The new alternative motor vehicle income tax credit is available for qualified fuel cell motor vehicles, advanced lean-burn technology motor vehicles, qualified hybrid motor vehicles and qualified alternative fuel motor vehicles purchased after 2005. For qualified hybrid vehicles, this credit is currently set to expire at the end of 2009.

The credit is determined differently for each type of vehicle and may vary considerably. For hybrid vehicles, it is based on a combination of increased fuel economy and lifetime fuel savings and can be as much as $3,400. Therefore, the higher the credit, the more fuel-efficient a vehicle will be.

A motor vehicle does not have to be used in a trade or business or for the production of income in order to qualify for this credit, but it must be new.

Taxpayers who want the maximum available credit may want to consider buying early since the full credit is only available for a limited time (explanation below about the 60,000 manufacturer limit).

Taxpayers who are affected by the Alternative Minimum Tax (AMT) should be cautious in that the credit will only offset the regular income tax and not the AMT, thus limiting or eliminating the credit for those taxpayers.

Taxpayers using the vehicles for business will be required to reduce the depreciable basis of the vehicle by the amount of the credit allowed. In addition, no credit is allowed for the cost of the vehicle taken as a Sec. 179 expense deduction.

Standard Mileage Tax Strategy – With gas prices going through the roof, taxpayers might consider taking advantage of the energy tax incentives available for the purchase of hybrid vehicles. If a taxpayer uses a vehicle for business, they can choose between deducting actual expenses such as fuel, repairs, insurance, etc., or deducting a standard amount for each business mile driven. The standard mileage rate is determined periodically by the IRS using average costs of operating a vehicle. By using the standard mileage rate with a high fuel-efficient vehicle, it is conceivable that a taxpayer’s deductions could be more than the actual cost of operating the vehicle.

If you are planning a hybrid vehicle purchase, it may be appropriate to call this office in advance to determine what tax benefit the purchase will provide.

Certified Vehicles (at press time) – The IRS has acknowledged the certification of the following vehicles for the hybrid and alternative fuel tax credit.

60,000 Vehicle Limit - Taxpayers may claim the full amount of the allowable credit for qualified hybrid motor vehicles up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th vehicle. For the second and third calendar quarters after the quarter in which the 60,000th vehicle is sold, taxpayers may claim 50% of the credit. For the fourth and fifth calendar quarters, taxpayers may claim 25% of the credit. No credit is allowed after the fifth quarter.

Vehicle Limit Applies to Manufacturer – Vehicle Models - The 60,000 hybrid vehicle limitation applies to the total of all qualified hybrid models sold by a manufacturer, not to each qualified hybrid model sold by it. Once the threshold is reached and the credit either is reduced or is eliminated for vehicles sold by a particular manufacturer, a prospective purchaser may want to factor the reduced or eliminated tax break into his choice of which vehicle to purchase.