The Energy Policy Act of 2005 provides a credit for taxpayers who purchase certain energy efficient vehicles, including Qualified Hybrid vehicles.¹ Notice 2006-9 provides procedures for manufacturers to certify to the Internal Revenue Service that certain passenger autos and light trucks qualify for the credit and the amount of the credit.² The credit amount for qualified hybrid vehicles other than passenger autos or light trucks is computed using a different formula.

Guidance regarding the credit for new qualified hybrid motor vehicles that are not passenger automobiles or light trucks will be provided in a separate notice. Generally, for a passenger car or light truck that is a qualified hybrid vehicle, a taxpayer may rely on the manufacturer’s certification that a specific make, model and model year vehicle qualifies for the credit and the amount of the credit for which it qualifies.³

Even though a manufacturer has certified a vehicle, a taxpayer must meet the following requirements to qualify for the credit:

1. The vehicle must be placed in service after 12-31-05 and purchased on or before 12-31-10.
2. The original use of the vehicle must begin with the taxpayer claiming the credit.
   
   a. The credit may only be claimed by the original owner of a new, qualifying, hybrid vehicle and does not apply to a used hybrid vehicle.
3. The vehicle must be acquired for use or lease by the taxpayer claiming the credit.
   
   a. The credit is only available to the original purchaser of a qualifying hybrid vehicle. If a qualifying vehicle is leased to a consumer, the leasing company may claim the credit.
   
   b. For qualifying vehicles used by a tax-exempt entity, the person who sold the qualifying vehicle to the person or entity using the vehicle is eligible to claim the credit, but only if the seller clearly discloses in a document to the tax-exempt entity the amount of credit.
4. The vehicle must be used predominantly within the United States.

Credit Phase Out

The new qualified hybrid motor vehicle credit begins to phase out in the second calendar quarter after the calendar quarter in which at least 60,000 of the manufacturer’s qualifying passenger automobiles and light trucks have been sold.  Notice 2006-9 requires manufacturers that have received acknowledgement of its certification must submit to the Service a report of the number of qualified vehicles sold to a retail dealer during the calendar quarter. For this purpose, qualified vehicles are any passenger automobile or light truck that is a new advanced lean bury technology motor vehicle or a qualified hybrid motor vehicle. After review of the quarterly reports, the Service will issue an acknowledgement letter to the vehicle manufacturer stating whether purchasers many continue to rely on the certification.

Notice 2006-78 announced the credit phase out schedule for advanced lean burn technology vehicles and hybrid vehicles manufactured by Toyota Motor Sales USA, Inc. (Toyota and Lexus vehicles). For the period of 10-1-06 to 3-31-07, purchasers of qualifying vehicles are eligible for 50% of the allowable credit. For the period of 4-1-07 to 9-30-07, purchasers of qualifying vehicles are eligible for 25% of the allowable credit. The table below includes both the full credit and the reduced credit amount depending upon when the vehicle was purchased.

The date of purchase determines the amount of the credit available for a vehicle, i.e. whether a vehicle is eligible for the full credit or whether a portion of the credit is phased-out. The placed in service date determines the taxable year in which the credit may be claimed.  

For example, if consumer A purchases a Prius on Sept. 30, 2006, and takes possession in February 2007, consumer A can claim the full credit for 2007, the year in which the vehicle is placed in service. On the other hand, if consumer B purchases a Prius on Oct. 1, 2006, and takes possession of the vehicle in February 2007, Consumer B can claim 50% of the credit in 2007, the year in which the vehicle is placed in service.

Eligible Vehicles

As of Dec. 14, 2006, the Internal Revenue Service had acknowledged the manufacturers’ certifications of the following qualified hybrid vehicles (arranged by model year) and credit amounts (additional vehicles may subsequently be acknowledged. Further acknowledgements will be included in a revised summary page):

2008

* Effective 10-1-06, Toyota and Lexus vehicles qualify for reduced credit amounts.


2007

2006

2005