IRS Provides Guidance on Tax Credits for Hybrids

The Internal Revenue Service (IRS) published a notice earlier this month that provides guidance on claiming a federal tax credit for the purchase of a hybrid vehicle or a vehicle with an advanced lean-burn engine. The IRS guidance tells how manufacturers can certify to the purchasers of these vehicles that the vehicles are eligible for the tax credit and what amount of tax credit they will earn.
Taxpayers who are purchasing these vehicles will be able to use the manufacturer’s certification to claim the credit on their tax return.

The tax credit for hybrid vehicles, which was enacted by the Energy Policy Act of 2005, may be as much as $3,400 for those who purchase the most fuel-efficient vehicles. Hybrid vehicles have drive trains powered by both an internal combustion engine and a rechargeable battery. Many currently available hybrid vehicles will qualify for the tax credit. The guidance also provides a similar certification process for advanced lean-burn technology vehicles.

Since taxpayers may claim the full amount of the allowable credit only up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid and advanced lean-burn technology motor vehicle, consumers seeking the credit may want to buy early in the year.

The Energy Policy Act also provides tax credits for motor vehicles that are not covered by the IRS guidance. The other vehicles eligible for credits are fuel cell vehicles, alternative fuel vehicles, and hybrid heavy trucks. The IRS will issue guidance providing certification procedures for these vehicles in the near future.

Published 01/27/2006