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.
Liquefied natural gas
Liquefied petroleum gas
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.
In order to qualify for the deduction:
The clean-fuel vehicle or equipment must be acquired for your own use and not for resale.
You must be its original user.
The motor vehicle must satisfy any federal or state emissions standards that apply to each fuel the vehicle is designed to use, or
It must satisfy any federal and state emissions certification, testing, and warranty requirements that apply.
Some vehicles do not qualify for the deduction, based on how they are used. The following do not qualify:
Vehicles used outside the United States
Vehicles used to furnish lodging or in connection with lodging
Vehicles used by tax-exempt organizations.
Vehicles used by governmental units or foreign persons or entities.
Deduction for Clean-Fuel Vehicle Refueling Property
If you use a clean-fuel vehicle in your trade or business, you may be able to deduct clean-fuel vehicle refueling property (other than a building where it is located) that is used to do either of the following:
Store or dispense a clean-burning fuel into the fuel tank of the clean-fuel vehicle, but only at the point where the fuel is delivered into the tank (not in a separate storage place or dispensing station.
Recharge electric motor vehicles, but only at the point where the vehicles are recharged.
Recharging property includes any equipment used to provide electricity to the battery of an electric vehicle. It includes high and low-voltage recharging equipment, and connection equipment suchas inductive charging equipment. It does not include other property used to generate electricity, or the battery used in the vehicle.
Before calculating the clean-fuel vehicle deduction, you must reduce the cost of the property by the amount you are claiming as a section 179 deduction. The section 179 deduction is a special tax provision that allows you to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service.
How much is the maximum deduction?
The maximum deduction you can claim for a qualified clean-fuel vehicle depends on the type of vehicle:
For a truck or van weighing over 26,000 pounds, or for a bus with a seating capacity of at least 20 adults, you can claim a deduction of up to $50,000.
For a truck or van weighing between 10,000 and 26,000 pounds, you can claim a deduction of up to $5,000.
For other vehicles, the maximum deduction is $2,000.
Clean-fuel vehicles refueling property
If you use the vehicle in your trade or business, you can claim a deduction of up to $100,000 for clean-fuel vehicle refueling property placed in service at one location.
When you calculate your maximum deduction, you have to reduce the $100,000 by any amounts you or a related person claimed for similar property that was placed in service at that same location for all prior years.
For purposes of the deduction limit for individuals, related persons incude the following:
Family and relatives
An individual and a corporation if the individual owns more than 50% of the corporation’s stock
A grantor and fiduciary of any trust
Fiduciaries of two separate trusts granted by the same person
A fiduciary and a beneficiary of the same trust or of two separate trusts if they were granted by the same person
A fiduciary of a trust and a corporation if the trust or grantor of the trust owns more than 50% of the corporation’s stock
A person and a tax-exempt educational or charitable organization, if the organization is controlled directly or indirectly by that person or members of that person’s family
An individual and a partnership if the person owns more than 50% of the partnership
An executor of an estate and a beneficiary of the estate
How To Claim the Deductions
How you claim the deductions for clean-fuel vehicle property and clean-fuel vehicle refueling property depends onthe kind of income tax return you file.
Individuals can claim the deduction for clean-fuel vehicle property as an adjustment to income in determining adjusted gross income on Form 1040. There is not a separate line on Form 1040 for this deduction, so you will need to enter the amount of your deduction and write "Clean Fuel" on the dotted line alongside the total adjustments line just above the line for Adjusted Gross Income.
Sole proprietors who use the clean-fuel vehicle for business purposes should claim the deduction in Other Expenses on Schedule C or F. If they use the clean-fuel vehicle partly for nonbusiness purposes, the nonbusiness portion should be reported as an adjustment to income in determining adjusted gross income on Form 1040.
Recapture of Deductions
The IRS provisions also include an incentive to maintain clean-fuel vehicles for their intended purpose.
If the vehicle ceases to qualify as a clean-fuel vehicle within 3 years after you claim the deduction, you may have to give back, or "recapture" the deduction. You recapture the deduction by including it, or part of it, in your taxable income.
A vehicle ceases to qualify if within 3 years after the date you placed it in service:
It is modified so that it can no longer be used with clean-burning fuel.
It ceases to qualify as a clean-fuel vehicle because it fails to meet emissions control standards.
The amount you will have to recapture and include in your income is as follows:
100% of your deduction if the vehicle ceases to qualify within the first full year after the date the vehicle was first placed in service.
Two-thirds of your deduction if the vehicle ceases to qualify within the second full year.
One-third if it ceases to qualify within the third full year.
How you report the recapture of your deduction and include it in your income depends on how you originally claimed the deduction.
Individuals who claimed a deduction as an adjustment to income in determining adjusted gross income should include the recapture amount in Other Income on Form 1040.
Sole proprietors who claimed the deduction as Other Expense on Schedule C or F should report the recapture amount as Other Income on Schedule C or F.
Likewise, if a deduction is claimed for the business use of clean-fuel vehicle refueling property, and that property ceases to qualify, for example, if the refueling property is converted to store and dispense gasoline, or if the property is no longer used 50% or more in your business, you will have to recapture part of your original deduction.
In this case, the amount that has to be recaptured and reported as income is calculated as a percentage, as follows:
Total recovery period for the property
Minus recovery years before the recapture year
Equals remaining recovery years
Divided by the total recovery period for the property
Times the deduction claimed
Sole proprietors should include this recapture amount in Other Income on Schedule C or F.
When you claim a deduction for a clean-fuel vehicle or clean-vehicle refueling property, you must reduce the basis of the property by the deduction claimed, for purposes of calculating depreciation and the gain or loss on an eventual sale or disposal of the property.
Electric Vehicle Credit
If you purchase a qualified electric vehicle and place it in service during the year, you can take a tax credit. You can take this credit regardless of whether you use the vehicle for business or personal purposes, or both.
Qualified Electric Vehicle
In order to claim the credit, you must meet the following requirements.
The vehicle must be powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or other portable sources of electrical current.
You are the first person to use it.
You acquired it for your own use and not for resale.
It has never been used as a nonelectric vehicle.
Hybrid gas-electric vehicles are not qualified electric vehicles. But you may be able to claim a deduction for these vehicles, as discussed above.
How Much is the Credit?
The credit is generally 10% of the cost of the electric vehicle, up to a maximum of $4,000 for each vehicle. If the vehicle is a depreciable business asset, you calculate the credit after reducing the cost by any section 179 deduction you take on the vehicle.
How To Claim the Credit
You must complete and attach Form 8834 to your tax return to claim the electric vehicle credit. On this form you will calculate any limitation on the amount you can claim as a credit. The total credit is limited to the excess of your regular tax liability, reduced by certain other credits, over your tentative minimum tax. The electric vehicle credit does not allow you to obtain a refund if your net regular tax is zero or less.
Individuals report the credit from Form 8834 in the Tax and Credits section of Form 1040, on the line for Other Credits.
Recapture of the Credit
As in the case of the deduction for clean-fuel vehicles, the electric vehicle credit is subject to recapture if, within 3 years after the date you place the vehicle in service, it ceases to qualify for the electric vehicle credit. The vehicle ceases to qualify if it is modified so that it is no longer primarily powered by electricity.
100% of your credit if the electric vehicle ceases to qualify within the first full year after it was placed in service.
Two-thirds of your credit if it ceases to qualify within the second full year after it was placed in service.
One-third if it ceases to qualify within the third full year.
You report the recapture amount by adding it into the Total Tax line on Form 1040 and writing "QEVCR" on the dotted line next to that line.
When you claim a tax credit for a qualified electric vehicle, you must reduce your basis in the vehicle by the the lesser of $4,000 or 10% of the cost of the vehicle.