Tax Breaks for New Clean-Fuel Vehicles

There are two types of tax breaks available to purchasers of alternative-fuel vehicles.

• If you purchase a certain type of electric vehicle, you may be entitled to a tax credit.
• If a vehicle qualifies as a "clean-fuel" vehicle, you may be entitled to a deduction from gross income.

While vehicles don't have to be used in a business to qualify for these tax benefits, you may want to keep these incentives in mind if you're purchasing a vehicle for use in your business.

Tax deduction for clean fuel vehicles. To encourage the use of vehicles powered by cleaner- burning fuels, a deduction from gross income is permitted for a portion of the cost of certain "clean-fuel" vehicles placed in service after June 30, 1993, and before January 1, 2007. Examples of "clean fuels" are natural gas and hydrogen, and fuels that are composed of at least 85 percent methanol, ethanol, alcohol, or ether.

For 2002 and 2003, the maximum clean fuel deduction for cars and light trucks is $2,000. For some trucks and vans with a gross weight of more than 10,000 pounds but not more than 26,000 pounds, the maximum deduction is $5,000. For trucks and vans with gross weight of more than 26,000 pounds, the maximum deduction is $50,000. The $50,000 maximum also applies to buses that can seat 20 adult passengers. The dollar limits above are reduced by 25 percent for property placed in service in 2004; 50 percent for property placed in service in 2005, and 75 percent for property placed in service in 2006. The deduction will be eliminated entirely in 2007.

If you file Schedule C for your business, this deduction should be claimed as an "other expense." If the vehicle is used only partly for business, the portion of the deduction that applies to personal use would be included on Line 34 of Form 1040, entering your deduction and "clean fuel" on the dotted line.

Tax credit for electric vehicles. A 10 percent tax credit (based on your purchase price) is allowed for certain electric vehicles placed in service after June 30, 1993, and before January 1, 2007. The maximum credit may not exceed $4,000 in 2002 and 2003. The credit will be phased out gradually (25, 50, and 75 percent in 2004, 2005, and 2006 respectively) until it is eliminated entirely in 2007. While it lasts, the allowable credit is claimed on IRS Form 8834, Qualified Electric Vehicle Credit.