their children under age 26. E, F, and G do not work for employers offering coverage. D’s required contribution for self-only coverage under D’s employer’s coverage does not exceed the required contribution percentage of D’s and E’s household income. D’s required contribution for coverage of D, E, F, and G exceeds the required contribution percentage of D’s and E’s household income, but D’s required contribution for coverage of D, E, and F does not exceed the required contribution percentage of the household income.
(ii) E and F are members of D’s family as defined in § 1.36B-1(d). G is not a member of D’s family under § 1.36B-1(d), because G is not D’s dependent. Under paragraph (c)(3)(v)(A)(1) of this section, D’s employer’s coverage is affordable for D because D’s required contribution for self-only coverage does not exceed the required contribution percentage of D’s and E’s household income. D’s employer’s coverage also is affordable for E and F, because, under paragraph (c)(3)(v)(A)(2) of this section, D’s required contribution for coverage of D, E, and F does not exceed the required contribution percentage of D’s and E’s household income. Although D’s cost to cover D, E, F, and G exceeds the required contribution percentage of D’s and E’s household income, under paragraph (c)(3)(v)(A)(2) of this section, the cost to cover G is not considered in determining whether D’s employer’s coverage is affordable for E and F, regardless of whether G actually enrolls in the plan, because G is not in D’s family. D, E, and F are eligible for minimum essential coverage for all months in 2023. Under paragraph (c)(4)(i) of this section, G is considered eligible for the coverage offered by D’s employer only if G enrolls in the coverage.
(5) Example 5: More than one family member with an employer offering coverage. (i) K and L are married, file a joint return, and have one dependent child, M. K works all year for an employer that offers coverage to employees, spouses, and children under age 26. L works all year for an employer that offers coverage to employees only. K’s required contribution for self-only coverage under K’s employer’s coverage does not exceed the required contribution percentage of K’s and L’s household income. Likewise, L’s required contribution for self-only coverage under L’s employer’s coverage does not exceed the required contribution percentage of K’s and L’s household income. However, K’s required contribution for coverage of K, L, and M exceeds the required contribution percentage of K’s and L’s household income.
(ii) L and M are members of K’s family as defined in § 1.36B-1(d). Under paragraph (c)(3)(v)(A)(1) of this section, K’s employer’s coverage is affordable for K because K’s required contribution for self-only coverage does not exceed the required contribution percentage of K’s and L’s household income. Similarly, L’s employer’s coverage is affordable for L, because L’s required contribution for self-only coverage does not exceed the required contribution percentage of K’s and L’s household income. Thus, K and L are eligible for minimum essential coverage for all months in 2023. However, under paragraph (c)(3)(v)(A)(2) of this section, K’s employer’s coverage is unaffordable for M, because K’s required contribution for coverage of K, L, and M exceeds the required contribution percentage of K’s and L’s household income. Accordingly, M is not eligible for minimum essential coverage for 2023.
(6) Example 6: Multiple offers of coverage for a related individual. (i) The facts are the same as in paragraph (c)(3)(v)(D)(5) of this section (Example 5), except that L works all year for an employer that offers coverage to employees, spouses, and children under age 26. L’s required contribution for coverage of K, L, and M does not exceed the required contribution percentage of K’s and L’s household income.
(ii) Although M is not eligible for affordable employer coverage under K’s employer’s coverage, paragraph (c)(3)(v)(A)(8) of this section dictates that L’s employer coverage must be evaluated to determine whether L’s employer coverage is affordable for M. Under paragraph (c)(3)(v)(A)(2) of this section, L’s employer’s coverage is affordable for M, because L’s required contribution for K, L, and M does not exceed the required contribution percentage of K’s and L’s household income. Accordingly, M is eligible for minimum essential coverage for all months in 2023.
(7) Example 7: Determination of unaffordability at enrollment. (i) Taxpayer D is an employee of Employer X. In November 2013 the Exchange for D’s rating area projects that D’s 2014 household income will be $37,000. It also verifies that D’s required contribution for self-only coverage under X’s health insurance plan will be $3,700 (10 percent of household income). Consequently, the Exchange determines that X’s plan is unaffordable. D enrolls in a qualified health plan and not in X’s plan. In December 2014, X pays D a $2,500 bonus. Thus, D’s actual 2014 household income is $39,500 and D’s required contribution for coverage under X’s plan is 9.4 percent of D’s household income.
(ii) Based on D’s actual 2014 household income, D’s required contribution does not exceed 9.5 percent of household income and X’s health plan is affordable for D. However, when D enrolled in a qualified health plan for 2014, the Exchange determined that X’s plan was not affordable for D for 2014. Consequently, under paragraph (c)(3)(v)(A)(3) of this section, X’s plan is not affordable for D and D is not eligible for minimum essential coverage under X’s plan for 2014.
(8) Example 8: Determination of unaffordability for plan year. The facts are the same as in paragraph (c)(3)(v)(D)(7) of this section (Example 7), except that X’s employee health insurance plan year is September 1 to August 31.
The Exchange for D’s rating area determines in August 2014 that X’s plan is unaffordable for D based on D’s projected household income for 2014. D enrolls in a qualified health plan as of September 1, 2014. Under paragraph (c)(3)(v)(A)(3) of this section, X’s plan is not affordable for D and D is not eligible for minimum essential coverage under X’s plan for the coverage months September to December 2014 and January through August 2015.
(9) Example 9: No affordability information affirmatively provided for annual redetermination. (i) The facts are the same as in paragraph (c)(3)(v)(D)(7) of this section (Example 7), except the Exchange redetermines D’s eligibility for advance credit payments for 2015. D does not affirmatively provide the Exchange with current information regarding affordability and the Exchange determines that D’s coverage is not affordable for 2015 and approves advance credit payments based on information from the previous enrollment period. In 2015, D’s required contribution for coverage under X’s plan is 9.4 percent of D’s household income.
(ii) Because D does not respond to the Exchange notification and the Exchange makes an affordability determination based on information from an earlier year, the employee safe harbor in paragraph (c)(3)(v)(A)(3) of this section does not apply. D’s required contribution for 2015 does not exceed 9.5 percent of D’s household income. Thus, X’s plan is affordable for D for 2015 and D is eligible for minimum essential coverage for all months in 2015.
(10) Example 10: Determination of unaffordability for part of plan year (part-year period). (i) Taxpayer E is an employee of Employer X beginning in May 2015. X’s employee health insurance plan year is September 1 to August 31. E’s required contribution for self-only coverage for May through August is $150 per month ($1,800 for the full plan year). The Exchange for E’s rating area projects E’s household income for purposes of eligibility for advance credit payments as $18,000. E’s actual household income for the 2015 taxable year is $20,000.
(ii) Under paragraph (c)(3)(v)(B) of this section, whether coverage under X’s plan is affordable for E is determined for the remainder of X’s plan year (May through August). E’s required contribution for a full plan year ($1,800) exceeds 9.5 percent of E’s household income (1,800/18,000 = 10 percent). Therefore, the Exchange determines that X’s coverage is unaffordable for May through August. Although E’s actual household income for 2015 is $20,000 (and E’s required contribution of $1,800 does not exceed 9.5 percent of E’s household income), under paragraph (c)(3)(v)(A)(3) of this section, X’s plan is unaffordable for E for the part of the plan year May through August 2015. Consequently, E is not eligible for minimum essential coverage under X’s plan for the period May through August 2015.
(11) Example 11: Affordability determined for part of a taxable year (part-year period). (i) Taxpayer F is an employee of Employer X. X’s employee health insurance plan year is September 1 to August 31. F’s required contribution for self-only coverage for the period September 2014 through August 2015 is $150 per month or $1,800 for the plan year. F does not enroll in X’s plan during X’s open season but enrolls in a qualified health plan for September through December 2014. F does not request advance credit payments and does not ask the Exchange for his rating area to determine whether X’s coverage is affordable for F. F’s household income in 2014 is $18,000.
(ii) Because F is a calendar year taxpayer and Employer X’s plan is not a calendar year plan, F must determine the affordability of X’s coverage for the part-year period in 2014 (September-December) under paragraph (c)(3)(v)(B) of this section. F determines the affordability of X’s plan for the September through December 2014 period by comparing the annual premiums ($1,800) to F’s 2014 household income. F’s required contribution of $1,800 is 10 percent of F’s 2014 household income. Because F’s required contribution exceeds 9.5 percent of F’s 2014 household income, X’s plan is not affordable for F for the part-year period September through December 2014 and F is not eligible for minimum essential coverage under X’s plan for that period.
(iii) F enrolls in Exchange coverage for 2015 and does not ask the Exchange to approve advance credit payments or determine whether X’s coverage is affordable. F’s 2015 household income is $20,000.
(iv) F must determine if X’s plan is affordable for the part-year period January 2015 through August 2015. F’s annual required contribution ($1,800) is 9 percent of F’s 2015 household income. Because F’s required contribution does not exceed 9.5 percent of F’s 2015 household income, X’s plan is affordable for F for the part-year period January through August 2015 and F is eligible for minimum essential coverage for that period.
(12) Example 12: Coverage unaffordable at year end. Taxpayer G is employed by Employer X. In November 2014, the Exchange for G’s rating area determines that G is eligible for affordable employer-sponsored coverage for 2015. G nonetheless enrolls in a qualified health plan for 2015 but does not receive advance credit payments. G’s 2015 household income is less than expected and G’s required contribution for employer-sponsored coverage for 2015 exceeds 9.5 percent of G’s actual 2015 household income. Under paragraph (c)(3)(v)(A)(1) of this section, G is not eligible for minimum essential coverage under X’s plan for 2015.
(13) Wellness program incentives: (i) Employer X offers an eligible employer-sponsored plan with a nondiscriminatory wellness program that reduces premiums by $300 for employees who do not use tobacco products or who complete a smoking cessation course. Premiums are reduced by $200 if an employee completes cholesterol screening within the first six months of the plan year. Employee B does not use tobacco and the cost of his premiums is $3,700. Employee C uses tobacco and the cost of her premiums is $4,000.
(ii) Under paragraph (c)(3)(v)(A)(4) of this section, only the incentives related to tobacco use are counted toward the premium amount used to determine the affordability of X’s plan. C is treated as having earned the $300 incentive for attending a smoking cessation course regardless of whether C actually attends the course. Thus, the required contribution for determining affordability for both Employee B and Employee C is $3,700. The $200 incentive for completing cholesterol screening is treated as not earned and does not reduce their required contribution.
(vi) Minimum value. See § 1.36B-6 for rules for determining whether an eligible employer-sponsored plan provides minimum value. An HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section that is affordable for a month under paragraph (c)(5) of this section is treated as providing minimum value for the month.
(vii) Enrollment in eligible employer-sponsored plan—(A) In general. Except as provided in paragraph (c)(3)(vii)(B) of this section, the requirements of affordability and minimum value do not apply for months that an individual is enrolled in an eligible employer-sponsored plan.
(B) Automatic enrollment. An employee or related individual is treated as not enrolled in an eligible employer-sponsored plan for a month in a plan year or other period for which the employee or related individual is automatically enrolled if the employee or related individual terminates the coverage before the later of the first day of the second full calendar month of that plan year or other period or the last day of any permissible opt-out period provided by the employer-sponsored plan or in regulations to be issued by the Department of Labor, for that plan year or other period.
(C) Examples. The following examples illustrate the provisions of this paragraph (c)(3)(vii):
(4) Special eligibility rules—(i) Related individual. An individual who may enroll in minimum essential coverage because of a relationship to another person eligible for the coverage, but is not included in the family, as defined in § 1.36B-1(d), of the other eligible person, is treated as eligible for such minimum essential coverage only for months that the related individual is enrolled in the coverage.
(ii) Exchange unable to discontinue advance credit payments—(A) In general. If an individual who is enrolled in a qualified health plan for which advance credit payments are made informs the Exchange that the individual is or will soon be eligible for other minimum essential coverage and that advance credit payments should be discontinued, but the Exchange does not discontinue advance credit payments for the first calendar month beginning after the month the individual informs the Exchange, the individual is treated as eligible for the other minimum essential coverage no earlier than the first day of the second calendar month beginning after the first month the individual may enroll in the other minimum essential coverage.
(B) Medicaid or CHIP. If a determination is made that an individual who is enrolled in a qualified health plan for which advance credit payments are made is eligible for Medicaid or CHIP but the advance credit payments are not discontinued for the first calendar month beginning after the eligibility determination, the individual is treated as eligible for the Medicaid or CHIP no earlier than the first day of the second calendar month beginning after the eligibility determination.
(5) Affordable HRA or other account-based group health plan—(i) In general. Except as otherwise provided in this paragraph (c)(5), an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is affordable for a month if the employee’s required HRA contribution (as defined in paragraph (c)(5)(ii) of this section) for the month does not exceed 1/12 of the product of the employee’s household income for the taxable year and the required contribution percentage (as defined in paragraph (c)(3)(v)(C) of this section).
(ii) Required HRA contribution. An employee’s required HRA contribution is the excess of—
(A) The monthly premium for the lowest cost silver plan for self-only coverage of the employee offered in the Exchange for the rating area in which the employee resides, over
(B) The monthly self-only HRA or other account-based group health plan amount (or the monthly maximum amount available to the employee under the HRA or other account-based group health plan if the HRA or other account-based group health plan provides for reimbursements up to a single dollar amount regardless of whether an employee has self-only or other-than-self-only coverage).
(iii) Monthly amounts—(A) Monthly lowest cost silver plan premium. For purposes of paragraph (c)(5)(ii)(A) of this section, the premium for the lowest cost silver plan is determined without regard to any wellness program incentive that affects premiums unless the wellness program incentive relates exclusively to tobacco use, in which case the incentive is treated as earned. If the premium differs for tobacco users and non-tobacco users, the premium for the lowest cost silver plan is the premium that applies to non-tobacco users. For the purpose of this paragraph (c)(5)(iii)(A), the term wellness program incentive has the same meaning as the term reward in 26 CFR 54.9802-1(f)(1)(i). A silver-level qualified health plan that is used for purposes of determining a taxpayer’s lowest cost silver plan for self-only coverage under paragraph (c)(5)(ii)(A) of this section does not cease to be the taxpayer’s lowest cost silver plan for self-only coverage solely because the plan terminates or closes to enrollment during the taxable year.
(B) Monthly HRA amount. For purposes of paragraph (c)(5)(ii)(B) of this section, the monthly self-only HRA or other account-based group health plan amount is the self-only HRA or other account-based group health plan amount newly made available under the HRA for the plan year, divided by the number of months in the plan year the HRA or other account-based group health plan is available to the employee. The monthly maximum amount available to the employee under the HRA or other account-based group health plan is the maximum amount newly made available for the plan year to the employee under the plan, divided by the number of months in the plan year the HRA or other account-based group health plan is available to the employee.
(iv) Employee safe harbor. An HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is not affordable for a month for an employee or a related HRA individual if, when the employee or related HRA individual enrolls in a qualified health plan for a period coinciding with the period the HRA or other account-based group health plan is available to the employee or related HRA individual (in whole or in part), an Exchange determines that the HRA or other account-based group health plan is not affordable for the period of enrollment in the qualified health plan. This paragraph (c)(5)(iv) does not apply to a determination made as part of the redetermination process described in 45 CFR 155.335 unless the individual receiving an Exchange redetermination notification affirmatively responds and provides current information about affordability. This paragraph (c)(5)(iv) does not apply for an individual who, with intentional or reckless disregard for the facts, provides incorrect information to an Exchange concerning the relevant HRA or other account-based group health plan amount offered by the employee’s employer. A reckless disregard of the facts occurs if the taxpayer makes little or no effort to determine whether the information provided to the Exchange is accurate under circumstances that demonstrate a substantial deviation from the standard of conduct a reasonable person would observe. A disregard of the facts is intentional if the taxpayer knows that the information provided to the Exchange is inaccurate.
(v) Amounts used for affordability determination. Only amounts that are newly made available for the plan year of the HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section and determinable within a reasonable time before the beginning of the plan year of the HRA or other account-based health plan are considered in determining whether an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is affordable. Amounts made available for a prior plan year that carry over to the current plan year are not taken into account for purposes of this paragraph (c)(5). Similarly, amounts made available to account for amounts remaining in a different HRA or other account-based group health plan the employer previously provided to the employee and under which the employee is no longer covered are not taken into account for purposes of this paragraph (c)(5).
(vi) Affordability for part-year period. Affordability under this paragraph (c)(5) is determined separately for each employment period that is less than a full calendar year or for the portions of the plan year of an employer’s HRA or other account-based group health plan that fall in different taxable years of an applicable taxpayer. An HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section is affordable for a part-year period if the employee’s annualized required HRA contribution for the part-year period does not exceed the required contribution percentage of the applicable taxpayer’s household income for the taxable year. The employee’s annualized required HRA contribution is the employee’s required HRA contribution for the part-year period times a fraction, the numerator of which is 12 and the denominator of which is the number of months in the part-year period during the applicable taxpayer’s taxable year. Only full calendar months are included in the computation under this paragraph (c)(5)(vi).
(vii) Related individual not allowed as a personal exemption deduction. A related HRA individual is treated as ineligible for minimum essential coverage under an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section for months that the employee opted out of and waived future reimbursements from the HRA or other account-based group health plan and the employee is not allowed a personal exemption deduction under section 151 for the related HRA individual.
(viii) Post-employment coverage. An individual who is offered an HRA or other account-based group health plan described in paragraph (c)(3)(i)(B) of this section, for months after an employee terminates employment with the employer offering the HRA or other account-based group health plan, is eligible for minimum essential coverage under the HRA or other account-based group health plan for months after termination of employment only if the employee does not forfeit or opt out of and waive future reimbursements from the HRA or other account-based group health plan for months after termination of employment.
(ix) Examples. The following examples illustrate the provisions of this paragraph (c)(5). The required contribution percentage is defined in paragraph (c)(3)(v)(C) of this section and is updated annually. Because the required contribution percentage for 2020 has not yet been determined, the examples assume a required contribution percentage for 2020 of 9.78 percent.
(A) Example 1: Determination of affordability—(1) Facts. In 2020 Taxpayer A is single, has no dependents, and has household income of $28,000. A is an employee of Employer X for all of 2020. X offers its employees an HRA described in paragraph (c)(3)(i)(B) of this section that reimburses $2,400 of medical care expenses for single employees with no children (the self-only HRA amount) and $4,000 for employees with a spouse or children for the medical expenses of the employees and their family members. A enrolls in a qualified health plan through the Exchange in the rating area in which A resides and remains enrolled for all of 2020. The monthly premium for the lowest cost silver plan for self-only coverage of A that is offered in the Exchange for the rating area in which A resides is $500.
(2) Conclusion. A’s required HRA contribution, as defined in paragraph (c)(5)(ii) of this section, is $300, the excess of $500 (the monthly premium for the lowest cost silver plan for self-only coverage of A) over $200 (1/12 of the self-only HRA amount provided by Employer X to its employees). In addition, 1/12 of the product of 9.78 percent and A’s household income is $228 ($28,000 × .0978 = $2,738; $2,738/12 = $228). Because A’s required HRA contribution of $300 exceeds $228 (1/12 of the product of 9.78 percent and A’s household income), the HRA is unaffordable for A for each month of 2020 under paragraph (c)(5) of this section. If A opts out of and waives future reimbursements from the HRA, A is not eligible for minimum essential coverage under the HRA for each month of 2020 under paragraph (c)(3)(i)(B) of this section.
(B) Example 2: Determination of affordability for a related HRA individual—(1) Facts. In 2020 Taxpayer B is married and has one child who is a dependent of B for 2020. B has household income of $28,000. B is an employee of Employer X for all of 2020. X offers its employees an HRA described in paragraph (c)(3)(i)(B) of this section that reimburses $3,600 of medical care expenses for single employees with no children (the self-only HRA amount) and $5,000 for employees with a spouse or children for the medical expenses of the employees and their family members. B, B’s spouse, and B’s child enroll in a qualified health plan through the Exchange in the rating area in which B resides and they remain enrolled for all of 2020. No advance credit payments are made for their coverage. The monthly premium for the lowest cost silver plan for self-only coverage of B that is offered in the Exchange for the rating area in which B resides is $500.
(2) Conclusion. B’s required HRA contribution, as defined in paragraph (c)(5)(ii) of this section, is $200, the excess of $500 (the monthly premium for the lowest cost silver plan for self-only coverage for B) over $300 (1/12 of the self-only HRA amount provided by Employer X to its employees). In addition, 1/12 of the product of 9.78 percent and B’s household income for 2020 is $228 ($28,000 × .0978 = $2,738; $2,738/12 = $228). Because B’s required HRA contribution of $200 does not exceed $228 (1/12 of the product of 9.78 percent and B’s household income for 2020), the HRA is affordable for B under paragraph (c)(5) of this section, and B is eligible for minimum essential coverage under an eligible employer-sponsored plan for each month of 2020 under paragraph (c)(3)(i)(B) of this section. In addition, B’s spouse and child are also eligible for minimum essential coverage under an eligible employer-sponsored plan for each month of 2020 under paragraph (c)(3)(i)(B) of this section.
(C) Example 3: Exchange determines that HRA is unaffordable—(1) Facts. The facts are the same as in paragraph (c)(5)(ix)(B) of this section (Example 2), except that B, when enrolling in Exchange coverage for B’s family, received a determination by the Exchange that the HRA was unaffordable, because B believed B’s household income would be lower than it turned out to be. Consequently, advance credit payments were made for their 2020 coverage.
(2) Conclusion. Under paragraph (c)(5)(iv) of this section, the HRA is considered unaffordable for B, B’s spouse, and B’s child for each month of 2020 provided that B did not, with intentional or reckless disregard for the facts, provide incorrect information to the Exchange concerning the HRA.
(D) Example 4: Affordability determined for part of a taxable year (part-year period)—(1) Facts. Taxpayer C is an employee of Employer X. C’s household income for 2020 is $28,000. X offers its employees an HRA described in paragraph (c)(3)(i)(B) of this section that reimburses medical care expenses of $3,600 for single employees without children (the self-only HRA amount) and $5,000 to employees with a spouse or children for the medical expenses of the employees and their family members. X’s HRA plan year is September 1 to August 31 and C is first eligible to participate in the HRA for the period beginning September 1, 2020. C enrolls in a qualified health plan through the Exchange in the rating area in which C resides for all of 2020. The monthly premium for the lowest cost silver plan for self-only coverage of C that is offered in the Exchange for the rating area in which C resides for 2020 is $500.
(2) Conclusion. Under paragraph (c)(3)(vi) of this section, the affordability of the HRA is determined separately for the period September 1 through December 31, 2020, and for the period January 1 through August 31, 2021. C’s required HRA contribution, as defined in paragraph (c)(5)(ii) of this section, for the period September 1 through December 31, 2020, is $200, the excess of $500 (the monthly premium for the lowest cost silver plan for self-only coverage for C) over $300 (1/12 of the self-only HRA amount provided by X to its employees). In addition, 1/12 of the product of 9.78 percent and C’s household income is $228 ($28,000 × .0978 = $2,738; $2,738/12 = $228). Because C’s required HRA contribution of $200 does not exceed $228, the HRA is affordable for C for each month in the period September 1 through December 31, 2020, under paragraph (c)(5) of this section. Affordability for the period January 1 through August 31, 2021, is determined using C’s 2021 household income and required HRA contribution.
(E) Example 5: Carryover amounts ignored in determining affordability—(1) Facts. Taxpayer D is an employee of Employer X for all of 2020 and 2021. D is single. For each of 2020 and 2021, X offers its employees an HRA described in paragraph (c)(3)(i)(B) of this section that provides reimbursement for medical care expenses of $2,400 to single employees with no children (the self-only HRA amount) and $4,000 to employees with a spouse or children for the medical expenses of the employees and their family members. Under the terms of the HRA, amounts that an employee does not use in a calendar year may be carried over and used in the next calendar year. In 2020, D used only $1,500 of her $2,400 maximum reimbursement and the unused $900 is carried over and may be used by D in 2021.
(2) Conclusion. Under paragraph (c)(5)(v) of this section, only the $2,400 self-only HRA amount offered to D for 2021 is considered in determining whether D’s HRA is affordable for D. The $900 carryover amount is not considered in determining the affordability of the HRA.
(d) Applicability date. Paragraphs (b)(2) and (c)(3)(v)(C) of this section apply to taxable years beginning after December 31, 2013.
(e) Applicability dates. (1) Except as provided in paragraphs (e)(2) through (6) of this section, this section applies to taxable years ending after December 31, 2013.
(2) Paragraph (b)(6)(ii), the last three sentences of paragraph (c)(2)(v), paragraph (c)(3)(i), paragraph (c)(3)(iii)(A), the last three sentences of paragraph (c)(3)(v)(A)(3), and paragraph (c)(4) of this section apply to taxable years beginning after December 31, 2016. Paragraphs (b)(6), (c)(3)(i), (c)(3)(iii)(A), and (c)(4) of § 1.36B-2 as contained in 26 CFR part I edition revised as of April 1, 2016, apply to taxable years ending after December 31, 2013, and beginning before January 1, 2017.
(3) Paragraphs (c)(3)(i)(B) and (c)(5) of this section, and the last sentences of paragraphs (c)(3)(ii), (c)(3)(v)(A)(1) through (3), and (c)(3)(vi) of this section apply to taxable years beginning on or after January 1, 2020.
(4) Paragraph (c)(4)(i) of this section applies to taxable years ending on or after December 31, 2020.
(5) The first two sentences of paragraph (c)(3)(v)(A)(2), paragraph (c)(3)(v)(A)(8), the second sentence of paragraph (c)(3)(v)(B), paragraphs (c)(3)(v)(D)(1) through (6), and the first sentences of paragraphs (c)(3)(v)(D)(8) and (9) of this section apply to taxable years beginning after December 31, 2022.
(6) The first sentence of paragraph (c)(2)(v) of this section applies to taxable years beginning on or after January 1, 2025. The first sentence of paragraph (c)(2)(v) of this section, as contained in 26 CFR part 1 edition revised as of April 1, 2024, applies to taxable years ending after December 31, 2013, and beginning before January 1, 2025.
(a) In general. A taxpayer’s premium assistance credit amount for a taxable year is the sum of the premium assistance amounts determined under paragraph (d) of this section for all coverage months for individuals in the taxpayer’s family.
(b) Definitions. For purposes of this section—
(1) The cost of a qualified health plan is the premium the plan charges; and
(2) The term coverage family means, in each month, the members of a taxpayer’s family for whom the month is a coverage month.
(c) Coverage month—(1) In general. A month is a coverage month for an individual if—
(i) As of the first day of the month, the individual is enrolled in a qualified health plan through an Exchange;
(ii) The taxpayer pays the taxpayer’s share of the premium for the individual’s coverage under the plan for the month by the unextended due date for filing the taxpayer’s income tax return for that taxable year, the full premium for the month is paid by advance credit payments, or the amount of the premium paid (including by advance credit payments) for the month is sufficient to avoid termination of the individual’s coverage for that month under one of the scenarios described in paragraph (c)(4) of this section; and
(iii) The individual is not eligible for the full calendar month for minimum essential coverage (within the meaning of § 1.36B-2(c)) other than coverage described in section 5000A(f)(1)(C) (relating to coverage in the individual market).
(2) Certain individuals enrolled during a month. If an individual enrolls in a qualified health plan and the enrollment is effective on the date of the individual’s birth, adoption, or placement for adoption or in foster care, or on the effective date of a court order, the individual is treated as enrolled as of the first day of that month for purposes of this paragraph (c).
(3) Premiums paid for a taxpayer. Premiums another person pays for coverage of the taxpayer, taxpayer’s spouse, or dependent are treated as paid by the taxpayer.
(4) Scenarios for payments sufficient to avoid coverage termination. The scenarios under which the amount of the premium paid (including by advance credit payments) for the month is sufficient to avoid termination of an individual’s coverage for that month under paragraph (c)(1)(ii) of this section are the following:
(i) The first month of a grace period described in 45 CFR 156.270(d) for the individual.
(ii) A month for which a premium payment threshold under 45 CFR 155.400(g) has been met and for which month the issuer of the individual’s qualified health plan provides coverage.
(iii) A month for which a State department of insurance has, during a declared emergency, issued an order prohibiting the issuer of the individual’s qualified health plan from terminating the individual’s coverage for the month irrespective of whether the full premium for the month is paid.
(5) Appeals of coverage eligibility. A taxpayer who is eligible for advance credit payments pursuant to an eligibility appeal decision implemented under 45 CFR 155.545(c)(1)(ii) for coverage of a member of the taxpayer’s coverage family who, based on the appeal decision, retroactively enrolls in a qualified health plan is considered to have met the requirement in paragraph (c)(1)(ii) of this section for a month if the taxpayer pays the taxpayer’s share of the premiums for coverage under the plan for the month on or before the 120th day following the date of the appeals decision.
(6) Examples. The following examples illustrate the provisions of this paragraph (c):
(ii) Under paragraph (c)(1) of this section, January through May 2014 are coverage months for M. June through December 2014 are not coverage months because M is eligible for minimum essential coverage for those months. Thus, under paragraph (a) of this section, M’s premium assistance credit amount for 2014 is the sum of the premium assistance amounts for the months January through May.
(ii) Under paragraph (c)(1) of this section, January through December of 2014 are coverage months for N and August through December are coverage months for N and S. N’s premium assistance credit amount for 2014 is the sum of the premium assistance amounts for these coverage months.
(ii) Because P claims T as a dependent, P (and not O) may claim a premium tax credit for coverage for T. See § 1.36B-2(a). Under paragraph (c)(2) of this section, the premiums that O pays for coverage for T are treated as paid by P. Thus, the months when T is covered by a qualified health plan and not eligible for other minimum essential coverage are coverage months under paragraph (c)(1) of this section in computing P’s premium tax credit under paragraph (a) of this section.
(d) Premium assistance amount—(1) Premium assistance amount. The premium assistance amount for a coverage month is the lesser of—
(i) The enrollment premiums, which are the premiums for the month for one or more qualified health plans in which a taxpayer or a member of the taxpayer’s family enrolls, reduced by any amounts—
(A) Refunded in the same taxable year as the premium liability is incurred; or
(B) Unpaid as of the unextended due date for filing the taxpayer’s income tax return for the taxable year that includes the month; or
(ii) The excess of the adjusted monthly premium for the applicable benchmark plan (benchmark plan premium) over
(2) Examples. The following examples illustrate the rules of paragraph (d)(1) of this section.
(ii) The issuer of R’s qualified health plan is notified that R died on September 20. The issuer terminates coverage as of that date and refunds the remaining portion of the September enrollment premiums ($150) for R’s coverage.
(iii) R’s premium assistance amount for each coverage month from January through August is $420 (the lesser of $450 and $420). Under paragraph (d)(1) of this section, R’s premium assistance amount for September is the lesser of the enrollment premiums for the month, reduced by any amounts that were refunded ($300 ($450-$150)) or the difference between the benchmark plan premium and the contribution amount for the month ($420). R’s premium assistance amount for September is $300, the lesser of $420 and $300.
(e) Adjusted monthly premium. The adjusted monthly premium is the premium an issuer would charge for the applicable benchmark plan to cover all members of the taxpayer’s coverage family, adjusted only for the age of each member of the coverage family as allowed under section 2701 of the Public Health Service Act (42 U.S.C. 300gg). The adjusted monthly premium is determined without regard to any premium discount or rebate under the wellness discount demonstration project under section 2705(d) of the Public Health Service Act (42 U.S.C. 300gg-4(d)) and may not include any adjustments for tobacco use. The adjusted monthly premium for a coverage month is determined as of the first day of the month.
(f) Applicable benchmark plan—(1) In general. Except as otherwise provided in this paragraph (f), the applicable benchmark plan for each coverage month is the second-lowest-cost silver plan (as described in section 1302(d)(1)(B) of the Affordable Care Act (42 U.S.C. 18022(d)(1)(B))) offered to the taxpayer’s coverage family through the Exchange for the rating area where the taxpayer resides for—
(i) Self-only coverage for a taxpayer—
(A) Who computes tax under section 1(c) (unmarried individuals other than surviving spouses and heads of household) and is not allowed a deduction under section 151 for a dependent for the taxable year;
(B) Who purchases only self-only coverage for one individual; or
(C) Whose coverage family includes only one individual; and
(ii) Family coverage for all other taxpayers.
(2) Family coverage. The applicable benchmark plan for family coverage is the second lowest-cost silver plan that would cover the members of the taxpayer’s coverage family (such as a plan covering two adults if the members of a taxpayer’s coverage family are two adults).
(3) Silver-level plan not covering pediatric dental benefits. If one or more silver-level qualified health plans offered through an Exchange do not cover pediatric dental benefits, the premium for the applicable benchmark plan is determined based on the second lowest-cost option among—
(i) The silver-level qualified health plans that are offered by the Exchange to the members of the coverage family and that provide pediatric dental benefits; and
(ii) The silver-level qualified health plans that are offered by the Exchange to the members of the coverage family that do not provide pediatric dental benefits in conjunction with the second lowest-cost portion of the premium for a stand-alone dental plan (within the meaning of section 1311(d)(2)(B)(ii) of the Affordable Care Act (42 U.S.C. 18031(d)(2)(B)(ii)) offered by the Exchange to the members of the coverage family that is properly allocable to pediatric dental benefits determined under guidance issued by the Secretary of Health and Human Services.
(4) Family members residing in different locations. If members of a taxpayer’s coverage family reside in different locations, the taxpayer’s benchmark plan premium is the sum of the premiums for the applicable benchmark plans for each group of coverage family members residing in different locations, based on the plans offered to the group through the Exchange where the group resides. If all members of a taxpayer’s coverage family reside in a single location that is different from where the taxpayer resides, the taxpayer’s benchmark plan premium is the premium for the applicable benchmark plan for the coverage family, based on the plans offered through the Exchange to the taxpayer’s coverage family for the rating area where the coverage family resides.
(5) Single or multiple policies needed to cover the family—(i) Policy covering a taxpayer’s family. If a silver-level plan or a stand-alone dental plan offers coverage to all members of a taxpayer’s coverage family who reside in the same location under a single policy, the premium (or allocable portion thereof, in the case of a stand-alone dental plan) taken into account for the plan for purposes of determining the applicable benchmark plan under paragraphs (f)(1), (f)(2), and (f)(3) of this section is the premium for this single policy.
(ii) Policy not covering a taxpayer’s family. If a silver-level qualified health plan or a stand-alone dental plan would require multiple policies to cover all members of a taxpayer’s coverage family who reside in the same location (for example, because of the relationships within the family), the premium (or allocable portion thereof, in the case of a standalone dental plan) taken into account for the plan for purposes of determining the applicable benchmark plan under paragraphs (f)(1), (f)(2), and (f)(3) of this section is the sum of the premiums (or allocable portion thereof, in the case of a stand-alone dental plan) for self-only policies under the plan for each member of the coverage family who resides in the same location.
(6) Plan not available for enrollment. A silver-level qualified health plan or a stand-alone dental plan that is not open to enrollment by a taxpayer or family member at the time the taxpayer or family member enrolls in a qualified health plan is disregarded in determining the applicable benchmark plan.
(7) Benchmark plan terminates or closes to enrollment during the year. A silver-level qualified health plan or a stand-alone dental plan that is used for purposes of determining the applicable benchmark plan under this paragraph (f) for a taxpayer does not cease to be the applicable benchmark plan for a taxable year solely because the plan or a lower cost plan terminates or closes to enrollment during the taxable year.
(8) Only one silver-level plan offered to the coverage family. If there is only one silver-level qualified health plan or one stand-alone dental plan offered through an Exchange that would cover all members of a taxpayer’s coverage family who reside in the same location (whether under one policy or multiple policies), that plan is used for purposes of determining the taxpayer’s applicable benchmark plan.
(9) Examples. The following examples illustrate the rules of this paragraph (f). Unless otherwise stated, in each example the plans are open to enrollment to a taxpayer or family member at the time of enrollment and are offered through the Exchange for the rating area where the taxpayer resides:
(ii) Under paragraph (f)(4) of this section, because the members of N’s coverage family reside in different locations, the monthly premium for N’s applicable benchmark plan is the sum of $1,000, the monthly premiums for the applicable benchmark plan for N, O, and P, who reside together, and $220, the monthly applicable benchmark plan premium for Q, who resides in a different location than N, O, and P. Consequently, the premium for N’s applicable benchmark plan is $1,220.
(ii) Under paragraph (f)(5) of this section, Issuer C’s silver-level plan that covers R, S, and T under one policy ($1,200 monthly premium) and Issuer A’s and Issuer B’s silver-level plans that do not cover R, S and T under one policy are considered in determining R’s and S’s applicable benchmark plan. In addition, under paragraph (f)(5)(ii) of this section, in determining R’s and S’s applicable benchmark plan, the premium taken into account for Issuer A’s plan is $1,450 (the aggregate premiums for self-only policies covering R ($400), S ($450), and T ($600) and the premium taken into account for Issuer B’s plan is $1,000 (the aggregate premiums for self-only policies covering R ($250), S ($300), and T ($450). Consequently, R’s and S’s applicable benchmark plan is the Issuer C silver-level plan covering R’s and S’s coverage family and the premium for their applicable benchmark plan is $1,200.
(ii) Under paragraph (f)(5)(ii) of this section, because multiple policies are required to cover U and V, the members of U’s coverage family who reside together in Location 1, the premium taken into account in determining U’s benchmark plan is $1,000, the sum of the premiums for the second-lowest aggregate cost of self-only policies covering U ($400) and V ($600) offered by the Exchange to U and V for the rating area in which U and V reside. Under paragraph (f)(5)(i) of this section, because all silver-level plans offered by the Exchange in which W and X reside cover W and X under a single policy, the premium for W and X’s coverage that is taken into account in determining U’s benchmark plan is $500, the second-lowest cost silver policy covering W and X that is offered by the Exchange for the rating area in which W and X reside. Under paragraph (f)(4) of this section, because the members of U’s coverage family reside in different locations, U’s monthly benchmark plan premium is $1,500, the sum of the premiums for the applicable benchmark plans for each group of family members residing in different locations ($1,000 for U and V, who reside in Location 1, plus $500 for W and X, who reside in Location 2).
(ii) Under paragraphs (f)(1), (f)(2), (f)(3), and (f)(7) of this section, the silver-level plan that BB and CC use to determine their applicable benchmark plan for all coverage months during the year is Plan 2. The applicable benchmark plan that DD uses to determine DD’s applicable benchmark plan is Plan 3, because Plan 2 is not open to enrollment through the Exchange when the DD family enrolls.
(g) Applicable percentage—(1) In general. The applicable percentage multiplied by a taxpayer’s household income determines the taxpayer’s annual required share of premiums for the benchmark plan. The required share is divided by 12 and this monthly amount is subtracted from the adjusted monthly premium for the applicable benchmark plan when computing the premium assistance amount. The applicable percentage is computed by first determining the percentage that the taxpayer’s household income bears to the Federal poverty line for the taxpayer’s family size. The resulting Federal poverty line percentage is then compared to the income categories described in the table in paragraph (g)(2) of this section. An applicable percentage within an income category increases on a sliding scale in a linear manner and is rounded to the nearest one-hundredth of one percent. For taxable years beginning after December 31, 2014, the applicable percentages in the table will be adjusted by the ratio of premium growth to income growth for the preceding calendar year and may be further adjusted to reflect changes to the data used to compute the ratio of premium growth to income growth for the 2014 calendar year or the data sources used to compute the ratio of premium growth to income growth. Premium growth and income growth will be determined in accordance with published guidance, see § 601.601(d)(2) of this chapter. In addition, the applicable percentages in the table may be adjusted for taxable years beginning after December 31, 2018, to reflect rates of premium growth relative to growth in the consumer price index.
(2) Applicable percentage table.
Household income percentage of Federal poverty line | Initial percentage | Final percentage |
---|---|---|
Less than 133% | 2.0 | 2.0 |
At least 133% but less than 150% | 3.0 | 4.0 |
At least 150% but less than 200% | 4.0 | 6.3 |
At least 200% but less than 250% | 6.3 | 8.05 |
At least 250% but less than 300% | 8.05 | 9.5 |
At least 300% but not more than 400% | 9.5 | 9.5 |
(3) Examples. The following examples illustrate the rules of this paragraph (g):
(ii) Determine the excess of B’s Federal poverty line percentage (210) over the initial household income percentage in B’s range (200), which is 10. Determine the difference between the initial household income percentage in the taxpayer’s range (200) and the ending household income percentage in the taxpayer’s range (250), which is 50. Divide the first amount by the second amount:
(iv) Multiply the amount in the first calculation (.20) by the amount in the second calculation (1.75) and add the product (.35) to the initial premium percentage in B’s range (6.3), resulting in B’s applicable percentage of 6.65:
(h) Plan covering more than one family—(1) In general. If a qualified health plan covers more than one family under a single policy, each applicable taxpayer covered by the plan may claim a premium tax credit, if otherwise allowable. Each taxpayer computes the credit using that taxpayer’s applicable percentage, household income, and the benchmark plan that applies to the taxpayer under paragraph (f) of this section. In determining whether the amount computed under paragraph (d)(1)(i) of this section (the premiums for the qualified health plan in which the taxpayer enrolls) is less than the amount computed under paragraph (d)(1)(ii) of this section (the benchmark plan premium minus the product of household income and the applicable percentage), the premiums paid are allocated to each taxpayer in proportion to the premiums for each taxpayer’s applicable benchmark plan.
(2) Example. The following example illustrates the rules of this paragraph (h):
(ii) Under paragraph (h)(1) of this section, both A and B may claim premium tax credits. A computes her credit using her household income, a family size of three, and a benchmark plan premium of $12,000. B computes his credit using his household income, a family size of one, and a benchmark plan premium of $6,000.
(iii) In determining whether the amount in paragraph (d)(1)(i) of this section (the premiums for the qualified health plan A and B purchase) is less than the amount in paragraph (d)(1)(ii) of this section (the benchmark plan premium minus the product of household income and the applicable percentage), the $15,000 premiums paid are allocated to A and B in proportion to the premiums for their applicable benchmark plans. Thus, the portion of the premium allocated to A is $10,000 ($15,000 × $12,000/$18,000) and the portion allocated to B is $5,000 ($15,000 × $6,000/$18,000).
(i) [Reserved]
(j) Additional benefits—(1) In general. If a qualified health plan offers benefits in addition to the essential health benefits a qualified health plan must provide under section 1302 of the Affordable Care Act (42 U.S.C. 18022), or a State requires a qualified health plan to cover benefits in addition to these essential health benefits, the portion of the premium for the plan properly allocable to the additional benefits is excluded from the monthly premiums under paragraph (d)(1)(i) or (ii) of this section. Premiums are allocated to additional benefits before determining the applicable benchmark plan under paragraph (f) of this section.
(2) Method of allocation. The portion of the premium properly allocable to additional benefits is determined under guidance issued by the Secretary of Health and Human Services. See section 36B(b)(3)(D).
(3) Examples. The following examples illustrate the rules of this paragraph (j):
(ii) Under this paragraph (j), B’s enrollment premiums and the benchmark plan premium are reduced by the portion of the premium that is allocable to the additional benefits provided under that plan. Therefore, B’s monthly enrollment premiums are reduced to $335 ($370 − $35) and B’s benchmark plan premium is reduced to $400 ($440 − $40). B’s premium assistance amount for a coverage month is $335, the lesser of $335 (B’s enrollment premiums, reduced by the portion of the premium allocable to additional benefits) and $340 (B’s benchmark plan premium, reduced by the portion of the premium allocable to additional benefits ($400), minus B’s $60 contribution amount).
(k) Pediatric dental coverage—(1) In general. For purposes of determining the amount of the monthly premium a taxpayer pays for coverage under paragraph (d)(1)(i) of this section, if an individual enrolls in both a qualified health plan and a plan described in section 1311(d)(2)(B)(ii) of the Affordable Care Act (42 U.S.C. 13031(d)(2)(B)(ii)) (a stand-alone dental plan), the portion of the premium for the stand-alone dental plan that is properly allocable to pediatric dental benefits that are essential benefits required to be provided by a qualified health plan is treated as a premium payable for the individual’s qualified health plan.
(2) Method of allocation. The portion of the premium for a stand-alone dental plan properly allocable to pediatric dental benefits is determined under guidance issued by the Secretary of Health and Human Services.
(3) Example. The following example illustrates the rules of this paragraph (k):
(ii) Under this paragraph (k), the amount C pays for premiums (Amount 1) for purposes of computing the premium assistance amount is increased by the portion of the premium for the stand-alone dental plan allocable to pediatric dental benefits that are essential health benefits. Thus, the amount of the premiums for the plan in which C enrolls is treated as $620 for purposes of computing the amount of the premium tax credit. C’s premium assistance amount for each coverage month is $605 (Amount 2), the lesser of Amount 1 (increased by the premiums allocable to pediatric dental benefits) and Amount 2.
(l) Families including individuals not lawfully present—(1) In general. If one or more individuals for whom a taxpayer is allowed a deduction under section 151 are not lawfully present (within the meaning of § 1.36B-1(g)), the percentage a taxpayer’s household income bears to the Federal poverty line for the taxpayer’s family size for purposes of determining the applicable percentage under paragraph (g) of this section is determined by excluding individuals who are not lawfully present from family size and by determining household income in accordance with paragraph (l)(2) of this section.
(2) Revised household income computation—(i) Statutory method. For purposes of paragraph (l)(1) of this section, household income is equal to the product of the taxpayer’s household income (determined without regard to this paragraph (l)(2)) and a fraction—
(A) The numerator of which is the Federal poverty line for the taxpayer’s family size determined by excluding individuals who are not lawfully present; and
(B) The denominator of which is the Federal poverty line for the taxpayer’s family size determined by including individuals who are not lawfully present.
(ii) Comparable method. The Commissioner may describe a comparable method in additional published guidance, see § 601.601(d)(2) of this chapter.
(m) Applicability date. Paragraph (g)(1) of this section applies to taxable years beginning after December 31, 2013.
(n) Applicability dates. (1) Except as provided in paragraphs (n)(2) through (4) of this section, this section applies to taxable years ending after December 31, 2013.
(2) Paragraphs (d)(1) (except for paragraph (d)(1)(i)) and (2) of this section apply to taxable years beginning after December 31, 2016. Paragraph (f) of this section applies to taxable years beginning after December 31, 2018. Paragraphs (d)(1) and (2) of § 1.36B-3, as contained in 26 CFR part 1 edition revised as of April 1, 2016, apply to taxable years ending after December 31, 2013, and beginning before January 1, 2017. Paragraph (f) of § 1.36B-3, as contained in 26 CFR part 1 edition revised as of April 1, 2016, applies to taxable years ending after December 31, 2013, and beginning before January 1, 2019.
(3) Paragraphs (c)(4) through (6) of this section apply to taxable years beginning on or after January 1, 2025. Paragraph (c)(4) of this section, as contained in 26 CFR part 1 edition revised as of April 1, 2024, applies to taxable years beginning after December 31, 2016, and beginning before January 1, 2025. Paragraph (c)(5) of this section, as contained in 26 CFR part 1 edition revised as of April 1, 2024, applies to taxable years ending after December 31, 2013, and beginning before January 1, 2025.
(4) Paragraph (d)(1)(i) of this section applies to taxable years beginning on or after January 1, 2025. Paragraph (d)(1)(i) of § 1.36B-3, as contained in 26 CFR part 1 edition revised as of April 1, 2016, applies to taxable years ending after December 31, 2013, and beginning before January 1, 2017. Paragraph (d)(1)(i) of § 1.36B-3, as contained in 26 CFR part 1 edition revised as of April 1, 2022, applies to taxable years beginning after December 31, 2016, and beginning before January 1, 2023. Paragraph (d)(1)(i) of § 1.36B-3, as contained in 26 CFR part 1 edition revised as of April 1, 2024, applies to taxable years beginning after December 31, 2022, and beginning before January 1, 2025.
(a) Reconciliation—(1) Coordination of premium tax credit with advance credit payments—(i) In general. A taxpayer must reconcile the amount of credit allowed under section 36B with advance credit payments on the taxpayer’s income tax return for a taxable year. A taxpayer whose premium tax credit for the taxable year exceeds the taxpayer’s advance credit payments may receive the excess as an income tax refund. A taxpayer whose advance credit payments for the taxable year exceed the taxpayer’s premium tax credit owes the excess as an additional income tax liability.
(ii) Allocation rules and responsibility for advance credit payments—(A) In general. A taxpayer must reconcile all advance credit payments for coverage of any member of the taxpayer’s family.
(B) Individuals enrolled by a taxpayer and claimed as a personal exemption deduction by another taxpayer—(1) In general. If a taxpayer (the enrolling taxpayer) enrolls an individual in a qualified health plan and another taxpayer (the claiming taxpayer) claims a personal exemption deduction for the individual (the shifting enrollee), then for purposes of computing each taxpayer’s premium tax credit and reconciling any advance credit payments, the enrollment premiums and advance credit payments for the plan in which the shifting enrollee was enrolled are allocated under this paragraph (a)(1)(ii)(B) according to the allocation percentage described in paragraph (a)(1)(ii)(B)(2) of this section. If advance credit payments are allocated under paragraph (a)(1)(ii)(B)(4) of this section, the claiming taxpayer and enrolling taxpayer must use this same allocation percentage to calculate their § 1.36B-3(d)(1)(ii) adjusted monthly premiums for the applicable benchmark plan (benchmark plan premiums). This paragraph (a)(1)(ii)(B) does not apply to amounts allocated under § 1.36B-3(h) (qualified health plan covering more than one family) or if the shifting enrollee or enrollees are the only individuals enrolled in the qualified health plan. For purposes of this paragraph (a)(1)(ii)(B)(1), a taxpayer who is expected at enrollment in a qualified health plan to be the taxpayer filing an income tax return for the year of coverage with respect to an individual enrolling in the plan has enrolled that individual. For taxable years to which section 151(d)(5) applies, the claiming taxpayer is the taxpayer who properly includes the shifting enrollee in his or her family for the taxable year.
(2) Allocation percentage. The enrolling taxpayer and claiming taxpayer may agree on any allocation percentage between zero and one hundred percent. If the enrolling taxpayer and claiming taxpayer do not agree on an allocation percentage, the percentage is equal to the number of shifting enrollees properly included in the enrolling taxpayer’s family divided by the number of individuals enrolled by the enrolling taxpayer in the same qualified health plan as the shifting enrollee.
(3) Allocating premiums. In computing the premium tax credit, the claiming taxpayer is allocated a portion of the enrollment premiums for the plan in which the shifting enrollee was enrolled equal to the enrollment premiums times the allocation percentage. The enrolling taxpayer is allocated the remainder of the enrollment premiums not allocated to one or more claiming taxpayers.
(4) Allocating advance credit payments. In reconciling any advance credit payments, the claiming taxpayer is allocated a portion of the advance credit payments for the plan in which the shifting enrollee was enrolled equal to the enrolling taxpayer’s advance credit payments for the plan times the allocation percentage. The enrolling taxpayer is allocated the remainder of the advance credit payments not allocated to one or more claiming taxpayers. This paragraph (a)(1)(ii)(B)(4) only applies in situations in which advance credit payments are made for coverage of a shifting enrollee.
(5) Premiums for the applicable benchmark plan. If paragraph (a)(1)(ii)(B)(4) of this section applies, the claiming taxpayer’s benchmark plan premium is the sum of the benchmark plan premium for the claiming taxpayer’s coverage family, excluding the shifting enrollee or enrollees, and the allocable portion. The allocable portion for purposes of this paragraph (a)(1)(ii)(B)(5) is the product of the benchmark plan premium for the enrolling taxpayer’s coverage family if the shifting enrollee was a member of the enrolling taxpayer’s coverage family and the allocation percentage. If the enrolling taxpayer’s coverage family is enrolled in more than one qualified health plan, the allocable portion is determined as if the enrolling taxpayer’s coverage family includes only the coverage family members who enrolled in the same plan as the shifting enrollee or enrollees. The enrolling taxpayer’s benchmark plan premium is the benchmark plan premium for the enrolling taxpayer’s coverage family had the shifting enrollee or enrollees remained a part of the enrolling taxpayer’s coverage family, minus the allocable portion.
(C) Responsibility for advance credit payments for an individual not reported on any taxpayer’s return. If advance credit payments are made for coverage of an individual who is not included in any taxpayer’s family, as defined in § 1.36B-1(d), the taxpayer who attested to the Exchange to the intention to include such individual in the taxpayer’s family as part of the advance credit payment eligibility determination for coverage of the individual must reconcile the advance credit payments.
(iii) Advance credit payment for a month in which an issuer does not provide coverage. For purposes of reconciliation, a taxpayer does not have an advance credit payment for a month if the issuer of the qualified health plan in which the taxpayer or a family member is enrolled does not provide coverage for that month.
(2) Credit computation. The premium assistance credit amount is computed on the taxpayer’s return using the taxpayer’s household income and family size for the taxable year. Thus, the taxpayer’s contribution amount (household income for the taxable year times the applicable percentage) is determined using the taxpayer’s household income and family size at the end of the taxable year. The applicable benchmark plan for each coverage month is determined under § 1.36B-3(f).
(3) Limitation on additional tax—(i) In general. The additional tax imposed under paragraph (a)(1) of this section on a taxpayer whose household income is less than 400 percent of the Federal poverty line is limited to the amounts provided in the table in paragraph (a)(3)(ii) of this section (or successor tables). For taxable years beginning after December 31, 2014, the limitation amounts may be adjusted in published guidance, see § 601.601(d)(2) of this chapter, to reflect changes in the consumer price index.
(ii) Additional tax limitation table.
Household income percentage of Federal poverty line | Limitation amount for taxpayers whose tax is determined under section 1(c) | Limitation amount for all other taxpayers |
---|---|---|
Less than 200% | $300 | $600 |
At least 200% but less than 300% | 750 | 1,500 |
At least 300% but less than 400% | 1,250 | 2,500 |
(iii) Limitation on additional tax for taxpayers who claim a section 162(l) deduction for a qualified health plan—(A) In general. A taxpayer who receives advance credit payments and deducts premiums for a qualified health plan under section 162(l) must use paragraph (a)(3)(iii)(B), and paragraph (a)(3)(iii)(C) or (D), of this section to determine the limitation on additional tax in this paragraph (a)(3) (limitation amount). Taxpayers must make this determination before calculating their section 162(l) deduction and premium tax credit. For additional rules for taxpayers who may claim a deduction under section 162(l) for a qualified health plan for which advance credit payments are made, see § 1.162(l)-1.
(B) Determining the limitation amount. A taxpayer described in paragraph (a)(3)(iii)(A) of this section must use the limitation amount for which the taxpayer qualifies under paragraph (a)(3)(iii)(C) or (D) of this section. The limitation amount determined under this paragraph (a)(3)(iii) replaces the limitation amount that would otherwise be determined under the additional tax limitation table in paragraph (a)(3)(ii) of this section. In applying paragraph (a)(3)(iii)(C) of this section, a taxpayer must first determine whether he or she qualifies for the limitation amount applicable to taxpayers with household income of less than 200 percent of the Federal poverty line for the taxpayer’s family size. If the taxpayer does not qualify to use the limitation amount applicable to taxpayers with household income of less than 200 percent of the Federal poverty line for the taxpayer’s family size, the taxpayer must next determine whether he or she qualifies for the limitation applicable to taxpayers with household income of less than 300 percent of the Federal poverty line for the taxpayer’s family size. If the taxpayer does not qualify to use the limitation amount applicable to taxpayers with household income of less than 300 percent of the Federal poverty line for the taxpayer’s family size, the taxpayer must next determine whether he or she qualifies for the limitation applicable to taxpayers with household income of less than 400 percent of the Federal poverty line for the taxpayer’s family size. If the taxpayer does not qualify to use the limitation amount applicable to taxpayers with household income of less than 200 percent, 300 percent, or 400 percent of the Federal poverty line for the taxpayer’s family size, the limitation on additional tax under section 36B(f)(2)(B) does not apply to the taxpayer.
(C) Requirements. A taxpayer meets the requirements of this paragraph (a)(3)(iii)(C) for a limitation amount if the taxpayer’s household income as a percentage of the Federal poverty line is less than or equal to the maximum household income as a percentage of the Federal poverty line for which that limitation is available. Household income for this purpose is determined by using a section 162(l) deduction equal to the lesser of—
(1) The sum of the specified premiums for the plan not paid through advance credit payments, the limitation amount (determined without regard to paragraph (a)(1)(iii)(C)(2) of this section), and any deduction allowable under section 162(l) for premiums other than specified premiums, and
(2) The earned income from the trade or business with respect to which the health insurance plan is established.
(D) Specified premiums not paid through advance credit payments. For purposes of paragraph (a)(3)(iii)(C) of this section, specified premiums not paid through advance credit payments means specified premiums, as defined in § 1.162(l)-1(a)(2), minus advance credit payments made with respect to the specified premiums.
(E) Examples. For examples illustrating the rules of this paragraph (a)(3)(iii), see Examples 13, 14, and 15 of paragraph (a)(4) of this section.
(4) Examples. The following examples illustrate the rules of this paragraph (a). In each example the taxpayer enrolls in a higher cost qualified health plan than the applicable benchmark plan:
(ii) A’s household income for 2014 is $33,622, which is 301 percent of the Federal poverty line for a family of one (applicable percentage 9.5). Consequently, A’s premium tax credit for 2014 is $2,006 (benchmark plan premium of $5,200 less contribution amount of $3,194 (household income of $33,622 × .095)). Because A’s advance credit payments for 2014 are $2,952 and A’s 2014 credit is $2,006, A has excess advance payments of $946. Under paragraph (a)(1) of this section, A’s tax liability for 2014 is increased by $946. Because A’s household income is between 300 percent and 400 percent of the Federal poverty line, if A’s excess advance payments exceeded $1,250, under the limitation of paragraph (a)(3) of this section, A’s additional tax liability would be limited to that amount.
(ii) In 2014, B and C do not claim L as their dependent (and no taxpayer claims a personal exemption deduction for L). Consequently, B’s and C’s family size for 2014 is three, their household income of $63,388 is 332 percent of the Federal poverty line for a family of three (applicable percentage 9.5), and the annual premium for their applicable benchmark plan is $12,000. Their premium tax credit for 2014 is $5,978 ($12,000 benchmark plan premium less $6,022 contribution amount (household income of $63,388 × .095)). Because B’s and C’s advance credit payments for 2014 are $8,535 and their 2014 credit is $5,978, B and C have excess advance payments of $2,557. B’s and C’s additional tax liability for 2014 under paragraph (a)(1) of this section, however, is limited to $2,500 under paragraph (a)(3) of this section.
(ii) D’s actual household income for 2014 is $44,903, which is 402 percent of the Federal poverty line for a family of one. D is not an applicable taxpayer and may not claim a premium tax credit. Additionally, the repayment limitation of paragraph (a)(3) of this section does not apply. Consequently, D has excess advance payments of $1,486 (the total amount of the advance credit payments in 2014). Under paragraph (a)(1) of this section, D’s tax liability for 2014 is increased by $1,486.
(ii) F begins a new job in August 2014 and is eligible for employer-sponsored minimum essential coverage for the period September through December 2014. F discontinues her Exchange coverage effective November 1, 2014. F’s household income for 2014 is $28,707 (257 percent of the Federal poverty line for a family size of one, applicable percentage 8.25).
(iii) Under § 1.36B-3(a), F’s premium assistance credit amount is the sum of the premium assistance amounts for the coverage months. Under § 1.36B-3(c)(1)(iii), a month in which an individual is eligible for minimum essential coverage other than coverage in the individual market is not a coverage month. Because F is eligible for employer-sponsored minimum essential coverage as of September 1, only the months January through August of 2014 are coverage months.
(iv) If F had 12 coverage months in 2014, F’s premium tax credit would be $2,832 (benchmark plan premium of $5,200 less contribution amount of $2,368 (household income of $28,707 × .0825)). Because F has only eight coverage months in 2014, F’s credit is $1,888 ($2,832/12 × 8). Because F does not discontinue her Exchange coverage until November 1, 2014, F’s advance credit payments for 2014 are $2,460 ($246 × 10). Consequently, F has excess advance payments of $572 ($2,460 less $1,888) and F’s tax liability for 2014 is increased by $572 under paragraph (a)(1) of this section.
(ii) On August 1, 2014, E loses her eligibility for government-sponsored minimum essential coverage. E enrolls in the qualified health plan that covers F for August through December 2014. The annual premium for the applicable benchmark plan is $10,000. The Exchange computes E’s monthly advance credit payments for the period September through December to be $675 as follows: benchmark plan premium of $10,000 less contribution amount of $1,906 (projected household income of $30,260 × .063) = $8,094; $8,094/12 = $675. E’s household income for 2014 is $28,747 (190 percent of the Federal poverty line, applicable percentage 5.84).
(iii) Under § 1.36B-3(c)(1), January through July of 2014 are coverage months for F and August through December are coverage months for E and F. Under paragraph (a)(2) of this section, E must compute her premium tax credit using the premium for the applicable benchmark plan for each coverage month. E’s premium assistance credit amount for 2014 is the sum of the premium assistance amounts for all coverage months. E reconciles her premium tax credit with advance credit payments as follows:
Advance credit payments (Jan. to July) | $1,925 | ($275 × 7) |
Advance credit payments (Aug. to Dec.) | 3,375 | ($675 × 5) |
Total advance credit payments | 5,300 | |
Benchmark plan premium (Jan. to July) | 3,033 | (($5,200/12) × 7) |
Benchmark plan premium (Aug. to Dec.) | 4,167 | (($10,000/12) × 5) |
Total benchmark plan premium | 7,200 | |
Contribution amount (taxable year household income × applicable percentage) | 1,679 | ($28,747 × .0584) |
Credit (total benchmark plan premium less contribution amount) | 5,521 |
(ii) E reconciles her premium tax credit with advance credit payments as follows:
Advance credit payments (March to July) | $1,375 | ($275 × 5) |
Advance credit payments (Aug. to Dec.) | 3,375 | ($675 × 5) |
Total advance credit payments | 4,750 | |
Benchmark plan premium (March to July) | 2,167 | (($5,200/12) × 5) |
Benchmark plan premium (Aug. to Dec.) | 4,167 | (($10,000/12) × 5) |
Total benchmark plan premium | 6,334 | |
Contribution amount for 10 coverage months (taxable year household income × applicable percentage × 10/12) | 1,399 | ($28,747 × .0584 × 10/12) |
Credit (total benchmark plan premium less contribution amount) | 4,935 |
(ii) Under paragraph (a)(1)(iii) of this section, F does not take into account advance credit payments for June or July of 2014 when reconciling the premium tax credit with advance credit payments under paragraph (a)(1) of this section.
(ii) K lives with H for more than half of 2014 and H claims K as a dependent for 2014. G and H agree to an allocation percentage, as described in paragraph (a)(1)(ii)(B)(2) of this section, of 20 percent. Under the agreement, H is allocated 20 percent of the items to be allocated, and G is allocated the remainder of those items.
(iii) If H is eligible for a premium tax credit, H takes into account $2,600 of the premiums for the plan in which K was enrolled ($13,000 x .20) and $2,400 of G’s benchmark plan premium ($12,000 × .20). In addition, H is responsible for reconciling $1,287 ($6,434 × .20) of the advance credit payments for K’s coverage.
(iv) G’s family size for 2014 includes only G and J and G’s household income of $58,900 is 380 percent of the Federal poverty line for a family of two (applicable percentage 9.5). G’s benchmark plan premium for 2014 is $9,600 (the benchmark premium for the plan covering G, J, and K ($12,000), minus the amount allocated to H ($2,400). Consequently, G’s premium tax credit is $4,004 (G’s benchmark plan premium of $9,600 minus G’s contribution amount of $5,596 ($58,900 × .095)). G has an excess advance payment of $1,143 (the excess of the advance credit payments of $5,147 ($6,434 − $1,287 allocated to H) over the premium tax credit of $4,004).
(ii) If H is eligible for a premium tax credit, H takes into account $4,290 of the premiums for the plan in which K was enrolled ($13,000 × .33). H, in computing H’s benchmark plan premium, must include $3,960 of G’s benchmark plan premium ($12,000 x .33). In addition, H is responsible for reconciling $2,123 ($6,434 x .33) of the advance credit payments for K’s coverage.
(iii) G’s benchmark plan premium for 2014 is $8,040 (the benchmark premium for the plan covering G, J, and K ($12,000), minus the amount allocated to H ($3,960). Consequently, G’s premium tax credit is $2,444 (G’s benchmark plan premium of $8,040 minus G’s contribution amount of $5,596 ($58,900 × .095)). G has an excess advance credit payment of $1,867 (the excess of the advance credit payments of $4,311 ($6,434 − $2,123 allocated to H) over the premium tax credit of $2,444).
(ii) Because B received the benefit of advance credit payments and deducts premiums for a qualified health plan under section 162(l), B must determine whether B is allowed a limitation on additional tax under paragraph (a)(3)(iii) of this section. B begins by testing eligibility for the $600 limitation amount for taxpayers with household income at less than 200 percent of the Federal poverty line for the taxpayer’s family size. B determines household income as a percentage of the Federal poverty line by taking a section 162(l) deduction equal to the lesser of $6,600 (the sum of the amount of premiums not paid through advance credit payments, $6,000 ($14,000 − $8,000), and the limitation amount, $600) and $75,000 (the earned income from the trade or business with respect to which the health insurance plan is established). The result is $97,100 ($103,700 − $6,600) or 412 percent of the Federal poverty line for B’s family size. Since 412 percent is not less than 200 percent, B may not use a $600 limitation amount.
(iii) B performs the same calculation for the $1,500 ($103,700 − $7,500 = $96,200 or 408 percent of the Federal poverty line) and $2,500 limitation amounts ($103,700 − $8,500 = $95,200 or 404 percent of the Federal poverty line), the amounts for taxpayers with household income of less than 300 percent or 400 percent, respectively, of the Federal poverty line for the taxpayer’s family size, and determines that B may not use either of those limitation amounts. Because B does not meet the requirements of paragraph (a)(3)(iii) of this section for any of the limitation amounts in section 36B(f)(2)(B), B is not eligible for the limitation on additional tax for excess advance credit payments.
(iv) Although B may not claim a limitation on additional tax for excess advance credit payments, B may still be eligible for a premium tax credit. B would determine eligibility for the premium tax credit, the amount of the premium tax credit, and the section 162(l) deduction using the rules under section 36B and section 162(l), applying no limitation on additional tax.
(ii) Because B received the benefit of advance credit payments and deducts premiums for a qualified health plan under section 162(l), B must determine whether B is allowed a limitation on additional tax under paragraph (a)(3)(iii) of this section. B first determines that B does not meet the requirements of paragraph (a)(3)(iii)(C) of this section for using the $600 or $1,500 limitation amounts, the amounts for taxpayers with household income of less than 200 percent or 300 percent, respectively, of the Federal poverty line for the taxpayer’s family size. That is because B’s household income as a percentage of the Federal poverty line, determined by using a section 162(l) deduction for premiums for the qualified health plan equal to the lesser of the sum of the premiums for the plan not paid through advance credit payments and the limitation amount, and the earned income from the trade or business with respect to which the health insurance plan is established, is more than the maximum household income as a percentage of the Federal poverty line for which that limitation is available (using the $600 limitation, B’s household income would be $72,202 ($78,802−($6,000 + $600)), which is 307 percent of the Federal poverty line for B’s family size; and using the $1,500 limitation, B’s household income would be $71,302 ($78,802−($6,000 + $1,500)), which is 303 percent of the Federal poverty line for B’s family size).
(iii) However, B meets the requirements of paragraph (a)(3)(iii)(C) of this section using the $2,500 limitation amount for taxpayers with household income of less than 400 percent of the Federal poverty line for the taxpayer’s family size. That is because B’s household income as a percentage of the Federal poverty line by taking a section 162(l) deduction equal to the lesser of $8,500 (the sum of the amount of premiums not paid through advance credit payments, $6,000, and the limitation amount, $2,500) and $75,000 (the earned income from the trade or business with respect to which the health insurance plan is established), is $70,302 (299 percent of the Federal poverty line), which is below 400 percent of the Federal poverty line for B’s family size, and is less than the maximum amount for which that limitation is available. Thus, B uses a limitation amount of $2,500 in computing B’s additional tax on excess advance credit payments.
(iv) B may determine the amount of the premium tax credit and the section 162(l) deduction using the rules under section 36B and section 162(l), applying the $2,500 limitation amount determined above.
(ii) Because C received the benefit of advance credit payments and deducts premiums for a qualified health plan under section 162(l), C must determine whether C is allowed a limitation on additional tax under paragraph (a)(3)(iii) of this section. C begins by testing eligibility for the $600 limitation amount for taxpayers with household income at less than 200 percent of the Federal poverty line for the taxpayer’s family size. C determines household income as a percentage of the Federal poverty line by taking a section 162(l) deduction equal to the lesser of $6,600 (the sum of the amount of premiums not paid through advance credit payments, $6,000 ($14,000−$8,000), and the limitation amount, $600), and $3,000 (C’s earned income from the trade or business with respect to which the health insurance plan is established). The result is $36,100 ($39,100−$3,000) or 147 percent of the Federal poverty line for C’s family size. Because 147 percent is less than 200 percent, the limitation amount under paragraph (a)(3)(iii) of this section that C uses in computing C’s additional tax on excess advance credit payments is $600.
(iii) C may determine the amount of the premium tax credit and the section 162(l) deduction using the rules under section 36B and section 162(l), applying the $600 limitation amount determined above.
(b) Changes in filing status—(1) In general. Except as provided in paragraph (b)(2) or (b)(3) of this section, a taxpayer whose marital status changes during the taxable year computes the premium tax credit by using the applicable benchmark plan or plans for the taxpayer’s marital status as of the first day of each coverage month. The taxpayer’s contribution amount (household income for the taxable year times the applicable percentage) is determined using the taxpayer’s household income and family size at the end of the taxable year.
(2) Taxpayers who marry during the taxable year—(i) In general. Taxpayers who marry during and file a joint return for the taxable year may compute the additional tax imposed under paragraph (a)(1) of this section under paragraph (b)(2)(ii) of this section. Only taxpayers who are unmarried at the beginning of the taxable year and are married (within the meaning of section 7703) at the end of the taxable year, at least one of whom receives advance credit payments, may use this alternative computation.
(ii) Alternative computation of additional tax liability—(A) In general. The additional tax liability determined under this paragraph (b)(2)(ii) is equal to the excess of the taxpayers’ advance credit payments for the taxable year over the amount of the alternative marriage-year credit. The alternative marriage-year credit is the sum of both taxpayers’ alternative premium assistance amounts for the pre-marriage months and the premium assistance amounts for the marriage months. This paragraph (b)(2)(ii) may not be used to increase the additional premium tax credit computed under paragraph (a)(1)(i) of this section.
(B) Alternative premium assistance amounts for pre-marriage months. Taxpayers compute the alternative premium assistance amounts for each taxpayer for each full or partial month the taxpayers are unmarried as described in paragraph (a)(2) of this section, except that each taxpayer treats the amount of household income as one-half of the actual household income for the taxable year and treats family size as the number of individuals in the taxpayer’s family prior to the marriage. The taxpayers may include a dependent of the taxpayers for the taxable year in either taxpayer’s family size for the pre-marriage months.
(C) Premium assistance amounts for marriage months. Taxpayers compute the premium assistance amounts for each full month the taxpayers are married as described in paragraph (a)(2) of this section.
(3) Taxpayers not married to each other at the end of the taxable year. Taxpayers who are married (within the meaning of section 7703) to each other during a taxable year but legally separate under a decree of divorce or of separate maintenance during the taxable year, and who are enrolled in the same qualified health plan at any time during the taxable year must allocate the benchmark plan premiums, the enrollment premiums, and the advance credit payments for the period the taxpayers are married during the taxable year. Taxpayers must also allocate these items if one of the taxpayers has a dependent enrolled in the same plan as the taxpayer’s former spouse or enrolled in the same plan as a dependent of the taxpayer’s former spouse. The taxpayers may allocate these items to each former spouse in any proportion but must allocate all items in the same proportion. If the taxpayers do not agree on an allocation that is reported to the IRS in accordance with the relevant forms and instructions, 50 percent of: The benchmark plan premiums; the enrollment premiums; and the advance credit payments for the married period, is allocated to each taxpayer. If for a period a plan covers only one of the taxpayers and no dependents, only one of the taxpayers and one or more dependents of that same taxpayer, or only one or more dependents of one of the taxpayers, then the benchmark plan premiums, the enrollment premiums, and the advance credit payments for that period are allocated entirely to that taxpayer.
(4) Taxpayers filing returns as married filing separately or head of household—(i) Allocation of advance credit payments. Except as provided in § 1.36B-2(b)(2)(ii), the premium tax credit is allowed to married (within the meaning of section 7703) taxpayers only if they file joint returns. See § 1.36B-2(b)(2)(i). Taxpayers who receive advance credit payments as married taxpayers and who do not file a joint return must allocate the advance credit payments for coverage under a qualified health plan equally to each taxpayer for any period the plan covers and in which advance credit payments are made for both taxpayers, only one of the taxpayers and one or more dependents of the other taxpayer, or one or more dependents of both taxpayers. If, for a period a plan covers, advance credit payments are made for only one of the taxpayers and no dependents, only one of the taxpayers and one or more dependents of that same taxpayer, or only one or more dependents of one of the taxpayers, the advance credit payments for that period are allocated entirely to that taxpayer. If one or both of the taxpayers is an applicable taxpayer eligible for a premium tax credit for the taxable year, the premium tax credit is computed by allocating the enrollment premiums under paragraph (b)(4)(ii) of this section. The repayment limitation described in paragraph (a)(3) of this section applies to each taxpayer based on the household income and family size reported on that taxpayer’s return. This paragraph (b)(4) also applies to taxpayers who receive advance credit payments as married taxpayers and file a tax return using the head of household filing status.
(ii) Allocation of premiums. If taxpayers who are married within the meaning of section 7703, without regard to section 7703(b), do not file a joint return, 50 percent of the enrollment premiums are allocated to each taxpayer. However, all of the enrollment premiums are allocated to only one of the taxpayers for a period in which a qualified health plan covers only that taxpayer and no dependents, only that taxpayer and one or more dependents of that taxpayer, or only one or more dependents of that taxpayer.
(5) Examples. The following examples illustrate the provisions of this paragraph (b). In each example the taxpayer enrolls in a higher cost qualified health plan than the applicable benchmark plan:
(ii) Q is a single taxpayer with two dependents. In 2013 the Exchange for the rating area where Q resides determines that Q’s 2014 household income will be $35,000 (183 percent of the Federal poverty line, applicable percentage 5.52). Q enrolls in a qualified health plan. The premium for the applicable benchmark plan is $10,000. Q’s monthly advance credit payment is $672, computed as follows: $10,000 benchmark plan premium minus contribution amount of $1,932 ($35,000 × .0552) equals $8,068 (total advance credit); $8,068/12 = $672.
(iii) P and Q marry on July 17, 2014 and enroll in a single policy for a qualified health plan covering four family members, effective August 1, 2014. The premium for the applicable benchmark plan is $14,000. Based on household income of $75,000 and a family size of four (325 percent of the Federal poverty line, applicable percentage 9.5), the Exchange approves advance credit payments of $573 per month, computed as follows: $14,000 benchmark plan premium minus contribution amount of $7,125 ($75,000 × .095) equals $6,875 (total advance credit); $6,875/12 = $573.
(iv) P and Q file a joint return for 2014 and report $75,000 in household income and a family size of four. P and Q compute their credit at reconciliation under paragraph (b)(1) of this section. They use the premiums for the applicable benchmark plans that apply for the months married and the months not married, and their contribution amount is based on their Federal poverty line percentage at the end of the taxable year. P and Q reconcile their premium tax credit with advance credit payments as follows:
Advance payments for P (Jan. to July) | $819 |
Advance payments for Q (Jan. to July) | 4,704 |
Advance payments for P and Q (Aug. to Dec.) | 2,865 |
Total advance payments | 8,388 |
Benchmark plan premium for P (Jan. to July) | 3,033 |
Benchmark plan premium for Q (Jan. to July) | 5,833 |
Benchmark plan premium for P and Q (Aug. to Dec.) | 5,833 |
Total benchmark plan premium | 14,699 |
Contribution amount (taxable year household income × applicable percentage) | 7,125 |
Credit (total benchmark plan premium less contribution amount) | 7,574 |
Additional tax | 814 |
(ii) P and Q compute the alternative marriage-year credit as follows:
Benchmark plan premium for P (Jan. to July) | $3,033 | (($5,200/12) × 7) |
Contribution amount ( | 2,078 | ($37,500 × .095 × 7/12) |
Alternative premium assistance amount for P’s pre-marriage months | 955 | ($3,033−$2,078) |
Benchmark plan premium for Q (Jan. to July) | 5,833 | (($10,000/12) × 7) |
Contribution amount ( | 1,339 | ($37,500 × .0612 × 7/12) |
Alternative premium assistance amount for Q’s pre-marriage months | 4,494 | ($5,833−$1,339) |
Benchmark plan premium for P and Q (Aug. to Dec.) | 5,833 | (($14,000/12 × 5) |
Contribution amount (taxable year household income × applicable percentage × 5/12) | 2,969 | ($75,000 × .095 × 5/12) |
Premium assistance amount for marriage months | 2,864 | ($5,833−$2,969) |
(iii) P and Q reconcile their premium tax credit with advance credit payments by determining the excess of their advance credit payments ($8,388) over their alternative marriage-year credit ($8,313). P and Q must increase their tax liability by $75 under paragraph (a)(1) of this section.
(ii) Taxpayer S is single with no dependents. In 2013, the Exchange for the rating area where S resides determines that S’s 2014 household income will be $20,000 (179 percent of the Federal poverty line, applicable percentage 5.33). S enrolls in a qualified health plan. The premium for the applicable benchmark plan is $5,200. S’s monthly advance credit payment is $345, computed as follows: $5,200 benchmark plan premium minus contribution amount of $1,066 ($20,000 × .0533) = $4,134 (total advance credit); $4,134/12 = $345.
(iii) R and S marry in September 2014 and enroll in a single policy for a qualified health plan covering them both, beginning October 1, 2014. The premium for the applicable benchmark plan is $10,000. Based on household income of $60,000 and a family size of two (397 percent of the Federal poverty line, applicable percentage 9.5), R’s and S’s monthly advance credit payment is $358, computed as follows: $10,000 benchmark plan premium minus contribution amount of $5,700 ($60,000 × .095) = $4,300; $4,300/12 = $358. R’s and S’s advance credit payments for 2014 are $5,232, computed as follows:
Advance payments for R (Jan. to Sept.) | $1,053 | ($117 × 9) |
Advance payments for S (Jan. to Sept.) | 3,105 | ($345 × 9) |
Advance payments for R and S (Oct. to Dec.) | 1,074 | ($358 × 3) |
Total advance payments | 5,232 |
(v) R and S compute their alternative marriage-year credit as follows:
Benchmark plan premium for R (Jan. to Sept.) | $3,900 | (($5,200/12) × 9) |
Contribution amount (( | 2,053 | ($31,000 × .0883 × 9/12) |
Premium assistance amount for R’s pre-marriage months | 1,847 | ($3,900 − $2,053) |
Benchmark plan premium for S (Jan. to Sept.) | 3,900 | (($5,200/12) × 9) |
Contribution amount (( | 2,053 | ($31,000 × .0883 × 9/12) |
Premium assistance amount for S’s pre-marriage months | 1,847 | ($3,900−$2,053) |
0 |
(vi) R and S reconcile their premium tax credit with advance credit payments by determining the excess of their advance credit payments ($5,232) over their alternative marriage-year credit ($3,694). R and S must increase their tax liability by $1,538 under paragraph (a)(1) of this section.
(ii) Because R’s and S’s premium tax credit of $3,484 exceeds their advance credit payments of $2,707, R and S are allowed an additional credit of $777. Although R and S marry in 2014, paragraph (b)(2) of this section (the alternative computation of additional tax for taxpayers who marry during the taxable year) does not apply because they do not owe additional tax for 2014.
(ii) V and W divorce on June 17, 2014, and obtain separate qualified health plans beginning July 1, 2014. V enrolls based on household income of $60,000 and a family size of three (314 percent of the Federal poverty line, applicable percentage 9.5). The premium for the applicable benchmark plan is $10,000. The Exchange approves advance credit payments of $358 per month, computed as follows: $10,000 benchmark plan premium minus V’s contribution amount of $5,700 ($60,000 × .095) equals $4,300 (total advance credit); $4,300/12 = $358.
(iii) W enrolls based on household income of $16,420 and a family size of one (147 percent of the Federal poverty line, applicable percentage 3.82). The premium for the applicable benchmark plan is $5,200. The Exchange approves advance credit payments of $381 per month, computed as follows: $5,200 benchmark plan premium minus W’s contribution amount of $627 ($16,420 × .0382) equals $4,573 (total advance credit); $4,573/12 = $381. V and W do not agree on an allocation of the premium for the applicable benchmark plan, the premiums for the plan in which they enroll, and the advance credit payments for the period they were married in the taxable year.
(iv) V and W each compute their credit at reconciliation under paragraph (b)(1) of this section, using the premiums for the applicable benchmark plans that apply to them for the months married and the months not married, and the contribution amount based on their Federal poverty line percentages at the end of the taxable year. Under paragraph (b)(3) of this section, because V and W do not agree on an allocation, V and W must equally allocate the benchmark plan premium ($7,050) and the advance credit payments ($3,438) for the six-month period January through June 2014 when they are married and enrolled in the same qualified health plan. Thus, V and W each are allocated $3,525 of the benchmark plan premium ($7,050/2) and $1,719 of the advance credit payments ($3,438/2) for January through June.
(v) V reports on his 2014 tax return $60,000 in household income and family size of three. W reports on her 2014 tax return $16,420 in household income and family size of one. V and W reconcile their premium tax credit with advance credit payments as follows:
V | W | |
---|---|---|
Allocated advance payments (Jan. to June) | $1,719 | $1,719 |
Actual advance payments (July to Dec.) | 2,148 | 2,286 |
Total advance payments | 3,867 | 4,005 |
Allocated benchmark plan premium (Jan. to June) | 3,525 | 3,525 |
Actual benchmark plan premium (July to Dec.) | 5,000 | 2,600 |
Total benchmark plan premium | 8,525 | 6,125 |
Contribution amount (taxable year household income × applicable percentage) | 5,700 | 627 |
Credit (total benchmark plan premium less contribution amount) | 2,825 | 5,498 |
Additional credit | 1,493 | |
Additional tax | 1,042 |
V | W | |
---|---|---|
Allocated advance payments (Jan. to June) | $2,716 | $722 |
Actual advance payments (July to Dec.) | 2,148 | 2,286 |
Total advance payments | 4,864 | 3,008 |
Allocated benchmark plan premium (Jan. to June) | 5,570 | 1,481 |
Actual benchmark plan premium (July to Dec.) | 5,000 | 2,600 |
Total benchmark plan premium | 10,570 | 4,081 |
Contribution amount (taxable year household income × applicable percentage) | 5,700 | 627 |
Credit (total benchmark plan premium less contribution amount) | 4,870 | 3,454 |
Additional credit | 6 | 446 |
(ii) X and Y file income tax returns for 2014 using a married filing separately filing status. X reports household income of $60,000 and a family size of three (314 percent of the Federal poverty line). Y reports household income of $16,420 and a family size of one (147 percent of the Federal poverty line).
(iii) Because X and Y are married but do not file a joint return for 2014, X and Y are not applicable taxpayers and are not allowed a premium tax credit for 2014. See § 1.36B-2(b)(2). Under paragraph (b)(4) of this section, half of the advance credit payments ($6,880/2 = $3,440) is allocated to X and half is allocated to Y for purposes of determining their excess advance payments. The repayment limitation described in paragraph (a)(3) of this section applies to X and Y based on the household income and family size reported on each return. Consequently, X’s tax liability for 2014 is increased by $2,500 and Y’s tax liability for 2014 is increased by $600.
(ii) X must reconcile the amount of credit with advance credit payments under paragraph (a) of this section. The premium for the applicable benchmark plan covering X and his two dependents is $9,800. X’s premium tax credit is computed as follows: $9,800 benchmark plan premium minus X’s contribution amount of $5,700 ($60,000 × .095) equals $4,100.
(iii) Under paragraph (b)(4) of this section, half of the advance payments ($6,880/2 = $3,440) is allocated to X and half is allocated to Y. Thus, X is entitled to $660 additional premium tax credit ($4,100 − $3,440). Y has $3,440 excess advance payments, which is limited to $600 under paragraph (a)(3) of this section.
(ii) A’s family size for 2014 for purposes of computing the premium tax credit is one, and A is the only member of her coverage family. Thus, A’s benchmark plan for all months of 2014 is the second lowest cost silver plan offered by the Exchange for A’s rating area that covers A. A’s household income includes only A’s modified adjusted gross income. Under paragraph (b)(4)(ii) of this section, A takes into account $5,000 ($10,000 x .50) of the premiums for the plan in which she was enrolled in determining her premium tax credit. Further, A must reconcile $3,250 ($6,500 x .50) of the advance credit payments for her coverage under paragraph (b)(4)(i) of this section.
(c) Applicability dates. Paragraphs (a)(1)(ii), (a)(3)(iii), (a)(4), Examples 4, 10, 11, 12, 13, 14, and 15, (b)(3), (b)(4), and (b)(5), Examples 9 and 10 apply to taxable years beginning after December 31, 2013. The last sentence of paragraph (a)(1)(ii)(B)(1), paragraph (a)(1)(ii)(B)(2), and paragraph (a)(1)(ii)(C) of this section apply to taxable years ending on or after December 31, 2020.
§ 1.36B-5 Information reporting by Exchanges.
(a) In general. An Exchange must report to the Internal Revenue Service (IRS) information required by section 36B(f)(3) and this section relating to individual market qualified health plans in which individuals enroll through the Exchange. No reporting is required under this section for enrollment in plans through the Small Business Health Options Exchange.
(b) Individual filing a return. For purposes of this section, the terms tax filer and responsible adult describe the individual who is expected to be the taxpayer filing an income tax return for the year of coverage with respect to individuals enrolling in a qualified health plan. A tax filer is an individual on behalf of whom advance payments of the premium tax credit are made. A responsible adult is an individual on behalf of whom advance payments of the premium tax credit are not made. An individual may be a tax filer or responsible adult whether or not enrolled in coverage. If more than one family (within the meaning of § 1.36B-1(d)) enrolls in the same qualified health plan, there is a tax filer or responsible adult for each family.
(c) Information required to be reported—(1) Information reported annually. An Exchange must report to the IRS the following information for each qualified health plan—
(i) The name, address, and taxpayer identification number (TIN), or date of birth if a TIN is not available, of the tax filer or responsible adult;
(ii) The name and TIN, or date of birth if a TIN is not available, of a tax filer’s spouse;
(iii) The amount of the advance credit payments paid for coverage under the plan each month;
(iv) For plans for which advance credit payments are made, the premium (excluding the premium allocated to benefits in excess of essential health benefits, see § 1.36B-3(j)) for the applicable benchmark plan for purposes of computing advance credit payments;
(v) Except as provided in paragraph (c)(3)(ii) of this section, for plans for which advance credit payments are not made, the premium (excluding the premium allocated to benefits in excess of essential health benefits, see § 1.36B-3(j)) for the applicable benchmark plan that would apply to all individuals enrolled in the qualified health plan if advance credit payments were made for the coverage;
(vi) The name and TIN, or date of birth if a TIN is not available, and dates of coverage for each individual covered under the plan;
(vii) The coverage start and end dates of the qualified health plan;
(viii) The monthly premium for the plan in which the individuals enroll, however—
(A) The premium allocated to benefits in excess of essential health benefits is excluded, see § 1.36B-3(j);
(B) The premium for a stand-alone dental plan allocated to pediatric dental benefits is added, see § 1.36B-3(k), but if a family (within the meaning of § 1.36B-1(d)) is enrolled in more than one qualified health plan, the pediatric dental premium is added to the premium for only one qualified health plan; and
(C) The amount is not reduced for advance credit payments;
(ix) The name of the qualified health plan issuer;
(x) The Exchange-assigned policy identification number;
(xi) The Exchange’s unique identifier; and
(xii) Any other information specified by forms or instructions or in published guidance, see § 601.601(d) of this chapter.
(2) Information reported monthly. For each calendar month, an Exchange must report to the IRS for each qualified health plan, the information described in paragraph (c)(1) of this section and the following information—
(i) For plans for which advance credit payments are made—
(A) The names, TINs, or dates of birth if no TIN is available, of the individuals enrolled in the qualified health plan who are expected to be the tax filer’s dependent; and
(B) Information on employment (to the extent this information is provided to the Exchange) consisting of—
(1) The name, address, and EIN of each employer of the tax filer, the tax filer’s spouse, and each individual covered by the plan; and
(2) An indication of whether an employer offered affordable minimum essential coverage that provided minimum value, and, if so, the amount of the employee’s required contribution for self-only coverage;
(ii) The unique identifying number the Exchange uses to report data that enables the IRS to associate the data with the proper account from month to month;
(iii) The issuer’s employer identification number (EIN); and
(iv) Any other information specified by forms or instructions or in published guidance, see § 601.601(d) of this chapter.
(3) Special rules for information reported—(i) Multiple families enrolled in a single qualified health plan. An Exchange must report the information specified in paragraphs (c)(1) and (c)(2) of this section for each family (within the meaning of § 1.36B-1(d)) enrolled in a qualified health plan, including families submitting a single application or enrolled in a single qualified health plan. If advance credit payments are made for coverage under the plan, the enrollment premiums reported to each family under paragraph (c)(1)(viii) of this section are the premiums allocated to the family under § 1.36B-3(h) (allocating enrollment premiums to each taxpayer in proportion to the premiums for each taxpayer’s applicable benchmark plan).
(ii) Alternative to reporting applicable benchmark plan. An Exchange satisfies the requirement in paragraph (c)(1)(v) of this section if, on or before January 1 of each year after 2014, the Exchange provides a reasonable method that a responsible adult may use to determine the premium (after adjusting for benefits in excess of essential health benefits) for the applicable benchmark plan that applies to the responsible adult’s coverage family for the prior calendar year for purposes of determining the premium tax credit on the tax return.
(iii) Partial month of coverage.—(A) In general. Except as provided in paragraph (c)(3)(iii)(B) of this section, if an individual is enrolled in a qualified health plan after the first day of a month, the amount reported for that month under paragraphs (c)(1)(iv), (c)(1)(v), and (c)(1)(viii) of this section is $0.
(B) Certain mid-month enrollments. For information reporting that is due on or after January 1, 2019, if an individual’s qualified health plan is terminated before the last day of a month, or if an individual is enrolled in coverage after the first day of a month and the coverage is effective on the date of the individual’s birth, adoption, or placement for adoption or in foster care, or on the effective date of a court order, the amount reported under paragraphs (c)(1)(iv) and (c)(1)(v) of this section is the premium for the applicable benchmark plan for a full month of coverage (excluding the premium allocated to benefits in excess of essential health benefits), and the amount reported under paragraph (c)(1)(viii) of this section is the enrollment premium for the month, reduced by any amounts that were refunded.
(4) Exemptions. For each calendar month, an Exchange must report to the IRS the name and TIN, or date of birth if a TIN is not available, of each individual for whom the Exchange has granted an exemption from coverage under section 5000A(e) and the related regulations, the months for which the exemption is in effect, and the exemption certificate number.
(d) Time for reporting—(1) Annual reporting. An Exchange must submit to the IRS the annual report required under paragraph (c)(1) of this section on or before January 31 of the year following the calendar year of coverage.
(2) Monthly reporting—(i) In general. Except as provided in paragraph (d)(2)(ii) of this section, an Exchange must submit to the IRS the monthly reports required under paragraphs (c)(2) and (c)(4) of this section on or before the 15th day following each month of coverage.
(ii) Initial monthly reporting in 2014. Exchanges must submit to the IRS the initial monthly report required under paragraphs (c)(2) and (c)(4) of this section on a date that the Commissioner may establish in other guidance, see § 601.601(d) of this section, but no earlier than June 15, 2014. The initial report must include cumulative information for enrollments for the period January 1, 2014,
through the last day of the month preceding the month for submitting the
initial monthly report.
(3) Corrections to information reported. In general, an Exchange must correct erroneous or outdated monthly-reported information in the next monthly report. If the information must be corrected after the final monthly submission on January 15 following the coverage year, corrections should be submitted by the 15th day of the month following the month in which the incorrect information is identified. However, no monthly report correction is permitted after April 15 following the year of coverage. Errors on the annual report must be corrected and reported to the IRS and to the individual recipient identified in paragraph (f) of this section as soon as possible.
(e) Electronic reporting. An Exchange must submit the reports to the IRS required under this section in electronic format. The information reported monthly will be submitted to the IRS through the Department of Health and Human Services.
(f) Annual statement to be furnished to individuals—(1) In general. An Exchange must furnish to each tax filer or responsible adult (the recipient for purposes of paragraphs (f) and (g) of this section) a written statement showing—
(i) The name and address of the recipient and
(ii) The information described in paragraph (c)(1) of this section for the previous calendar year.
(2) Form of statements. A statement required under this paragraph (f) may be made by furnishing to the recipient identified in the annual report either a copy of the report filed with the IRS or a substitute statement. A substitute statement must include the information required to be shown on the report filed with the IRS and must comply with requirements in published guidance (see § 601.601(d)(2) of this chapter) relating to substitute statements. A reporting entity may use an IRS truncated taxpayer identification number as the identification number for an individual in lieu of the identification number appearing on the corresponding information report filed with the IRS.
(3) Time and manner for furnishing statements. An Exchange must furnish the statements required under this paragraph (f) on or before January 31 of the year following the calendar year of coverage. If mailed, the statement must be sent to the recipient’s last known permanent address or, if no permanent address is known, to the recipient’s temporary address. For purposes of this paragraph (f)(3), an Exchange’s first class mailing to the last known permanent address, or if no permanent address is known, the temporary address, discharges the Exchange’s requirement to furnish the statement. An Exchange may furnish the statement electronically in accordance with paragraph (g) of this section.
(g) Electronic furnishing of statements—(1) In general. An Exchange required to furnish a statement under paragraph (f) of this section may furnish the statement to the recipient in an electronic format in lieu of a paper format. An Exchange that meets the requirements of paragraphs (g)(2) through (g)(7) of this section is treated as furnishing the statement in a timely manner.
(2) Consent—(i) In general. A recipient must have affirmatively consented to receive the statement in an electronic format. The consent may be made electronically in any manner that reasonably demonstrates that the recipient is able to access the statement in the electronic format in which it will be furnished. Alternatively, the consent may be made in a paper document that is confirmed electronically.
(ii) Withdrawal of consent. The consent requirement of this paragraph (g)(2) is not satisfied if the recipient withdraws the consent and the withdrawal takes effect before the statement is furnished. An Exchange may provide that the withdrawal of consent takes effect either on the date the Exchange receives it or on another date no more than 60 days later. The Exchange may provide that a request by the recipient for a paper statement will be treated as a withdrawal of consent to receive the statement in an electronic format. If the Exchange furnishes a statement after the withdrawal of consent takes effect, the recipient has not consented to receive the statement in electronic format.
(iii) Change in hardware or software requirements. If a change in the hardware or software required to access the statement creates a material risk that a recipient will not be able to access a statement, an Exchange must, prior to changing the hardware or software, notify the recipient. The notice must describe the revised hardware and software required to access the statement and inform the recipient that a new consent to receive the statement in the revised electronic format must be provided to the Exchange. After implementing the revised hardware and software, the Exchange must obtain a new consent or confirmation of consent from the recipient to receive the statement electronically.
(iv) Examples. The following examples illustrate the rules of this paragraph (g)(2):
(3) Required disclosures—(i) In general. Prior to, or at the time of, a recipient’s consent, an Exchange must provide to the recipient a clear and conspicuous disclosure statement containing each of the disclosures described in paragraphs (g)(3)(ii) through (g)(3)(viii) of this section.
(ii) Paper statement. An Exchange must inform the recipient that the statement will be furnished on paper if the recipient does not consent to receive it electronically.
(iii) Scope and duration of consent. An Exchange must inform the recipient of the scope and duration of the consent. For example, the Exchange must inform the recipient whether the consent applies to each statement required to be furnished after the consent is given until it is withdrawn or only to the first statement required to be furnished following the consent.
(iv) Post-consent request for a paper statement. An Exchange must inform the recipient of any procedure for obtaining a paper copy of the recipient’s statement after giving the consent described in paragraph (g)(2)(i) of this section and whether a request for a paper statement will be treated as a withdrawal of consent.
(v) Withdrawal of consent. An Exchange must inform the recipient that—
(A) The recipient may withdraw consent by writing (electronically or on paper) to the person or department whose name, mailing address, telephone number, and email address is provided in the disclosure statement;
(B) An Exchange will confirm the withdrawal and the date on which it takes effect in writing (either electronically or on paper); and
(C) A withdrawal of consent does not apply to a statement that was furnished electronically in the manner described in this paragraph (g) before the date on which the withdrawal of consent takes effect.
(vi) Notice of termination. An Exchange must inform the recipient of the conditions under which the Exchange will cease furnishing statements electronically to the recipient.
(vii) Updating information. An Exchange must inform the recipient of the procedures for updating the information needed to contact the recipient and notify the recipient of any change in the Exchange’s contact information.
(viii) Hardware and software requirements. An Exchange must provide the recipient with a description of the hardware and software required to access, print, and retain the statement, and the date when the statement will no longer be available on the Web site. The Exchange must advise the recipient that the statement may be required to be printed and attached to a Federal, State, or local income tax return.
(4) Format. The electronic version of the statement must contain all required information and comply with applicable published guidance (see § 601.601(d) of this chapter) relating to substitute statements to recipients.
(5) Notice—(i) In general. If a statement is furnished on a Web site, the Exchange must notify the recipient. The notice may be delivered by mail, electronic mail, or in person. The notice must provide instructions on how to access and print the statement and include the following statement in capital letters, “IMPORTANT TAX RETURN DOCUMENT AVAILABLE.” If the notice is provided by electronic mail, this statement must be on the subject line of the electronic mail.
(ii) Undeliverable electronic address. If an electronic notice described in paragraph (g)(5)(i) of this section is returned as undeliverable, and the Exchange cannot obtain the correct electronic address from the Exchange’s records or from the recipient, the Exchange must furnish the notice by mail or in person within 30 days after the electronic notice is returned.
(iii) Corrected statement. An Exchange must furnish a corrected statement to the recipient electronically if the original statement was furnished electronically. If the original statement was furnished through a Web site posting, the Exchange must notify the recipient that it has posted the corrected statement on the Web site in the manner described in paragraph (g)(5)(i) of this section within 30 days of the posting. The corrected statement or the notice must be furnished by mail or in person if—
(A) An electronic notice of the Web site posting of an original statement or the corrected statement was returned as undeliverable; and
(B) The recipient has not provided a new email address.
(6) Access period. Statements furnished on a Web site must be retained on the Web site through October 15 of the year following the calendar year to which the statements relate (or the first business day after October 15, if October 15 falls on a Saturday, Sunday, or legal holiday). The furnisher must maintain access to corrected statements that are posted on the Web site through October 15 of the year following the calendar year to which the statements relate (or the first business day after October 15, if October 15 falls on a Saturday, Sunday, or legal holiday) or the date 90 days after the corrected forms are posted, whichever is later.
(7) Paper statements after withdrawal of consent. An Exchange must furnish a paper statement if a recipient withdraws consent to receive a statement electronically and the withdrawal takes effect before the statement is furnished. A paper statement furnished under this paragraph (g)(7) after the statement due date is timely if furnished within 30 days after the date the Exchange receives the withdrawal of consent.
(h) Effective/applicability date. Except for the last sentence of paragraph (c)(3)(i) of this section and paragraph (c)(3)(iii) of this section, this section applies to taxable years ending after December 31, 2013. The last sentence of paragraph (c)(3)(i) of this section and paragraph (c)(3)(iii) of this section apply to taxable years beginning after December 31, 2018. Paragraph (c)(3) of § 1.36B-5 as contained in 26 CFR part I edition revised as of April 1, 2016, applies to information reporting for taxable years ending after December 31, 2013, and beginning before January 1, 2019.
§ 1.36B-6 Minimum value.
(a) In general—(1) Employees. An eligible employer-sponsored plan provides minimum value (MV) for an employee of the employer offering the coverage only if—
(i) The plan’s MV percentage, as defined in paragraph (c) of this section, is at least 60 percent based on the plan’s share of the total allowed costs of benefits provided to the employee; and
(ii) The plan provides substantial coverage of inpatient hospital services and physician services.
(2) Related individuals—(i) In general. An eligible employer-sponsored plan provides MV for an individual who may enroll in the plan because of a relationship to an employee of the employer offering the coverage (a related individual) only if—
(A) The plan’s MV percentage, as defined in paragraph (c) of this section, is at least 60 percent based on the plan’s share of the total allowed costs of benefits provided to the related individual; and
(B) The plan provides substantial coverage of inpatient hospital services and physician services.
(ii) Plans providing MV to employees. If an eligible employer-sponsored plan provides MV to an employee under paragraph (a)(1) of this section, the plan also provides MV for related individuals if—
(A) The scope of benefits is the same for the employee and related individuals; and
(B) Cost sharing (including deductibles, co-payments, coinsurance, and out-of-pocket maximums) under the plan is the same for the employee and related individuals under the tier of coverage that would, if elected, include the employee and all related individuals (disregarding any differences in deductibles or out-of-pocket maximums that are attributable to a different tier of coverage, such as self plus one versus family coverage).
(b) MV standard population. [Reserved]
(c) MV percentage—(1) In general. [Reserved]
(2) Wellness program incentives—(i) In general. Nondiscriminatory wellness program incentives offered by an eligible employer-sponsored plan that affect deductibles, copayments, or other cost-sharing are treated as earned in determining the plan’s MV percentage if the incentives relate exclusively to tobacco use. Wellness program incentives that do not relate to tobacco use or that include a component unrelated to tobacco use are treated as not earned for this purpose. For purposes of this section, the term wellness program incentive has the same meaning as the term reward in § 54.9802-1(f)(1)(i) of this chapter.
(ii) Example. The following example illustrates the rules of this paragraph (c)(2):
(ii) Under paragraph (c)(2)(i) of this section, only the incentives related to tobacco use are considered in determining the plan’s MV percentage. C is treated as having earned the $300 incentive for attending a smoking cessation course regardless of whether C actually attends the course. Thus, the deductible for determining for the MV percentage for both Employees B and C is $3,700. The $200 incentive for completing cholesterol screening is disregarded.
(3) Employer contributions to health savings accounts. Employer contributions for the current plan year to health savings accounts that are offered with an eligible employer-sponsored plan are taken into account for that plan year towards the plan’s MV percentage.
(4) Employer contributions to health reimbursement arrangements. Amounts newly made available for the current plan year under a health reimbursement arrangement that would be integrated within the meaning of Notice 2013-54 (2013-40 IRB 287), see § 601.601(d) of this chapter, with an eligible employer-sponsored plan for an employee enrolled in the plan are taken into account for that plan year towards the plan’s MV percentage if the amounts may be used to reduce only cost-sharing for covered medical expenses. A health reimbursement arrangement counts toward a plan’s MV percentage only if the health reimbursement arrangement and the eligible employer-sponsored plan are offered by the same employer. Employer contributions to a health reimbursement arrangement count for a plan year towards the plan’s MV percentage only to the extent the amount of the annual contribution is required under the terms of the plan or otherwise determinable within a reasonable time before the employee must decide whether to enroll in the eligible employer-sponsored plan.
(5) Expected spending adjustments for health savings accounts and health reimbursement arrangements. [Reserved]
(d) Methods for determining MV. [Reserved]
(e) Scope of essential health benefits and adjustment for benefits not included in MV Calculator. [Reserved]
(f) Actuarial certification. [Reserved]
(1) In general. [Reserved]
(2) Membership in American Academy of Actuaries. [Reserved]
(3) Actuarial analysis. [Reserved]
(4) Use of MV Calculator. [Reserved]
(g) Effective/applicability date—in general. (1) Except as provided in paragraph (g)(2) of this section, this section applies for taxable years ending after December 31, 2013.
(2) Exceptions. (i) Paragraph (a)(1)(ii) of this section applies for plan years beginning after November 3, 2014; and
(ii) Paragraph (a)(2) of this section applies to taxable years beginning after December 31, 2022.
§ 1.37-1 General rules for the credit for the elderly.
(a) In general. In the case of an individual, section 37 provides a credit against the tax imposed by chapter 1 of the Internal Revenue Code of 1954. This section and §§ 1.37-2 and 1.37-3 provide guidance in the computation of the credit for the elderly provided under section 37 for taxable years beginning after 1975. For rules relating to the computation of the retirement income credit provided under section 37 for taxable years beginning before 1976, see 26 CFR 1.37-1 through 1.37-5 (Rev. as of April 1, 1980). Note that section 403 of the Tax Reduction and Simplification Act of 1977 provides that a taxpayer may elect to compute the credit under section 37 for the taxpayer’s first taxable year beginning in 1976 in accordance with the rules applicable to taxable years beginning before 1976.
(b) Limitation on the amount of the credit. The credit allowed by section 37 for a taxable year shall not exceed the tax imposed by chapter 1 of the Code for the taxable year (reduced, in the case of a taxable year beginning before 1979, by the general tax credit allowed by section 42).
(c) Married couples must file joint returns. If the taxpayer is married at the close of the taxable year, the credit provided by section 37 shall be allowed only if the taxpayer and the taxpayer’s spouse file a joint return for the taxable year. The preceding sentence shall not apply in the case of a husband and wife who are not members of the same household at any time during the taxable year. For the determination of marital status, see §§ 143 and 1.143-1.
(d) Nonresident aliens ineligible. No credit is allowed under section 37 to any individual for any taxable year during which that individual is at any time a nonresident alien unless the individual is treated, by reason of an election under section 6013 (g) or (h), as a resident of the United States for that taxable year.
§ 1.37-2 Credit for individuals age 65 or over.
(a) In general. This section illustrates the computation of the credit for the elderly in the case of an individual who has attained the age of 65 before the close of the taxable year. This section shall not apply to an individual for any taxable year for which the individual makes the election described in section 37(e)(2) and paragraph (b) of § 1.37-3.
(b) Computation of credit. The credit for the elderly for an individual to whom this section applies equals 15 percent of the individual’s “section 37 amount” for the taxable year. An individual’s “section 37 amount” for a taxable year is the initial amount determined under section 37(b)(2), reduced as provided in section 37(b)(3) and (c)(1).
(c) Examples. The computation of the credit for the elderly for individuals to whom this section applies may be illustrated by the following examples:
Initial amount under section 37(b)(2) | $2,500 | |
Reductions required by section 37 (b)(3) and (c)(1): | ||
Social security payments | $1,450 | |
One-half the excess of adjusted gross income over $7,500 | 250 | 1,700 |
Section 37 amount | 800 | |
15 pct. of $800 | $120 |
Initial amount under section 37(b)(2) | $3,750 | |
Reductions required by section 37 (b)(3): | ||
Railroad retirement pension | $1,550 | |
Social Security payments | 1,200 | 2,750 |
Section 37 amount | 1,000 | |
15 pct. of $1,000 | 150 | |
Limitation based upon amount of tax (derived from table reflecting allowance of general tax credit) | $139 |
§ 1.37-3 Credit for individuals under age 65 who have public retirement system income.
(a) In general. This section provides rules for the computation of the credit for the elderly under section 37(e) in the case of an individual who has not attained the age of 65 before the close of the taxable year and whose gross income for the taxable year includes retirement income within the meaning of paragraph (d)(1)(ii) of this section (i.e., under a public retirement system). If such an individual is married within the meaning of section 143 at the close of the taxable year and the spouse of the individual has attained the age of 65 before the close of the taxable year, this section shall apply to the individual for the taxable year only if both spouses make the election described in paragraph (b) of this section. If both spouses make the election described in paragraph (b) of this section for the taxable year, the credit of each spouse shall be determined under the rules of this section. See paragraph (f)(2) of this section for a limitation on the effects of community property laws in making determinations and computations under section 37(e) and this section.
(b) Election by certain married taxpayers. If a married individual under age 65 at the close of the taxable year has retirement income and the spouse of that individual has attained the age of 65 before the close of the taxable year, both spouses may elect to compute the credit provided by section 37 under the rules of section 37(e) and this section. The spouses shall signify the election on the return (or amended return) for the taxable year in the manner prescribed in the instructions accompanying the return. The election may be made at any time before the expiration of the period of limitation for filing claim for credit or return for the taxable year. The election may be revoked without the consent of the Commissioner at any time before the expiration of that period by filing an amended return.
(c) Computation of credit. The credit of an individual under section 37(e) and this section equals 15 percent of the individual’s credit base for the taxable year. The credit base of an individual for a taxable year is the lesser of—
(1) The retirement income of the individual for the taxable year, or
(2) The amount determined under section 37(e)(5), as modified by section 37(e) (6) and (7).
(d) Retirement income—(1) General rule—(i) For individuals 65 or over. Section 37(e)(4)(A) enumerates the kinds of income which may be treated as the retirement income of an individual who has attained the age of 65 before the close of the taxable year. They include income from pensions and annuities, interest, rents, dividends, certain bonds received under a qualified bond purchase plan, and certain individual retirement accounts or annuities.
(ii) For individuals under 65. In the case of an individual who has not attained the age of 65 before the close of the taxable year, retirement income consists only of income from pensions and annuities (including disability annuity payments) under a public retirement system which arises from services performed by that individual or by a present or