Matthew Accounting, PLLC
Energy-Efficient Vehicle Credits |
On August 8, 2005, President Bush signed the "Energy Policy Act of 2005" into law. The provisions of this legislation include new tax credits for the purchase of fuel-efficient vehicles.
The high price of fuel these days is causing an increasing number of taxpayers to look for ways to ease the strain on their pocketbooks. Congress is also looking for ways to reduce fuel consumption to counter the negative effects on the U.S. economy and reduce our dependence on foreign sources of fossil fuels.
If you have been considering purchasing a new car or truck with environmental and fuel efficient technologies, Congress has just added some significant incentives that become available in 2006 that should help offset some of the higher purchase costs of many of these types of vehicles.
The incentives are in the form of tax credits for the purchase of new hybrid, fuel cell, advanced lean burn and alternative power vehicles. The amount of the credits vary based on a number of factors, including type of vehicle, vehicle weight class and fuel economy.
Generally, the credit for purchasing these alternative power vehicles is allowed to the vehicle owner, including the lessor of a leased vehicle. It is only allowed in the year the vehicle is placed in service, and the vehicle must be used predominantly in the U.S. to qualify for the credit. No credit is allowable for the portion of the cost of any property taken into account under Code Sec. 179, the expensing provision.
The portion of the credit attributable to vehicles of a character subject to an allowance for depreciation is treated as a portion of the general business credit; the remainder of the credit is allowable to the extent of the excess of the regular tax (reduced by certain other credits) over the alternative minimum tax (AMT) for the taxable year. Thus, the credit is not allowed against AMT and may be reduced even if the taxpayer is not subject to AMT.
Here is a rundown of these credits.
Qualified Hybrid Vehicles
This credit replaces the previous $2,000 AGI deduction available for certified hybrid vehicles purchased before 2006. A qualified hybrid vehicle is a motor vehicle that draws propulsion energy from onboard sources of stored energy, which include both an internal combustion engine or heat engine using combustible fuel and a rechargeable energy storage system (such as batteries).
Automobiles or light trucks - For an automobile or light truck (vehicles weighing 8,500 pounds or less), the amount of credit for the purchase of a hybrid vehicle is the sum of two components primarily based on the vehicle’s fuel efficiency compared with the 2002 standards. These components of the credit are:
(1) A fuel economy credit amount of $400 to $2,400. This credit amount is based on the amount that the vehicle exceeds the Model Year City Fuel Economy (MYCFE) rating expressed as an increased percentage of the 2002 MYCFE rating:
|
Increased Fuel Economy Percent (%)
|
Credit
|
|
125 to 149
|
$400
|
|
150 to 174
|
$800
|
|
175 to 199
|
$1,200
|
|
200 to 224
|
$1,600
|
|
225 to 249
|
$2,000
|
|
250 or more
|
$2,400
|
(2) A fuel economy credit of $250 to $1,000. The conservation credit amount is determined based on the vehicle's "lifetime fuel savings" and is as follows:
|
Lifetime Fuel Savings (in gallons of gas)
|
Credit
|
| At least 1,200 but less than 1,800 |
$ 250
|
| At least 1,800 but less than 2,400 |
$ 500
|
| At least 2,400 but less than 3,000 |
$ 750
|
| At least 3,000 |
$1,000
|
These two credits (the increased fuel economy and the lifetime fuel savings) are added together to form the hybrid vehicle credit, which can total as much as $3,400.
To qualify for the credit, the vehicle must have a maximum available power from the rechargeable energy storage system of at least 4% and meet or exceed certain EPA emissions standards.
Larger vehicles (Over 8,500 pounds) - For larger hybrid motor vehicles, the rules are significantly more complicated and you should call our office for details.
Fuel Cell Vehicles
A qualified fuel cell vehicle is a motor vehicle that is propelled by power derived from cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel stored onboard the vehicle. The amount of credit for the purchase of a fuel cell vehicle is determined by a base credit that depends on the weight class of the vehicle and, for automobiles or light trucks, an additional credit amount that depends on the rated fuel economy of the vehicle compared to a base fuel economy.
Automobiles or light trucks – For an automobile or light truck (vehicles weighing 8,500 pounds or less), the base credit amount is $8,000 plus a fuel economy credit amount that ranges from $1,000 to $4,000, depending on the vehicle's rated fuel economy.
Larger vehicles (Over 8,500 pounds) - For larger fuel cell motor vehicles, the credit ranges from $10,000 to a maximum of $40,000, based upon the gross vehicle weight rating.
Alternative fuel vehicles
Qualified alternative fuel motor vehicles operate only on qualifying alternative fuels and can't be operated on gasoline or diesel (except to the extent gasoline or diesel fuel is part of a qualified mixed fuel). The credit for the purchase of a new alternative fuel vehicle is 50% of the vehicle's incremental cost. The vehicle’s incremental cost is the excess of the manufacturer's suggested retail price for the vehicle over the suggested retail price for a gasoline or diesel fuel motor vehicle of the same model, but not to exceed a limit based upon the vehicle’s weight. If the vehicle also meets certain emissions standards, the percentage is increased to 80%.
Alternative fuels are compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen and any liquid fuel that is at least 85% methanol. Certain mixed fuel vehicles, that is, vehicles that use a combination of an alternative fuel and a petroleum-based fuel, are eligible for a reduced credit.
Automobiles or light trucks – For vehicles with a gross vehicle weight rating of 8,500 pounds or less, the maximum incremental cost to compute the credit is $5,000. Thus, the credit maximum would be $2,500 (50% of $5,000) or $4,000 (80% of $5,000) for the vehicles that also meet the emissions standards.
Larger vehicles (Over 8,500 pounds) - For larger vehicles, the credit ranges from $5,000 to a maximum of $32,000, based upon the gross vehicle weight rating.
Advanced lean burn technology motor vehicles
This credit only applies to passenger automobiles or light trucks with an internal combustion engine. The credit is in part based on the amount the vehicle exceeds city fuel economy standards and in part on the lifetime fuel savings of the vehicle. To qualify, the vehicle must:
- Be designed to operate primarily using more air than is necessary for complete combustion of the fuel,
- Use direct injection,
- Achieve at least 125% of the 2002 model year city fuel economy, and
- Meet certain other specified conditions.
The amount of the credit is the sum of: (1) an amount for fuel efficiency of between $400 and $2,400, and (2) an amount for conservation of between $250 and $1,000.
Electric Vehicle Credit
Also available through December 31, 2006 is the electric vehicle credit. To qualify for this credit, the vehicle must be powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or other portable sources of electrical current. The original use of the vehicle must commence with the taxpayer and must have been acquired for use by the taxpayer and not for resale. The credit amount is 10% of the vehicle's cost, but not to exceed $4,000 for qualifying vehicles purchased in 2005 or $1,000 for 2006. 2006 is the last year this credit is available.
Final Word
One final word: tell that contractor or salesperson, who is quoting tax advantages or savings during the sales presentation, that you need to check with your tax advisor first to verify the tax benefits before signing on the dotted line. Be sure to contact us so we can determine the benefits based on your particular tax situation. And remember, even though the vehicle credit is available for purchases in the next several years, the homeowner credits are only for 2006 and 2007; therefore, don’t be premature and don’t wait too long to make your energy-property purchases. As the old cliché goes…timing is everything, and it is especially true when it comes to taking advantage of these new energy tax credits.
Credit Sunset Dates: The new alternative motor vehicle credit won't apply to any property purchased after:
- December 31, 2014 for a qualified fuel cell motor vehicle,
- December 31, 2010 for an advanced lean burn technology motor vehicle or for a qualified hybrid motor vehicle that is a passenger automobile or light truck or for a qualified alternative fuel motor vehicle, and
- December 31, 2009 for a qualified hybrid motor vehicle that is other than a passenger automobile or light truck.
60,000 Vehicle Limit: For both hybrid and lean burn vehicle credits, taxpayers who want the maximum available credit may want to consider buying early since the full credit is only available for a limited time. The full credit is only available up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. After that, only 50% of the credit is allowed for the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold and then only 25% in the fourth and fifth calendar quarters and none after the fifth quarter.
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