Interested in a plug-in electric car? Uncle Sam wants to help you buy one. 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 Nissan Leaf and Chevy Volt are two vehicles eligible for the maximum total credit of $7,500. 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. The credit is claimed on Form 8834, Qualified Plug-In Electric and Electric Vehicle 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 forward 20 years or backward 1 year 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.