What tax incentives are available to you for alternative fuel vehicles and advanced technologies? Clean Cities Technical Response Services answers your questions.

The Alternative Fuels & Advanced Vehicles Data Center (AFDC) Federal Incentives and Laws Website includes a list of federal tax credits and exemptions related to alternative fuels and advanced vehicles. The short summaries on the Incentives and Laws Web site provide an overview of the available incentives. Each summary description also includes links to useful Web sites and/or points of contact for further information.

Incentives available through the U.S. Internal Revenue Service (IRS) can sometimes be difficult to understand because of complex legal language. We have compiled information below to help you understand some of the details associated with federal tax incentives. NOTE: The Technical Response Service strongly recommends that, before you or one of your stakeholders make a tax related decision, contact a certified tax professional or the IRS directly. The toll-free IRS tax assistance phone number is 800-829-1040.

The Basics

Federal tax incentives related to alternative fuels and advanced vehicles currently come in the form of a credit or an exemption, defined as follows:

Tax credit: A dollar-for-dollar reduction of taxes owed. Examples of tax credits include:

Alternative Fuel Infrastructure Tax Credit

Qualified Alternative Fuel Motor Vehicle (QAFMV) Tax Credit

Tax exemption: A part of a business or non-business income on which no tax is imposed. Examples of tax exemptions include:

Alternative Fuel Tax Exemption

Idle Reduction Equipment Excise Tax Exemption

Depending on the incentive, the credit or exemption can be taken against excise or income tax liability (amount owed), defined as follows:

Income tax: Tax on income, both earned (e.g., salary, wages) and unearned (e.g., interest, dividends). Examples of credits against income tax liability include:

Light-Duty Hybrid Electric Vehicle (HEV) and Advanced Lean Burn Vehicle Tax Credit

Fuel Cell Motor Vehicle Tax Credit

Excise tax: A tax on the sale or use of specific products or transactions. Examples of credits against excise tax liability include:

Hydrogen Fuel Excise Tax Credit

Navigating the IRS Web site

The IRS maintains a Web site dedicated to the various federal alternative motor vehicle credits (including the QAFMV, Light-Duty HEV, Advanced Lean Burn Vehicle, and Fuel Cell Motor Vehicle Tax Credits), which lists the vehicles that qualify for each specific incentive (http://www.irs.gov/businesses/corporations/article/0,,id=202341,00.html). Additional information about federal tax incentives can be found in IRS forms and related instruction documents. The AFDC Incentives and Laws Web site includes references to the relevant IRS forms for each of the incentives listed. You may search the IRS Forms and Instructions Web site (http://www.irs.gov/app/picklist/list/formsInstructions.html) for the most current versions of these documents. Since the IRS forms and instructions are revised each tax year, be sure that you are referencing the correct version of the document.

General Business Credit and the Carryback/Carryforward Provisions

Certain tax credits are available to businesses independently or through the General Business Credit. The IRS defines a business as a continuous and regular activity that has income or profit as its primary purpose. The amount of the current year General Business Credit is equal to the sum of several individual tax credits, including the QAFMV and Alternative Fuel Infrastructure credits (if applicable).

If a business cannot use all or part of the credit in a given tax year because of a lack of federal tax liability, it may carry the unused credit back one tax year. If the business still has unused credit after carrying it back a year, the business may carry the unused portion of credit forward for each of the 20 tax years after the year the credit was earned. Any portion of the General Business Credit still unused after the 20-year carryforward period or at the time when the business ceases to exist may be taken as a tax deduction.

The General Business Credit applies to property used in a trade or business. Therefore, someone claiming the credit on a qualified vehicle purchased for personal use is not eligible for the carryback and carryforward provisions. Other limitations may apply. For more information on the General Business Credit, reference IRS Form 3800 and the associated instructions.

Tax Credits for Tax-Exempt Entities

Entities without any federal tax liability (i.e., tax-exempt organizations, governmental agencies) may still take advantage of certain tax credits.

For vehicle credits (including the QAFMV, Light-Duty HEV, Advanced Lean Burn Vehicle, and Fuel Cell Motor Vehicle Tax Credits), a taxpaying seller of a qualified vehicle to a tax-exempt entity may claim the tax credit and provide written notice of the amount of the credit to the tax-exempt entity. The tax-exempt entity may then work with the seller to negotiate a discount in the sale price of the vehicle. Likewise, a taxpayer that sells qualified alternative fueling infrastructure to a tax-exempt entity may claim the Alternative Fuel Infrastructure Tax Credit and disclose the credit amount to the tax-exempt entity in writing. The tax-exempt entity would then use the information to negotiate a reduction in the sale price of the infrastructure.

An entity that sells a vehicle or infrastructure to a tax-exempt entity in order to take advantage of the tax credit is eligible for the carryback and carryforward provisions, with the understanding that the property is subject to depreciation.

Contacting the IRS

If you have additional questions about federal tax incentives related to alternative fuels and advanced vehicles, please reference the IRS Web site or contact the IRS directly at one of the following numbers:

Vehicle and infrastructure income tax incentive questions?

Office of Passthroughs & Special Industries: 202-622-3110

Excise tax incentive questions?

Excise Tax Branch: 202-622-3130

General questions?

800-829-1040

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