The American Recovery and Reinvestment Act (ARRA) of 2009 modified the tax credits originally enacted in the Energy Improvement and Extension Act (EISA) of 2008 intended to encourage individual taxpayers to invest in energy-efficient products, including plug-in electric vehicles and related conversion kits.

Plug-in Electric Drive Vehicle Credit (Section 1141)

Under the ARRA, qualified Plug-In Electric Vehicles purchased on or before December 31, 2009, receive a tax credit of between $2,500 and $7,500. To qualify for the credit, the vehicle must be newly purchased, have four or more wheels, have a gross weight of less than 14,000 pounds, and use a battery with at least 4 kilowatt hours, rechargeable from an external electrical source. In addition, the vehicle must be for on-road use, not off-road usage, such as at a golf course. Note: Only vehicles actually acquired, not just contracted to be purchased, qualify for the tax credit.

The amount of the credit is based on the vehicle’s battery capacity, with batteries having a minimum of 4 kilowatt hours receiving the $2,500 tax credit. Batteries with 5 kilowatt hours of capacity are given an additional $417 credit, plus $417 for each kilowatt hour of battery capacity exceeding 5 kilowatt hours.

The tax credit will be phased out over a one year period beginning with the second calendar quarter after the calendar quarter wherein the manufacturer sells 200,000 vehicles in the U.S. Taxpayers receive 50% of the credit in the first two quarters of the phase-out period, 25% of the credit in the final two quarters of the phase-out, with no tax credit given thereafter.

Plug-In Electric Vehicle Credit (Section 1142)

The modifications to the tax rules for plug-in electric vehicles established tax credits for low-speed and two- or three-wheeled plug-in vehicles. Such vehicles purchased after February 17, 2009, and on or before January 1, 2012, qualify for a tax credit of 10 percent of the cost, up to a maximum of $2,500. Vehicles qualifying for this credit must either be a low-speed vehicle propelled using a battery with a capacity of 4 kilowatt hours or more, or be a two- or three-wheeled vehicle using a battery with a capacity of 2.5 kilowatt hours or more. Vehicles qualifying for the standard tax credit under Section 1141 cannot also take the tax credit under Section 1142.

Conversion Kits (Section 1143)

In addition to tax credits for the purchase of new plug-in electric vehicles, there is also a provision giving tax credits for converting gas and hybrid cars to qualified plug-in electric drive vehicles. To earn the tax credit, the vehicle must be converted to plug-in electric drive and put into service after February 17, 2009. The tax credit equals 10 percent of the conversion cost with a maximum credit of $4,000. This tax credit is not available on conversions made after December 31, 2011, though a taxpayer can still take this tax credit on a vehicle for which a Hybrid Vehicle Tax Credit was claimed in a prior year.

Alternative Motor Vehicle Credit as Personal Credit Against AMT (Section 1144)

The modifications to the tax rules now allows, effective for 2009, the Alternative Motor Vehicle Credit, including the tax credit for hybrid vehicles, to be taken as a Personal Credit in calculating a taxpayer’s “Alternative Minimum Tax” (AMT). Previously these credits could not be used to reduce the AMT or the credit was reduced for taxpayers who did not owe the AMT.

Tax Credit Availability

Taxpayers can take a tax credit for each qualifying Plug-In Electric Vehicle purchased, but the taxpayer must have tax liability against which to apply the credit. Unused tax credits for plug-in vehicles cannot be carried back or forward.

Additional information is available on the IRS website and in a number of IRS notices and press releases: “Tax Breaks Available for Taxpayers Who Purchase Qualified Plug-In Electric Vehicles” (IR-2009-45), dated April 24, 2009, “Qualified Plug-in Electric Vehicle Credit” (Notice 2009-54), dated June 29, 2009, “New Qualified Plug-in Electric Drive Motor Vehicle Credit” (Notice 2009-89), dated November 30, 2009, and

“Qualified Plug-In Electric Vehicle Credit Under Section 30” (Notice 2009-58).

Taxpayers should consult with CPAs, professional tax preparers or other tax practitioners for advice concerning their specific tax situation.

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