The Energy Policy Act of 2005 replaced the clean-fuel burning deduction with an alternative motor vehicle tax credit. A tax credit is subtracted directly from the total amount of federal tax owed, thus reducing the tax obligation.
ALTERNATIVE MOTOR VEHICLES
An alternative motor vehicle is a new vehicle that qualifies as one of the following four types of vehicles.
– ADVANCED LEAN BURN TECHNOLOGY VEHICLE: This is a vehicle with an internal combustion engine that incorporates direct injection, and is designed to operate primarily using more air than is necessary for complete combustion of the fuel.
– QUALIFIED HYBRID VEHICLE: This is a vehicle that draws propulsion energy from onboard sources of stored energy that are both an internal combustion or heat engine using consumable fuel and a rechargeable energy storage system.
– QUALIFIED ALTERNATIVE FUEL VEHICLE: This is a vehicle fueled by compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen or any liquid consisting of at least 85 percent methanol.
– QUALIFIED FUEL CELL VEHICLE: This is a vehicle propelled by power derived from one or more cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel. Generally, you can rely on the manufacturer’s certification that a specific make, model, and model year vehicle qualifies for the credit and the maximum amount of the credit for which it qualifies. In addition to certification, the following requirements must be met to qualify for the credit: · You placed the vehicle in service after year 2005.
· The original use of the vehicle began with you.
· You acquired the vehicle for your use or to lease to others and not for resale.
· You use the vehicle primarily in the United States. Credit Phaseout: This credit is subject to phaseout once the manufacturer sells 60,000 of these vehicles for use in the United States after 2005. The phaseout begins in the second calendar quarter after the quarter in which the 60,000th vehicle was sold. Then the phaseout allows 50 percent of the full credit for two quarters, 25 percent of the full credit for two additional quarters and no credit thereafter. Toyota sold more than 60,000 vehicles by end of June 2006. So if the vehicle is a Toyota or Lexus hybrid, you get 100 percent credit if purchased before Oct. 1, 2006; 50 percent if purchased after Sept. 30, 2006 but before April 1, 2007; 25 percent if purchased after March 31, 2007 but before Oct. 1, 2007 and 0 percent if purchased after Sept. 30, 2007. If you bought Toyota Prius by Sept. 30, 2006, the credit is $3,150. There is a long list of hybrid vehicles for which credit is available. To find out the updated list, go to www.irs.gov and search under “hybrid.” To figure your credit, use Form 8910. If it is a business vehicle, you may have to reduce the basis of vehicle by the amount of credit taken. If your vehicle was used only for personal purposes during the year and you owe alternative minimum tax then do not complete Form 8910 because your allowable credit will be zero.
Parveen Maheshwari, C.P.A., can be reached at (650) 340-1400 or[email protected]