This is an email from the IRS tax law assistance people, in response to the question of whether the Insight qualifies for the "clean fuel properties" deduction (form 535):

Subject: IRS Email Tax Law Assistance
Author:  TaxHelp@h...
Date:    8/30/2000 1:48 PM
     

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Thank you for your question.
     

As you've read in Publication 535, gasoline is not a "clean-burning fuel", but 
electricity is.  If the vehicle were predominantly electric with a gasoline 
boost, then you would look to the Qualified Electric Vehicle Credit -- Internal 
Revenue Code (IRC) Section 30 (See Form 8834 [Qualified Electric Vehicle 
Credit].).  The Toyota Prius is likely to fall into this category based on the 
technical data we've seen from the manufacturer, and as reported to us by 
taxpayers like yourself.  We've not received any technical advice on the issue 
yet from our National Office.  From what I've seen, the Honda Insight is 
predominantly gasoline powered with an electric boost.  This would disqualify it
from the Qualified Electric Vehicle Credit.  What's left is taking a partial 
deduction (either personal or trade/business) for the part of the vehicle that 
would be classified as "clean-fuel property", which might include the electric 
motor, and the electric storage system/recharging system.  If
the Fair Market Value of this part of the car were $2,000 or more then you might
be eligible for the full deduction of $2,000.  Remember that this is a 
deduction, not a credit.  Your tax savings would only be your tax rate times the
deduction at best.
     

Although the IRS cannot endorse or warrant any commercial product, for your 
information I've attached an excerpt from IRC Section 30 on the Qualified 
Electric Vehicle Credit.  The Toyota Prius sounds as if there might be a much 
greater tax benefit, than even the best scenario on the Honda Insight.  The 
Qualified Electric Vehicle Credit is scheduled to be phased out, gradually, 
after 2001, so it is worth looking at now.  It is calculated by taking 10% of 
the purchase price, up to a maximum credit of $4,000.  It is a nonrefundable 
credit (Form 1040, Line 47 with a checkbox) -- like the Child Tax Credit.  The 
sum of your nonrefundable credits cannot exceed you income tax liability.  If 
your decision on which vehicle to buy is strictly based on tax benefit, then the
Qualified Vehicle Credit would probably be a better deal.  Naturally, you'd have
to consider all the facts before making a purchase decision (assuming that you 
have not already purchased the Honda).
     

If you decide to take a partial deduction for Clean-Fuel vehicle, be sure that 
you can substantiate all items included in your clean-fuel property inventory, 
and how you valued each part of the property.  There's no way to avoid audit 
risk on a gray area deduction except to get a Private Letter Ruling in advance 
through the IRS' Chief Counsel's Office.  Rulings are not made through the 
Technical Assistance/Tax Law E-Mail Program, or over the telephone by Customer 
Service.
     

I hope that this information is helpful.
     

ATTACHMENT - IRC SECTION 30 
     

Sec. 30. Credit for qualified electric vehicles (a) Allowance of credit There 
shall be allowed as a credit against the tax imposed by this chapter for the 
taxable year an amount equal to 10 percent of the cost of any qualified electric
vehicle placed in service by the taxpayer during the taxable year. (b) 
Limitations (1) Limitation per vehicle The amount of the credit allowed under 
subsection (a) for any vehicle shall not exceed $4,000. (2) Phaseout In the case
of any qualified electric vehicle placed in service after December 31, 2001, the
credit otherwise allowable under subsection (a) (determined after the 
application of paragraph (1)) shall be reduced by - (A) 25 percent in the case 
of property placed in service in calendar year 2002, (B) 50 percent in the case 
of property placed in service in calendar year 2003, and (C) 75 percent in the 
case of property placed in service in calendar year 2004. (3) Application with 
other credits The credit allowed by subsection (a) for any taxable 
year shall not exceed the excess (if any) of - (A) the regular tax for
the taxable year reduced by the sum of the credits allowable under subpart A and
sections 27 and 29, over - (B) the tentative minimum tax for the taxable year. 
(c) Qualified electric vehicle For purposes of this section - (1) In general The
term ''qualified electric vehicle'' means any motor vehicle - (A) which is 
powered PRIMARILY by an electric motor drawing current from rechargeable 
batteries, fuel cells, or other portable sources of electrical current, (B) the 
original use of which commences with the taxpayer, and (C) which is acquired for
use by the taxpayer and not for resale. (2) Motor vehicle For purposes of 
paragraph (1), the term ''motor vehicle'' means any vehicle which is 
manufactured primarily for use on public streets, roads, and highways (not 
including a vehicle operated exclusively on a rail or rails) and which has at 
least 4 wheels. (d) Special rules (1) Basis reduction The basis
of any property for which a credit is allowable under subsection (a) shall be 
reduced by the amount of such credit (determined without regard to subsection 
(b)(3)). (2) Recapture The Secretary shall, by regulations, provide for 
recapturing the benefit of any credit allowable under subsection (a) with 
respect to any property which ceases to be property eligible for such credit. 
(3) Property used outside United States, etc., not qualified No credit shall be 
allowed under subsection (a) with respect to any property referred to in section
50(b) or with respect to the portion of the cost of any property taken into 
account under section 179. (4) Election to not take credit No credit shall be 
allowed under subsection (a) for any vehicle if the taxpayer elects to not have 
this section apply to such vehicle. (e) Termination This section shall not apply
to any property placed in service after December 31, 2004. 
     

END ATTACHMENT.
     

Your Question Was:
I would like to know if a Honda Insight qualifies for a tax deduction under 
publication 535 (chapter 15) - Clean-Fuel Vehicles.  After reading the 
publication I believe it does qualify, but am not sure how much the deduction 
should be.  The Insight is a gasoline-electric hybrid automobile.  It uses a gas
engine of approximately 67 horsepower along with an electric motor of 
approximately 7 horsepower.  The purchase price is approximately $21,000 
including sales tax. I would like to know if this car qualifies for a $2000 
deduction without risking an audit to find out!  Thank you.
     

     
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EMPLOYEE ID: 91-04088      Mr. Finley    Tel.:(800)829-1040    msg#: 664786