The Internal Revenue Code Section 30B provides the “Alternative Fuel Motor Vehicle Credit” (AFMVC) that is included under the Energy Policy Act of 2005 and defines tax credits for four distinct vehicle categories:

1. Qualified Hybrid Vehicles

2. Qualified Fuel Cell Vehicles

3. Qualified Alternative Fuel Motor Vehicles (QAFMV) and Heavy Hybrids

4. Advanced Lean-Burn Technology Vehicles

The Energy Policy Act of 2005 changed the clean-fuel burning deduction to a tax credit for hybrid vehicles purchased or put into service on or after January 1, 2006.

The value of the credit depends on the vehicle category. The IRS notices “Qualified Hybrid Vehicles and Advanced Lean Burn Vehicles” (Notice No. 2006-9) contain the procedures for manufacturers to certify passenger vehicles and light trucks as QAFMVs, while instructions for certifying heavy trucks are in “Heavy Hybrid Vehicles” (Notice No. 2009-54). Procedures for certifying Fuel Cell Vehicles are in “Qualifying Fuel Cell Vehicles” (Notice No. 2008-33).

Below are descriptions of applying the AFMVC to each of the vehicle categories:

1. Qualified Hybrid Vehicles

Hybrid vehicles utilize a combination of gasoline and electric engines with rechargeable batteries to power their drive trains. For hybrid vehicles, taxpayers can normally rely on the manufacturer’s certification of a specific make, model and model year that qualifies for the credit. However, the credit can only be claimed after the maker has sold at least 60,000 hybrid passenger vehicles or light truck or advance lean burn technology vehicles in a quarter. The credit is phased over four quarters with 100% of the credit claimed in the first quarter following the qualifying quarter (i.e. 60,000 vehicles sold); 50% claimed in the second and third quarters following the qualifying quarter and 25% claimed in the third and fourth quarters thereafter. No claim can be made after the fifth quarter following the qualifying quarter.

2. Fuel Cell Vehicles

A Fuel Cell vehicle utilizes one or more cells that convert chemical energy directly into electrical power to drive the vehicle’s power train. The value of the tax credit for Fuel Cell vehicles varies with the vehicle’s gross weight, though passenger vehicles and light trucks qualify for an additional credit based on their fuel efficiency.

3. Qualified Alternative Fuel Motor Vehicles (QAFMV) and Heavy Hybrids

Alternative Fuel Motor vehicles use compressed natural gas (CNG), liquefied natural gas (LNG), liquefied petroleum gas (LPG or propane), hydrogen or mixed fuels (i.e. LPG and gasoline or LNG and gasoline). Vehicles that are originally equipped to run on alternate fuels or are converted in the aftermarket to do so both qualify for the tax credit.

4. Advanced Lean-Burn Technology Vehicles

Advanced Lean-Burn Technology vehicles utilize an internal combustion engine that is designed to operate on a higher air mixture than normal and uses direct fuel injection technology to reach 125% of the 202 model year “City Fuel Economy” rating. The tax credit is based on the vehicle’s fuel efficiency as compared to the 2002 model year, plus an additional credit based on projected lifetime fuel savings for the vehicle.

The credit is only given to the purchaser of new vehicles, must be put into service after December 31, 2005, and on or before December 31, 2010, and must be mainly used in the U.S. If the vehicle is leased, the leasing company, not the lessee, is eligible for the credit, provided they purchased the vehicle new.

Additional information, including listings of vehicles that qualify under the above categories is available from the IRS in various publications. Taxpayers should also consult with their CPAs, professional tax preparers and other tax practitioners.

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