If you are in the market for a new vehicle, are concerned about the environment and about fuel economy, there are tax breaks available that may help you make the decision. You can take an income tax deduction for a clean-fuel vehicle and a direct credit against your tax for part of the cost of an electric vehicle.
Clean-Fuel and Electric Vehicles
If you are in the market for a new vehicle, keep in mind that part of the cost of a more environmentally compatible vehicle could be offset by a special income tax deduction for clean-fuel vehicles, or a tax credit for an electric vehicle.
What are the tax benefits?
For U.S. federal income tax purposes, there are two tax benefits available:
If you purchase and place in service a clean-fuel vehicle, you are allowed to take a tax deduction, which reduces your adjusted gross income subject to tax.
If you purchase an electric vehicle, you can take a credit for 10% of the cost, up to a maximum of $4,000. The credit is a direct reduction of your tax.
You can take the deduction for a clean-fuel vehicle or the credit for an electric vehicle regardless of whether the vehicle is for business or personal use. If you use a clean-fuel vehicle in your trade or business, you may also be able to take a deduction for part of the cost of refueling equipment associated with that vehicle.
These deductions and the credit are available only in the tax year you place the vehicle in service.
What qualifies as a clean-fuel vehicle?
The Internal Revenue Service (IRS) defines the following as clean-burning fuels. Vehicles that use these types of fuels would therefore qualify for the clean-fuel vehicle deduction.
Natural gas
Liquefied natural gas
Liquefied petroleum gas
Hydrogen
Electricity
Any other fuel that is at least 85% alcohol (any kind) or ether
The IRS provisions refer to "clean-fuel vehicle property", which can be either the vehicle itself or equipment installed on a vehicle to convert it into a clean-fuel vehicle.
Hybrid gas and electric automobiles such as the Ford Escape, Honda Insight, Honda Civic Hybrid, and Toyota Prius, that are originally designed and manufactured to use a clean-burning fuel, qualify as clean-fuel vehicles. It should be noted that a distinction is made between clean-fuel vehicles and electric vehicles. Clean-fuel vehicles qualify for the deduction, and do not include electric vehicles, which qualify for the credit.
The following equipment installed on a vehicle to enable it to use a clean-burning fuel may also qualify for the deduction:
A clean-fuel engine (or modification of an engine) that can use a clean-burning fuel,
Equipment used to store or deliver the fuel to the engine, or
Equipment used to exhaust gases from the combustion of the fuel.
For vehicles that can use either a clean-burning fuel or any other fuel, your deduction is generally limited to the additional cost involved to enable the vehicle to use clean-burning fuel.