2005 Tax Changes Affecting Electric & Clean-Fuel Vehicles

Taxpayers who put a qualified electric or clean-fuel vehicle into service during 2005 can claim the maximum electric vehicle credit and/or the maximum clean-fuel vehicle deduction, according to the Internal Revenue Service (IRS). Other clean-fuel property placed into service this year may also be eligible to take the maximum deductions.

Popular gas/electric hybrid vehicles, such as Toyota’s Prius and Honda’s Insight, not powered primarily by an electric motor, are NOT qualified electric vehicles. If the gross vehicle weight rating of the hybrid vehicles does not exceed 10,000 pounds, however, they may qualify for the clean-fuel vehicle deduction.

Qualified Electric Vehicle Credit

The IRS generally defines a qualified electric vehicle as:

  • Being powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells or other portable sources of electrical current.
  • Having at least four wheels and is manufactured primarily for use on public streets, roads and highways.
  • Is originally used by the taxpayer.
  • Was not acquired for resale purposes
  • Has never been used as a non-electric vehicle.
  • Is used predominantly in the U.S.

If the vehicle meeting these requirements was placed in service during 2005, the taxpayer can claim a credit of up to $4,000 (approximately 10 percent of the vehicle’s cost) by completing Form 8834 and attaching it to their tax return. Remember to check box c and enter 8834 next to the check on Line 55, if using Form 1040. Also, if the credit is claimed for a qualified electric vehicle, the basis in that vehicle is reduced by the maximum credit allowable, regardless of whether the credit allowed is less than that amount. Chapter 12 of Publication 535 has more detail on adjusting basis.

If the qualified electric vehicle was placed in service prior to 2005, as a depreciable business asset, the cost of the vehicle must be reduced by any section 179 deduction, prior to calculating the credit. In addition, if the vehicle is used predominantly outside the U.S. or modified in any way so as to render it unable to qualify for the electric vehicle tax credit within three years of being put in service, all or part of the credit may be recaptured.
Clean-Fuel Vehicle Deduction

According to the IRS, the original purchaser of a qualifying hybrid gas-electric car before 2006, may deduct $2,000 for the first year the vehicle is used. Hybrid vehicles qualifying for the clean-fuel deduction include:

  • 2005 & 2006 Ford Escape Hybrid
  • 2006 Mercury Mariner Hybrid
  • 2006 Lexus RX 400h
  • 2001-2005 Toyota Prius
  • 2006 Toyota Highlander Hybrid
  • 2000-2005 Honda Insight
  • 2003-2005 Honda Civic Hybrid
  • 2005 Honda Accord Hybrid

To claim the clean-fuel deduction, individuals must use Form 1040, entering “Clean-Fuel” and the deduction amount on the dotted line to the left of line 35, including this amount in that line’s total adjustments to income.

Part of the cost of qualified clean-fuel vehicle property used in farming business and qualified clean-fuel vehicle refueling property, may also be deductible. More details on these deductions can be found in Publication 535.

At the time of this writing Publication 535 for 2005 was not available on the IRS web site.

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