Tax Update: Motor Vehicles

The high cost of fuel is a popular topic these days. The debate over oil prices, however, obscures the fact that considerable legislative, regulatory, and legal action has been taken over the last year affecting motor vehicles, including the Energy Tax Incentives Act of 2005, the Safe, Accountable, Flexible, Efficient, Transportation Equity Act: A Legacy for Users (SAFETY), Rev. Proc. 2006-15, 2006-5, IRB 387, Rev. Proc. 2006-18, 2006-12 IRB 845, and Notice 2005-44, 2005-25 IRB 1287. The following summarizes information presented at the American Institute of Certified Public Accountants (AICPA’s) Small business Practitioners’ Tax Forum held July 17-18 in Chicago, Ill.

Provisions of the Energy Tax Incentives Act of 2005 and the SAFETY Act provides a new tax credit for Fuel Cell Motor Vehicles, a tax credit for new advanced Lean Burn Technology Motor Vehicles, a tax credit for New Qualified Hybrid Motor Vehicles , a tax credit for Alternative Fuel Vehicle, the repeal of the gas guzzler tax for limousines and the termination of the deduction for Clean Fuel Vehicles.

The new credit for qualified fuel cell motor vehicles ranges from 8,000 for vehicles with a gross weight of no more than 8,500 pounds, to 40,000 for vehicles weighing more than 26,000 pounds. To qualify, the motor vehicle must meet the following requirements:

  • The original use of the vehicle must begin with the taxpayer.
  • The vehicle must be acquired for the use or lease of the taxpayer and not for resale.
  • The vehicle must be made by a manufacturer.
  • If the vehicle is a passenger auto or light truck, the vehicle must be certified as meeting or exceeding the Bin 5, Tire II emission standard established in the regulations under the Clean Air Act for that make model and year.
  • The vehicle must be propelled by power derived from one or more cells converting chemical energy directly into electricity by combining oxygen with hydrogen fuel and other provisions.

The requirements for claiming the new advanced lean burn technology motor vehicle credit include:

  • The original use of the vehicle must begin with the taxpayer.
  • The vehicle must be acquired for the used or lease of the taxpayer and not for resale.
  • The vehicle must be made by a manufacturer
  • The vehicle must be a passenger auto or light truck with an internal combustion engine that is designed to operate primarily using more air than necessary for the complete combustion of fuel, incorporates direct injection and achieves at least 125 percent of the 2002 model year city fuel economy.

In addition, 2004 model year lean burn technology motor vehicles must also receive a certificate that the vehicle meets or exceeds the Bin 5, Tier II emission standard established under the Clean Air Act for that make and model year, for the gross vehicle weight rating is 6,000 pounds or less. For 2004 model year vehicles having a gross vehicle weight rating of more than 6,000 pounds but less that 8,500, must be certified to meet or exceed the Bin 8, Tier II emission standard established by the Clean Air Act.

The lean burn credit can be increased by a conservation credit based on lifetime fuel savings in gallons of gas. The credit will be phased out, however, when a manufacturer of these vehicles certifies that it has sold a combined total of 60,000 of these vehicles for use in the U.S. since December 31, 2005. For vehicle purchased in the same calendar quarter as the sale of the 60,000th unit, and the next calendar quarter, taxpayers will be allowed to continue to claim the full allowable credit amount. The credit amount will be limited to 50 percent of the allowable credit amount for vehicles purchased in the next two calendar quarters and to 25 percent of the allowable credit amount for vehicles purchased in the following two quarters. The credit will be disallowed in all calendar quarters thereafter. This provision is effective for vehicles placed in service after December 31, 2005, and terminates as of December 31, 2010. Vehicles purchased after December 31, 2010, will not qualify for this credit.

The new qualified hybrid motor vehicle credit has attracted significant attention with the list of hybrid vehicle models certified for the credit being updated as recently as last week, the updated list of certified vehicles is available online. In addition, hybrid vehicle must meet the following requirements:

  • The original use of the vehicle must begin with the taxpayer
  • The vehicle must be acquired for the use or lease of the taxpayer and not for resale
  • The vehicle must be made by a manufacturer
  • The vehicle must draw propulsion energy from onboard sources of stored energy that are both an internal combustion or heat engine using consumable fuel and a rechargeable energy storage system.
  • The vehicle must be used predominantly within the U.S.

The hybrid credit is subject to the maximum unit limitations of the lean burning vehicle credit. This credit is effective for vehicles placed into service after December 31, 2005, and purchased before January 1, 2010.

The qualified alternative fuel vehicle credit is effective for vehicles placed into service after December 31, 2005, and purchased before January 1, 2011. The creation of this credit means that the deduction for clean-fuel vehicles is no longer necessary and will not be permitted for vehicles placed into service after December 31, 2005.

The requirements for claiming the alternative fuel credit include:

  • The original use of the vehicle must begin with the taxpayer.
  • The vehicle must be acquired for the use or lease of the taxpayer and not for resale
  • The vehicle must be made by a manufacturer
  • The vehicle must be capable of using an alternative fuel, defined as compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, and any liquid at least 85 percent of the volume of which consists of methanol.

The amount of the alternative fuel vehicle credit equals the applicable percentage times the incremental cost of the vehicle. Incremental costs equals the excess of the manufacturer’s suggested retail price (MSRP) for the vehicle over the MSRP for a gasoline or diesel fuel motor vehicle of the same model, to the extent that the amount does not exceed certain limits.

The new qualified alternative fuels motor vehicle credit may be claimed in a reduced amount for vehicles that use a mixture of alternative and petroleum-based fuels. The credit for mixed-fuel vehicles is expressed as a percentage of the credit. For instance, if a mixed-fuel vehicle uses a 75/25 percent mixture (at least 75 percent alternative fuel and at most 25 percent petroleum-based fuel), it is eligible for 70 percent of the credit.

The Energy Tax Incentives Act of 2005 and the SAFETY Act are not the only actions taken this year that impact vehicles.

The Internal Revenue Service, in Rev. Proc. 2006-15, 2006-5 IRB 387, announced that the maximum value of employer-provided vehicles first made available to employees for personal use in calendar year 2006 (1) for which the vehicle cents-per-mile valuation rule of Reg. 1.61-21(e) can be used is $15,000 for a passenger auto and $16,400 for a truck or van and (2) for which the fleet-average valuation rule of Reg 1.61-21(d) can be used is $19,900 for a passenger auto and $21,400 for a truck or van.

In Rev. Proc. 206-18, 206-12 IRB 845, the IRS announced the depreciation limits for passenger autos placed in service during 2006. The limit is $2.960 for the first tax year. Separate limits are provided for trucks and vans ($3,260 for the first tax year) and electric autos ($8,980 for the first tax year). The IRS also published tables providing the income inclusion amounts for leassees of passenger autos, trucks and vans, and electric autos leased during 2006.

The IRS released guidance on the charitable deductions for donated vehicles in Notice 2005-44, 2005-25 IRB 1287. The 2004 Jobs Creation Act generally limits the deduction to the actual sale price of the vehicle when sold by the charity at auction and requires donors to get timely acknowledgement from the charity to claim the deduction. The guidance in this Notice clarifies the meaning of significant intervening use of a vehicle and the material improvement to a vehicle. In addition, it explains how to determine the vehicle’s fair market value (FMV) if one of the exceptions applies. A donor can also claim a deduction for the FMV of a donated vehicle if the charity gives or sells the vehicle at a significantly below-market price to a needy individual, if the transfer furthers the charitable purpose of helping poor persons who need transportation. Finally, the IRS describes in this Notice the content and the due dates for acknowledgements by the charity.

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