US Federal Incentives

The following summary of US Federal Incentives is current as a Sept 2006.

New Federal Tax Incentives Favor Market Growth

NGVAmerica’s refers to the new federal tax incentives signed into law last August (2005) as a “three-legged stool” comprising vehicle tax credits, motor fuel excise tax credits and station tax credits. The incentives include:

Federal Alternative Fuel Vehicle Tax Credits
Federal Motor Fuels Excise Tax Credits
Fueling Station Equipment Tax Credit

Federal Alternative Fuel Vehicle Tax Credits

Under a provision of the Energy Policy Act of 2005, buyers of a new dedicated alternative fueled vehicle placed in service after December 31, 2005 are eligible for a tax credit of 50 percent of the incremental cost of the vehicle, with an additional 30 percent “bonus” credit for vehicles meeting the most stringent applicable EPA or California Air Resources Board (CARB) emission standard. If the buyer of the vehicle is a tax-exempt entity, such as a school district, transit agency or municipality, the tax credit may transfer to the seller of the vehicle. The amount of pass-through tax credit is a negotiating point between the buyer and seller to be reflected in a lower purchase price.

The amount of the available tax credit is based on four gross vehicle weight rating (GVWR) groupings that have total incremental cost caps ranging from a $5000 for light duty vehicles (up to 8,500 lbs.) to $40,000 for heavy duty vehicles (more than 26,000 lbs.). For example, a dedicated natural gas-powered light-duty pick-up that meets a lesser EPA emission standard could qualify for up to $2,500, while a Honda Civic GX, which meets CARB’s more stringent SULEV standard, could qualify for up to $4,000 in federal tax credits. Heavy-duty natural gas powered vehicles with GVWR over 26,000 pounds, such as a transit bus or utility crew truck, could qualify for up to $32,000 if the engine meets the strictest emission standard in place for heavy-duty engines.

Federal Motor Fuels Excise Tax Credits

Natural gas’ historical cost advantage over gasoline and diesel fuel will improve substantially due to the new federal motor fuels excise tax credit contained in the Energy Policy Act of 2005. Beginning October 1, 2006, the federal government will pay the seller of vehicular alternative fuel 50 cents per gallon of LNG or gasoline-gallon-equivalent (gge) of CNG. For CNG, the motor fuels excise tax credit is not generated until the gas is compressed for vehicular use.

While one highway bill provision provides this new tax credit, another provision raises the CNG federal tax from its current 6 cents per gge to 18.3 cents per gge, making it equivalent to the federal tax paid per gallon of gasoline, and it also raises the LNG tax from 11.9 to 24.3 cents per gallon, making it equivalent to the federal tax paid per gallon of diesel fuel. For private companies like investor-owned utilities, the net difference after the “rebate” is about 38 cents per gge of CNG and nearly 64 cents per dge of LNG.

NGVAmerica is still awaiting IRS guidance on the fuel credit including how it defines the word “seller.” The highway bill’s language is clear that a fleet operator who buys natural gas and compresses it for use in his/her own fleet is considered the “seller” of the fuel, even though no monetary transaction has taken place. Less clear, however, are cases where the purchase of natural gas and the ownership, operation and maintenance of fueling equipment is shared between the end-use fleet operator and a fuel service provider, such as a utility or independent fuel supplier.

Fueling Station Equipment Tax Credit

The third leg of the stool, is the energy bill provision that allows for an income tax credit equal to 30 percent of the cost of any qualified alternative fuel vehicle refueling property used in a trade or business and placed into service after December 31, 2005. The credit is capped at a maximum of $30,000 “per property” per year. As with the vehicle purchase tax credit, the fueling infrastructure tax credit can be taken by the equipment seller if the purchaser is a tax-exempt entity. The same provision repeals an existing $100,000 tax deduction for fueling stations. The new measure remains in effect until December 31, 2009.

The legislation also permits carrying forward of tax credits if the total allowable credit exceeds the taxable entity’s tax liability for that year. As of late-June when this article was written, final IRS guidance was still being developed. Of particular interest is whether the IRS will define individual pieces of equipment as “property” as it does in regulations pertaining to depreciable assets, thus allowing multiple pieces of “property” per fueling station, or if it will take a more restrictive interpretation and define “property” as the entire refueling facility.

The provision also includes a 30 percent credit for home refueling appliances with a maximum credit of $1,000.

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