IRS Provides Guidance on Tax Credits for Efficient Vehicles

January 25, 2006

The Internal Revenue Service (IRS) published a notice on January 13th that provides initial guidance on claiming a federal tax credit for the purchase of a hybrid vehicle or a vehicle with an advanced lean-burn engine. The Energy Policy Act of 2005 allows a tax credit of as much as $3,400 for buyers of the most fuel-efficient vehicles. The new IRS guidance describes how manufacturers can certify to the purchasers of these vehicles that the vehicles are indeed eligible for the tax credit and what size tax credit they will earn. This certification removes most of the burden from the purchaser: if you have the manufacturer's certification in hand, you can claim the tax credit. The only exception is if the IRS finds that a manufacturer's claim is incorrect, in which case the IRS will announce that the manufacturer's right to issue certifications has been withdrawn. Even in that case, certifications received before the IRS announcement will still be accepted for a tax credit.

For each manufacturer, the new tax credit stops after it sells 60,000 eligible vehicles, with the count starting at the beginning of this year. As noted by the IRS, buyers can claim the tax credit until the end of the first calendar quarter after the quarter in which the manufacturer reaches 60,000 sales. So for manufacturers that are selling high volumes of eligible vehicles, such as Toyota and Honda, people seeking to earn the credit should act quickly.

"Advanced lean-burn technology," by the way, is a clean-burning diesel engine that operates with more air than is necessary for the complete combustion of the fuel. According to the Diesel Technology Forum, the emissions requirements included in the tax credit means that eligible vehicles will probably not be available until the 2007 model year. The Energy Policy Act also provides tax credits for fuel cell vehicles, alternative fuel vehicles, and hybrid heavy trucks. The IRS will issue guidance on certification procedures for these vehicles in the near future. See the IRS press release, the IRS guidance (PDF 35 KB), and the Diesel Technology Forum fact sheet (PDF 24 KB). Download Adobe Reader.