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August 25, 2005



This explains the new alternative motor vehicle credit as enacted into law by the Energy Policy Act of 2005.

The credit, which is the sum of four distinct credits based on the type of vehicle purchased, is effective for property placed in service after December 31, 2005, in taxable years ending after such date. Because this provision overlaps with the deduction for qualified hybrid vehicles, that provision terminates as of December 31, 2005, an acceleration of one year.

The alternative motor vehicle credit is the sum of four amounts. Each amount is determined based on the type of motor vehicle purchased or leased. The four types are: (1) new qualified fuel cell motor vehicle; (2) new advanced lean burn technology motor vehicle; (3) new qualified hybrid motor vehicle; and (4) new qualified alternative fuel motor vehicle.


New Qualified Fuel Cell Motor Vehicle

The amount of the new qualified fuel cell motor vehicle credit is based on the weight of the vehicle. For example, if the vehicle has a gross vehicle weight rating of not more than 8,500 pounds, the credit amount is $8,000 ($4,000 in case of a vehicle placed in service after 2009). If the vehicle has a weight rating between 8,500 and 14,000 pounds, the credit amount is $10,000. If the vehicle has a weight rating between 14,000 and 26,000 pounds, the credit amount is $20,000. Finally, for vehicles with a weight rating above 26,000 pounds, the credit amount is $40,000.

The above credit amounts may be increased if the vehicle is a passenger automobile or light truck that obtains certain fuel efficiencies, ranging from $1,000 if the vehicle achieves at least 150% but less than 175% of the 2002 model year city fuel economy to $4,000 if such vehicle achieves at least 300% of the 2002 model year city fuel economy. The statute provides a table outlining the 2002 model year fuel economies for vehicles depending on their vehicle inertia weight class.

A new qualified fuel cell motor vehicle means a motor vehicle which: (1) is propelled by power derived from one or more cells which convert chemical energy directly into electricity by combining oxygen with hydrogen fuel which is stored on board the vehicle in any form and may or may not require reformation prior to use; (2) for passenger automobiles or light trucks, has received on or after August 8, 2005, an EPA certification that such vehicle meets or exceeds Bin 5 Tier II emission levels under the Clean Air Act for that make and model; (3) the original use commences with the taxpayer (i.e., new vehicles); (4) is acquired for purchase or lease, not for resale; and (5) is made by a manufacturer.


New Advanced Lean Burn Technology Motor Vehicle

The amount of the new advanced lean burn technology motor vehicle credit is based on the fuel economy of the vehicle. The credit amount ranges from $400 for vehicles that achieve a fuel economy (expressed as a percentage of the 2002 model year city fuel economy) of at least 125% but less than 150% to $2,400 if at least 250%. The credit amount can be increased if the vehicle achieves a lifetime fuel savings ranging from $250 if the lifetime fuel savings is at least 1,200 gallons of fuel but less than 1,800 to $1,000 if the lifetime fuel savings is at least 3,000 gallons. Lifetime fuel savings is a mathematical equation specifically defined in the statute.

A new advanced lean burning technology motor vehicle is limited to a passenger automobile and light truck which: (1) has an internal combustion engine which: (i) is designed to operate primarily using more air than is necessary for complete combustion of the fuel, (ii) incorporates direct injection, (iii) achieves at least 125% of the 2002 model year city fuel economy, and (iv) for 2004 and later model years, has received an EPA certification, depending on the weight of the vehicle; (2) the original use commences with the taxpayer (i.e., new vehicles); (3) is acquired for purchase or lease, not for resale; and (4) is made by a manufacturer.


New Qualified Hybrid Motor Vehicle

The amount of the new qualified hybrid motor vehicle credit depends on whether the hybrid is considered a passenger automobile or light truck and has a gross vehicle weight rating of 8,500 pounds or less. If the hybrid is a passenger automobile or light truck and meets the weight restriction, then the amount of the credit is based on the fuel economy of the vehicle. The credit amount ranges from $400 for vehicles that achieve a fuel economy (expressed as a percentage of the 2002 model year city fuel economy) of at least 125% but less than 150% to $2,400 if at least 250%. The credit amount can be increased if the vehicle achieves a lifetime fuel savings ranging from $250 if the lifetime fuel savings is at least 1,200 gallons of fuel but less than 1,800 to $1,000 if the lifetime fuel savings is at least 3,000 gallons. Lifetime fuel savings is a mathematical equation specifically defined in the statute.

In the case of a hybrid motor vehicle which is not a passenger automobile or light truck and does not have a gross vehicle weight rating of 8,500 pounds or less, the amount of the credit is the amount equal to the qualified incremental hybrid cost of the vehicle as certified by the manufacturer multiplied by an applicable percentage. The applicable percentages are 20%, 30% and 40%, if the vehicle achieves an increase in city fuel economy relative to a comparable vehicle of at least 30% but less than 40%, at least 40% but less than 50%, and at least 50%, respectively. The qualified incremental cost is the excess of the MSRP for such vehicle over such price for a comparable vehicle. The amount of qualified incremental hybrid cost that can be taken into account for this calculation is limited depending on the gross vehicle weight rating of the hybrid vehicle. The limitation amounts are $7,500 if the vehicle does not weigh more than 14,000 pounds, $15,000 for vehicles weighing 14,000 to 26,000 pounds and $30,000 for vehicles weighing more than 26,000 pounds.

A new qualifying hybrid vehicle is a motor vehicle that draws propulsion energy from onboard sources of stored energy which include both an internal combustion engine or heat engine using combustible fuel and a rechargeable energy storage system (e.g., batteries). A qualifying hybrid automobile or light truck must have a maximum available power from the rechargeable energy storage system of at least four percent. In addition, the vehicle must meet or exceed certain EPA emissions standards (Bin 5 Tier II emissions standards for vehicles with a gross vehicle weight rating of 6,000 pounds or less; Bin 8 Tier II emissions standards for vehicles with a gross vehicle weight rating greater than 6,000 pounds and not more than 8,500 pounds). Other power requirements must be met for hybrid vehicles above 8,500 pounds, but are not necessarily passenger automobiles or light trucks. For hybrids that the credit is determined based on the incremental cost, such hybrid, to be qualified, must have an internal combustion or heat engine which has received certification by the EPA for emissions conformity under the Clean Air Act for 2004 through 2007 model year for diesel heavy duty engines or ottocycle heavy duty engines. Other requirements include being a new vehicle, which is acquired for use or lease and not for resale and is made by a manufacturer. A vehicle that is not a passenger automobile or light truck and has a weight rating of less than 8,500 pounds cannot be a qualifying hybrid motor vehicle.


New Qualified Alternative Fuel Motor Vehicle

The new qualified alternative fuel motor vehicle credit amount equals the applicable percentage multiplied by the incremental cost of such vehicle. The applicable percentage is 50%, plus 30% if the vehicle has received an EPA certificate of conformity under the Clean Air Act and meets or exceeds the most stringent standard under the Act for that make and model year vehicle or has received certification that the vehicle meets the same requirements for vehicles leased or sold in California. For vehicles weighing more than 14,000 pounds, such standards are those in effect on August 8, 2005.

The incremental cost of such vehicle equals the amount of the excess of the MSRP for such vehicle over such price for a gasoline or diesel fuel motor vehicle of the same model, but limited in amount. Such limitation, ranging from $5,000 to $40,000, depends on the weight on the vehicle.

A new qualified alternative fuel motor vehicle is any motor vehicle that: (1) is only capable of operating on an alternative fuel; (2) the original use commences with the taxpayer (i.e., new vehicles); (3) is acquired for use or lease, but not for resale; and (4) is made by a manufacturer. Alternative fuels are compress natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, and any liquid at least 85% of the volume of which consists of methanol.

For certain mixed-fuel vehicles, the credit amount is dependent on the amount of the mixture. For 75/25 mixed-fuel vehicles, the credit amount is 70% of what would have been allowed if the vehicle met the new qualified alternative fuel motor vehicle standards. For 90/10 mixed-fuel vehicles, the credit amount is 90% of what would have been allowed. The mixture is that of alternative fuel to petroleum-based fuel.


Special Rules and Limitations

A number of special rules may limit the amount of the overall credit. For example, the statute imposes a limitation on the number of qualified hybrid motor vehicles and advanced lean-burn technology motor vehicles sold by each manufacturer of such vehicles that are eligible for the credit. Taxpayers may claim the full amount of the allowable credit up to the end of the first calendar quarter after the quarter in which the manufacturer records its sale of the 60,000th hybrid and advanced lean-burn technology motor vehicle. Taxpayers may claim 50% of the otherwise allowable credit during the two calendar quarters subsequent to the first quarter after the manufacturer has recorded its 60,000th such sale. In the third and fourth calendar quarters subsequent to the first quarter after the manufacturer has recorded its 60,000th such sale, the taxpayer may claim 25% of the otherwise allowable credit.

If the vehicle placed in service by the taxpayer is subject to an allowance for depreciation, the alternative fuel motor vehicle credit is part of the general business credit, subject to special rules and limitations. If the vehicle is not subject to an allowance for depreciation, the credit is considered a personal credit and, for any taxable year, cannot exceed the excess (if any) of the taxpayer's regular tax reduced by the allowable nonrefundable personal credits and the foreign tax credit plus the credit for qualified electric vehicles over the taxpayer's tentative minimum tax for the taxable year.

A taxpayer may elect not to take the credit. The credit does not apply for vehicles predominantly used outside of the United States. No credit can be applied to the portion of the cost that is taken into account for 179 expensing.

Finally, the credit has specific termination dates depending on the type of vehicle. In the case of a new qualified fuel cell motor vehicle, the credit does not apply for such property purchased after December 31, 2014. For new advanced lean burn technology motor vehicles, the credit does not apply for such vehicles purchased after December 31, 2010. The same date applies for qualified hybrid motor vehicles that are passenger automobiles or light trucks and have a weight rating not more than 8,500 pounds. For other hybrid vehicles, the property must be purchased on or before December 31, 2009. For alternative fuel vehicles, the vehicle must be purchased before December 31, 2010, for the credit to apply.

Given the complexity of determining the proper vehicle qualifying for the credit and the proper amount of the credit, please call our office for any additional assistance we can provide.









2005 C J M cjmalleyaccountancycorp