IRS Certifies Lexus RX 400h for Clean-Fuel Deduction

Automobiles that are powered in part by gasoline and in part by electricity are deemed “clean fuel vehicles”. These vehicles have risen in popularity, in part because of income tax benefits.

The IRS has certified the 2006 Lexus RX 400h as eligible for the clean-burning fuel deduction. This is the first 2006 model that the IRS has certified for the valuable deduction. Taxpayers who purchase a new hybrid vehicle during 2005 may claim a tax deduction of up to $2,000. The IRS previously certified the 2005 models of the Toyota Prius, Honda Insight, Honda Civic Hybrid, Honda Accord Hybrid, and Ford Escape Hybrid. Hybrid vehicles get greater mileage by combining an electric motor with a gasoline-powered engine. The electric motor is charged as the car operates.

The new law provides special benefits for vehicles powered by clean technology, which may qualify for a $2,000 tax deduction. Vehicles powered by electricity using hydrogen fuel cells or rechargeable batteries are “qualified electric vehicles” (QEV) and may qualify for a $4,000 deduction.

The $2,000 clean-burning fuel deduction is available for certified vehicles placed in service in 2005. The deduction is scheduled to drop to $500 in 2006. No deduction will be allowed after 2006. The deduction must be taken in the year the vehicle is placed in service, and the taxpayer must be the original owner. The deduction is not available for leased vehicles, even if the taxpayer exercises an option to buy at the end of the lease term.

If a vehicle uses both gasoline and a clean-burning fuel such as electricity, the clean-burning fuel deduction is limited to the incremental cost of modifying the vehicle’s engine or fuel system to use the clean-burning fuel, up to the $2,000 limit. In order to qualify for the deduction the manufacturer must document the incremental cost of the vehicle’s electric motor and related equipment.

It is not necessary to itemize deductions to claim the clean-burning fuel deduction. The deduction is available to individuals, estates, trusts, employees using a hybrid for business, S-corporations, C-corporations and partnerships. Businesses may have to recapture the deduction as ordinary income if the business sells the hybrid vehicle within three years and certain other conditions are met. The standard mileage rate for business use of a car is 40.5 cents for 2005 and does not change for clean-fuel burning vehicles.

— Mike Beausang

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