Rules Change for Hybrid Vehicle Tax Credit

By Brant Goldwyn, FFG Washington Staff Writer

Thinking of purchasing one of those new hybrid cars for your business, or for personal use, in order to take advantage of the federal tax credits now available for buyers? Well, you can strike the Toyota Prius off your list.

Not because it's a bad vehicle. But because it's a popular one. In fact, so popular that the tax credit has been reduced because so many have been sold.

The hybrid motor vehicle credit is reduced by 50 percent once the manufacturer sells 60,000 vehicles eligible for the credit. Sales of hybrid Toyotas have reached the threshold that triggers the phase-out of the credit. Beginning October 1, 2006, the credit for a Toyota hybrid vehicle will be cut in half. For purchasers of the popular Prius, the credit of $3,150 will be cut to $1,575.

It has been unclear whether the September 30 deadline would apply to the date that the sales contract is signed, the date the full purchase price is paid, or the date the car is placed in service. According to recent IRS guidance, the amount of the credit should be determined as of the date of purchase, not the date the car is placed in service. The placed-in-service date determines which year’s tax return on which the credit will be claimed.

For example, a Prius purchased on September 30 will be entitled to a credit of $3,150, even if the car is not placed in service until October 1 or later. If a car purchased on September 30 is not placed in service until January 1, 2007, the buyer will be entitled to the $3,150 credit but must claim it on the taxpayer’s return for 2007. Whether a transaction is treated as a purchase is based on nontax rules, such as benefits and burdens.

On April 1, 2007, the credit for a Prius will again be reduced, to $787.50. After September 30, 2007, purchasers of any Toyota hybrid vehicle will no longer be entitled to the credit. The phase-out of the credit applies to all hybrid models of Toyota. The rules for the credit require that the taxpayer purchase a new car and the car not be purchased for resale.

Congress's intent in passing the hybrid credit was to encourage the use of this environmentally friendly, albeit expensive, technology. The incentives seem to have worked, especially for Toyota (and anybody who bought a Prius before the October 1 deadline).

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