Tax Breaks for New Clean-Fuel Vehicles

There are two types of tax breaks available to purchasers of alternative-fuel vehicles.

• If you purchase a certain type of electric vehicle, you may be entitled to a tax credit.
• If a vehicle qualifies as an alternative fuel vehicle, you may be entitled to a tax credit.

While vehicles don't have to be used in a business to qualify for these tax benefits, you may want to keep these incentives in mind if you're purchasing a vehicle for use in your business.

Alternative motor vehicle credit. Starting in 2006, the Energy Tax Incentives Act of 2005 creates a series of new tax credits to encourage the development, manufacture and use of alternative fuel motor vehicles. The credits are collectively claimed under the title of the "Alternative Motor Vehicle Credit." This credit is equal to the sum of four separate credit components:

• the qualified fuel cell motor vehicle credit (available through December 31, 2014);
• the advanced lean burn technology motor vehicle credit (available through December 31, 2010);
• the qualified hybrid motor vehicle credit (available through December 31, 2010, for passenger automobiles or light trucks with a gross vehicle weight rating (GVWR) of no more than 8,500 pounds and through December 31, 2009, for qualified hybrid motor vehicles that are not passenger automobiles or light trucks and have a GVWR of more than 8,500 pounds); and
• the qualified alternative fuel motor vehicle credit (available through December 31, 2010)

The amount of the credit may be as much as $3,400 for those who purchase the most fuel-efficient passenger automobiles and light trucks. Calculating the credit, however, can be extremely challenging because of the complexity involved.

Form 8910, Alternative Motor Vehicle Credit, is used to compute all components of the alternative motor vehicle credit, including the hybrid credit. If the vehicle is used for business purposes, the credit amount is also reported on Form 3800, General Business Credit. The credit amount for vehicles used for personal purposes is reported on line 55 of Form 1040.

Tax credit for electric vehicles. A 10 percent tax credit (based on your purchase price) was allowed for certain electric vehicles placed in service after June 30, 1993, and before January 1, 2007. The maximum credit could not exceed $3,000 in 2006. Unfortunately, the credit was eliminated entirely in 2007.