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Top 6 Environmentally Friendly Vehicle Tax Credits for Businesses

7 minute read

Individuals and businesses have been encouraged to “go green” for some time now, and legislators are creating tax incentives to further encourage these changes. We’ve already discussed tax incentives for businesses making sustainable changes to real property, so now we will shift our focus to the tax incentives that are available when businesses switch to sustainable, eco-friendly vehicles. Many of these credits expired at the end of 2021, so this filing season may be the last year to take advantage of them!

Alternative Fuel Tax Credit

The alternative fuel tax credit expired at the end of 2021, but it’s possible that legislators will pass an extenders bill that retroactively reinstates the credit for 2022. Typically, extenders bills are passed in December, so only time will tell if the alternative fuel tax credit will be available in 2022.

If Congress extends the credit, businesses that use or sell alternative fuels may be eligible for a tax credit of $0.50 per gallon (or equivalent) of fuel. Alternative fuels include:

  • Liquefied petroleum gas (propane, butane, etc.)
  • P Series fuels (renewable non-petroleum-based fuels)
  • Compressed or liquefied natural gas
  • Liquefied hydrogen
  • Liquid fuel that meets certain carbon capture requirements that is derived from coal through the Fischer-Tropsch process
  • Compressed or liquefied gas derived from biomass
  • Liquefied fuel derived from biomass

The credit first offsets the entity’s alternative fuel tax liability, and any excess can be refunded on their tax return. You can claim this credit on federal form 4136.

Alternative Fuel Vehicle Refueling Property Credit

Businesses are eligible for a refundable 30% credit when purchasing electronic vehicle (EV) charging stations through December 31, 2021. There are two main types of EV charging stations on the market – direct current (DC) fast charging stations and alternating current (AC) charging ctations.

No matter what EV charging station you placed into service, you may be eligible for a 30% tax credit on the cost of the hardware and installation. There are a few stipulations, though:

  • The fueling station must be in the United States.
  • The original use of the property must have begun with you. In other words, you can’t have purchased a used EV fueling station.
  • The total cost eligible for the credit should be reduced by any Section 179 expense you’ve deducted on the property.

A 30% credit is also available on refueling stations using alternative fuel, like ethanol, natural gas, hydrogen and certain biodiesel fuels. You can claim this credit on federal form 8911.

The credit was available in tax years 2018 through 2021, and taxpayers can amend prior year tax returns to claim credits if they haven’t already.

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Two Alternative Motor Vehicle Credits

Wondering what cars qualify for the alternative motor vehicle credit? There are three different types of eco-friendly vehicles that run on alternative fuels:

Plug-In Hybrid Vehicles (PHEVs)

Plug-in hybrids use a traditional gas-powered engine in conjunction with a battery and use smart technology to switch between the two power methods.

Electric Vehicles (EVs)

Fully electric vehicles rely only on electricity for power and therefore produce no emissions.

Fuel-Cell Vehicles

Fuel-cell vehicles are powered by hydrogen and produce no tailpipe emissions, making them more efficient than gas-powered engines.

All three may be eligible for tax credits.

The plug-in electric drive vehicle credit applies to both plug-in hybrid vehicles (PHEVs) and electric vehicles (EVs). Businesses that purchase one of these vehicles may be eligible for an electric vehicle tax credit between $2,500 to $7,500 depending on the battery’s capacity. However, the PHEV credit is phased out once manufacturers sell 200,000 qualifying vehicles, which means that only newer cars will qualify. The IRS created a list of qualifying vehicles that shows the credit awarded to each vehicle. You can claim your credit on federal form 8936.

Fuel-cell vehicles are also eligible for a credit. The alternative motor vehicle credit is awarded to taxpayers purchasing new vehicles that run on hydrogen fuel cells (like the Honda Clarity or the Hyundai Nexo). The base credit is $4K, but as fuel economy improves, so does the credit. For example, the credit will increase by an additional $2K if the vehicle achieves at least 200% of a certain fuel economy standard. You can claim this credit on federal form 8910.

Like most of these clean energy vehicle credits, both the plug-in electric drive vehicle credit and the  alternative motor vehicle credit expired at the end of 2021. Barring an extender in a budget bill, they will not be available going forward.

Biodiesel Tax Credit & the Biodiesel Mixture Tax Credit

The biodiesel tax credit is equal to$1 per gallon to taxpayers who use or sell qualifying biodiesel or renewable diesel. This tax credit entices businesses to pursue biodiesel or renewable diesel in lieu of conventional diesel.

Like its sister credit, the biodiesel mixture credit is valued at $1 per gallon of biodiesel. But this credit is awarded to businesses that use biodiesel in the production of a qualified biodiesel mixture to be sold as fuel or used as fuel in their own business.

You can claim one or both credits on federal form 4136.

Both tax credits were set to expire in 2017, but they were retroactively reinstated in 2018 and extended through the end of 2022 with the passage of the Consolidated Appropriations Act.

Tax Planning Saves You Money While Saving the Environment

Making environmentally friendly business decisions is easier said than done. Even if sustainability is something that you value, it can be difficult to remain competitive in the market if sustainable options are more expensive than the conventional choices. Fortunately, tax credits like the ones we explored today can help make that decision a bit easier. We invite you to take a peek at Corvee’s tax planning software to see just how much money these tax credits can save you. This can help you determine if the more sustainable option is also a fiscally sound one for you and your business.

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