United States: Considering Purchasing a Hybrid Vehicle?

As discussed in our Year-End Tax Planning Guide for 2005, on August 8, 2005, the Energy Tax Incentives Act of 2005 (the "Energy Act") was signed into law. Although it contained $14.5 billion in tax incentives designed to improve energy production, transportation and efficiency, its provisions were not effective until 2006 and included tax credits for individuals who purchase vehicles powered by alternative fuels.

The Energy Act replaced the $2,000 above-the-line deduction previously available for the purchase of hybrid vehicles through December 31, 2005, with a new qualified hybrid motor vehicle tax credit for qualified hybrid passenger automobiles and light trucks purchased after that date. A qualified vehicle may not weigh more than 8,500 pounds, must be purchased before a statutorily-defined number of qualified vehicles are purchased and must meet certain fuel-economy requirements.

In addition, the maximum credit is $3,400 and it will expire after December 31, 2010. The amount of the credit cannot reduce your federal income tax liability below the alternative minimum tax (AMT) amount. Therefore, if you are already subject to the AMT, you will receive no benefit from this credit. If you are unsure of your AMT exposure and are considering an alternative fuel vehicle purchase, please feel free to give us a call.

The Internal Revenue Service has acknowledged the certifications by Ford Motor Company and by Toyota Motor Sales U.S.A. Inc. that several of their 2006 and 2007 vehicles (and a Toyota 2005 model year vehicle) qualify for the hybrid tax credit enacted by the Energy Act. The hybrid vehicle certifications recently acknowledged by the Service and their credit amounts are:

If you seek this credit, you should consider buying early since the full credit is available only for a limited time. As additional vehicles are manufactured that qualify for the hybrid tax credit, the IRS will acknowledge their certifications.

In general, hybrid vehicles have higher price tags than conventional fuel vehicles. Accordingly, you should consider whether the combination of gasoline savings and potential tax credits will allow you to recoup the hybrid’s higher price. The uncertainty in predicting future gas prices, the difficulty in estimating the number of miles the car will be driven, the possibility that additional tax incentives for hybrids will be allowed and the resale value of a hybrid vehicle also affect the value of a hybrid.

Furthermore, since hybrid vehicles use expensive nickel-metal hydride battery packs that do not have unlimited lives, the battery replacement expense, which may be $3,000 or more, must also be considered. And as indicated above, the full credit for hybrid vehicles is available only for a limited time, the credit does not apply against the AMT and any unused credit cannot be carried over to another tax year.

Based on these factors, it is clear that the decision to purchase a hybrid vehicle is not totally subject to objective, quantitative analysis, since these and other uncertainties exist. Please do not hesitate to contact us if you would like to discuss your particular options with regard to the new hybrid vehicle tax credit.

This newsletter is for general information and does not include full legal analysis of the matters presented. It should not be construed or relied upon as legal advice or legal opinion on any specific facts or circumstances. The invitation to contact the authors or attorneys in our firm is not a solicitation to provide professional services and should not be construed as a statement as to any availability to perform legal services in any jurisdiction in which such attorney is not permitted to practice.