With manufacturers now promoting their new plug-in electric models, the cars have caught up with the buyer tax credit Congress dangled for them three years ago. CPAs’ clients are likely to ask about this and other tax breaks for plug-in electrics.
Although the Chevy Volt was available only in a few markets earlier this year, General Motors says it’s stepping up its phased rollout to make the Volt available in all 50 states by the end of 2011. Nissan maxed out its production capacity with 20,000 advance orders for its Leaf, requiring it to suspend reservations temporarily. Ford is expected to introduce its 2012 plug-in Focus later this year.
HOW MUCH IS THE FEDERAL CREDIT?
The income tax credit for a “new qualified plug-in electric drive motor vehicle” was enacted as IRC § 30D by the Emergency Economic Stabilization Act of 2008 (PL 110-343) and modified by the American Recovery and Reinvestment Act of 2009 (PL 111-5). For each qualifying vehicle, a credit is allowed of $2,500 plus, for vehicles with at least five kilowatt hours (kwh) of rechargeable battery power, $417, plus $417 for each additional kwh above five, up to an additional credit of $5,000.
The 2011 Volt is advertised as having a battery capacity of 16 kwh. Thus, it is eligible for a credit of $2,500, plus $417, plus $417 times 11 kwh (16 kwh – 5 kwh), for a total of $7,504, just over the maximum allowable credit of $7,500.
WHICH MODELS ARE ELIGIBLE?
The 2011 Nissan Leaf has a rated battery capacity of 24 kwh, so it also appears to qualify for a full $7,500 credit, as will the upcoming Ford Focus Electric, with 23 kwh. Other requirements for a new qualified plug-in electric car are that it be powered “to a significant extent” by an electric motor drawing power from a battery with a capacity of at least four kwh that can be recharged from an external source of electricity. Thus, cars like the Volt that use both a plug-in electric engine and a gasoline engine, technically known as plug-in hybrid electric vehicles (PHEVs), are eligible. Other PHEVs that appear to qualify for at least a partial credit include a version of the Escape SUV that Ford plans to offer starting next year. The Escape will be powered by an externally rechargeable 10 kwh battery pack and a four-cylinder gasoline engine.
Vehicles with fewer than four wheels or weighing more than 14,000 pounds are not eligible, although the former may be eligible for the section 30 credit available until Dec. 31, 2011, of 10% of their cost, up to a maximum credit of $2,500.
For a list of plug-in motor vehicles and credit amounts for which the IRS has received appropriate information and acknowledged eligibility, see tinyurl.com/4yg77q5. An independent source of information for comparing specifications and features is the nonprofit Plug In America (pluginamerica.org).
HOW LONG IS THE FEDERAL CREDIT AVAILABLE?
Like the hybrid vehicle credit before it, the section 30D credit has a production phaseout, but a more generous one. For each manufacturer, once the total of qualifying vehicles manufactured and sold for use in the U.S. since the beginning of 2010 reaches 200,000, the otherwise applicable credit per vehicle will be cut in half for two calendar quarters, starting with the second calendar quarter after the quarter in which the threshold is met. Then itwill be reduced to 25% in the third and fourth quarters and then eliminated after that. The phaseout applies to the aggregate of all qualified models produced by the same manufacturer.
The hybrid credit phased out at 60,000 vehicles per manufacturer produced and sold after Dec. 31, 2005 (section 30B(f)(2)). Although the plug-in electric threshold is more than triple that amount, Rep. Sander Levin and his brother, Sen. Carl Levin, both Michigan Democrats, have proposed raising it to 500,000 vehicles per manufacturer (HR 500 and S 232). In his 2011 State of the Union address, President Barack Obama set a goal of having 1 million plug-in electric vehicles on U.S. roads by 2015.
WHO CAN MAKE BEST USE OF THE CREDIT?
The credit is available for each qualifying vehicle the taxpayer places in service. The original use of the vehicle must be that of the taxpayer. It may have been acquired to lease to others, but not for resale. A lessee of the vehicle may not claim the credit.
In addition to the limit on the credit amount stated above, the credit is subject to a tax liability limitation. For business use vehicles, the credit is treated as part of the general business credit and is therefore subject to the tax liability limitation in section 38(c), which limits the credit to a part of the taxpayer’s regular tax liability. The credit cannot be used to offset any of the taxpayer’s alternative minimum tax (AMT) liability. However, any unused credit can be carried backward one year or forward up to 20 years under the general business credit rules.
For personal use vehicles, the credit is treated as a nonrefundable personal credit and is limited by the taxpayer’s amount of tax liability for the year the car is placed in service (including AMT). If the sum of this, the section 27 foreign tax credit and other personal credits (for 2011, not including the residential energy-efficient property credit of section 25D and, for 2012, not including the section 23 adoption credit) exceeds the taxpayer’s tax liability for the year in which the vehicle is placed in service, the difference is wasted. Clients who anticipate a change in tax liability will want to try to plan their acquisition accordingly.
HOW IS THE CREDIT CLAIMED?
The credit is claimed on Form 8834, Qualified Plug-In Electric and Electric Vehicle Credit. The Treasury Inspector General for Tax Administration determined an error rate in the first half of 2010 of 20% for credit claims for plug-in electrics and alternative motor vehicles (report no. 2011-41-011, Jan. 21, 2011), and it seems reasonable to expect the IRS could develop additional substantiation requirements, much as it did for the first-time homebuyer credit. TIGTA cited 22 variants or misspellings of “Chevrolet” it found on filed Forms 8834, and the IRS agreed that the form should at least use standardized codes to clearly identify vehicle make and model.
WHAT OTHER CREDITS AND INCENTIVES ARE AVAILABLE?
A number of states also offer income tax credits and other incentives. Nissan has a database searchable by state and ZIP code at tinyurl.com/4drs2lt.
Stationary recharging equipment purchased separately may be eligible for the section 30C alternative fuel vehicle refueling property credit if placed in service before Jan. 1, 2012. A nonrefundable personal credit is available (or general business credit component) of 30% of the cost of the equipment (50% in 2009 and 2010); up to $1,000 for personal use ($2,000 in 2009 and 2010); and up to $30,000 for depreciable business property ($50,000 in 2009 and 2010).
In addition, a credit for converting a vehicle into a plug-in electric is available under section 30B(i). The credit is 10% of the cost up to $40,000, meaning the maximum credit is $4,000. The conversion must be made before the end of 2011. The credit may be taken whether or not the taxpayer bought the car new and whether or not the taxpayer claimed another credit related to the converted vehicle, such as the section 30B(d) qualified hybrid motor vehicle credit that was available before 2011.
By JofA Senior Editor Paul Bonner. To comment on this article or to suggest an idea for another article, contact him at email@example.com or 919-402-4434.
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