Energy Efficient Motor Vehicle Credits for Tax Year 2006

The 2005 Energy Tax Incentives Act essentially repealed Internal Revenue Code Section 179A, effective as of January 1, 2006, and replaced it with new Internal Revenue Code Section 30B, which authorizes a set of new motor vehicle credits.

Credits for the Purchase of Energy Efficient Motor Vehicles

Energy efficient motor vehicles are designed to use less fuel than most gas powered vehicles. To claim any of the new vehicle credits, the vehicle MUST:

1. Be Approved by the United States Treasury Department, AND

2. Be made by a manufacturer, AND

3. Meet certain Clean Air Act and maximum available power specifications (which vary based on the gross vehicle weight rating "GVWR" of the vehicle), AND

4. Be NEW (original use) property acquired for the use or lease of the taxpayer and not for resale, AND

5. The vehicle must be used primarily in the United States.

NOTE: The vehicle does not need to be used for business purposes to qualify for any of the vehicle credits.

There are FOUR alternative motor vehicle credits:

1. Qualified Fuel Cell Motor Vehicle Credit

A fuel cell vehicle uses hydrogen as its main source of power. The amount of the credit is based on the gross vehicle weight rating (GVWR) and ranges from $8,000 to $40,000. Qualified fuel cell vehicles that meet the definition of either a passenger automobile or light truck and meet certain standards for increased fuel efficiency will be allowed to increase the credit based on the increase in fuel efficiency over the year 2002 city fuel economy standards. The additional amount can range from $1,000 to $4,000.

The fuel cell motor vehicle credit is available for vehicles placed in service between January 1, 2006 and December 31, 2014. After December 31, 2009, the base credit decreases to $4,000 for cars and light trucks.

2. Advanced Lean Burn Technology Motor Vehicle Credit

This type of vehicle has a combustion engine designed to use more air than necessary for complete combustion of the fuel. The amount of the credit is based on overall fuel economy and ranges from $400 to $2,400. In addition, a conservation credit is also available and it is based on the vehicle's estimated lifetime fuel savings and ranges from $250 to $1,000.

The advanced lean burn technology motor vehicle credit is available for vehicles placed in service between January 1, 2006 and December 31, 2010.

NOTE: See "Phase-Out and Other Special Rules for Motor Vehicle Credits" below.

3. Qualified Hybrid Motor Vehicle Credit

A hybrid vehicle uses both gas and electricity to propel the vehicle. The amount of the credit is based on overall fuel economy and ranges from $400 to $2,400. In addition, a conservation credit is also available and it is based on the vehicle's estimated lifetime fuel savings and ranges from $250 to $1,000.

The qualified hybrid motor vehicle credit is available for vehicles placed in service between January 1, 2006 and December 31, 2010, if the vehicle weighs less than 8,500 pounds. If the vehicles weighs more than 8,500 pounds, the credit expires December 31, 2009.

NOTE: See "Phase-Out and Other Special Rules for Motor Vehicle Credits" below.

4. Qualified Alternative Fuel Motor Vehicle Credit

This type of vehicle is designed to use alternative fuels such as compressed or liquefied natural gas, liquefied petroleum gas, hydrogen or other liquid fuels that are at least 85% methanol. Hybrid vehicles may qualify under this definition. However, electric vehicles that qualify for the electric vehicle credit are specifically excluded from the definition. The amount of the credit is based on a percentage of the incremental cost (equal to the excess of the manufacturer's suggested retail price (MSRP) for the vehicle over the MSRP for a gasoline or diesel fuel motor vehicle of the same model) of the vehicle and ranges from $5,000 to $40,000. A reduced credit is available for vehicles that use a fuel mixes that are no more than 25% gasoline.

For more information on qualifying vehicles visit the following websites:

• IRS - Hybrid & Alternative Motor Vehicles

• IRS - News Releases & Fact Sheets - Hybrid & Alternative Motor Vehicles

• IRS - Summary - Credit for Qualified Hybrid Vehicles

• www.EnergyTaxIncentives.org

Phase-Out and Other Special Rules for Motor Vehicle Credits

The credits for hybrid and lean burn vehicles will be phased out over a period of four calendar quarters once the manufacturer has sold over 60,000 qualifying vehicles. The phase-out period will begin with the second calendar quarter following the quarter in which the 60,000 milestone is reached. The phase-out will be complete starting with the sixth quarter after that milestone is reached, which means that no further credits will be allowed for vehicles from that manufacturer.

Specifically, during the first two quarters of the four-quarter phase-out period, the credits will be reduced to 50% of the otherwise allowable amount. During the last two quarters of the phase-out period, the credits will be reduced to only 25% of the otherwise allowable amount.

Furthermore, these vehicle credits cannot be used to reduce the taxpayer's federal income tax liability below the alternative minimum tax amount, and the depreciable basis of vehicles used for business will be reduced by the credit amounts and the amount eligible for the credit must be reduced by any Internal Revenue Code Section 179 expense claimed on the property.

The credits will not be phased out for high-income taxpayers, and will be available for personal-use and for business-use property.

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