Only a few years ago, vehicles with cleaner burning fuel were a rarity. GM and Honda tried to mass-produce electric cars, but those vehicles never caught on and recently were taken out of production. Now, another wave of “green vehicles” –the hybrid vehicle—has arrived. This time, they seem to be here to stay.

The Toyota Prius and the Honda Insight and Civic Hybrid are hybrid vehicles –part gasoline, part electric –now on sale in showrooms through the U.S. With a starting sticker price ranging from $19,080 to $20,480, they look “normal” from the outside, but are propelled by the combination of a gasoline internal combustion engine and an electric motor that is recharged during use. These cars are environmentally friendly, fuel efficient, and now made more affordable because of a new $2,000 federal tax deduction.

Clean-fuel vehicle deduction

Hybrid vehicles are eligible for the “clean-fuel” vehicle deduction under Internal Revenue Code Section 179A. This “above-the-line” deduction –which may be taken whether or not you itemize your other deductions-- is $2,000.

This new deduction is not only available this year, but is also available retroactively for 2000 and 2001 for new vehicles purchased and placed on the road in those years (applicable for the most part to the Toyota Prius, which has been sold since 2000). Those who purchased in 2000 and 2001 should apply for immediate tax refunds.

Remember that this tax break is a deduction and not a credit. The bottom-line value of the new clean-fuel deduction therefore depends on your tax bracket. For example, if you are in the 30 percent tax bracket, the $2,000 deduction is the equivalent of getting $600 cash-back on your purchase. If you are in the 25 percent income tax bracket, the deduction is worth an extra $500 in your pocket.

Some “fine-print”

Like some automobile sales contracts, the Tax Code too has some “fine print” qualifications in connection with the $2,000 deduction. To qualify for the $2,000 deduction, a hybrid vehicle must:

· Be purchased new by the taxpayer, for original use and not for resale;

· Meet the federal and state emission standards;

· Be manufactured for use on public roads/highways;

· Have at least four wheels; and

· Must be for use mainly within the U.S.

Vehicle manufacturers go through a certification process to qualify all sales of any particular model. Toyota has recently qualified its Prius model with the IRS and Honda expects to have its Civic Hybrid and Insight models approved shortly.

One major caution: If you lease rather than buy your hybrid vehicle, you are not entitled to the deduction. Only new car purchasers are eligible. (However, since the manufacturer’s leasing corporation is the purchaser and is therefore entitled to the clean-fuel deduction, those who lease a hybrid vehicle may see lower lease payments passed on as a result.)

Business automobiles

A taxpayer is entitled to the $2,000 clean-fuel deduction whether the hybrid vehicle is used for business or for personal transportation. However, if it is used primarily for business, taking the $2,000 deduction may reduce certain business tax deductions otherwise available:

· The tax basis of the vehicle for depreciation purposes (applicable if you don’t take the standard mileage rate) must be reduced by the amount of the $2,000 deduction;

· The tax basis used to determine any taxable gain on the vehicle when you eventually sell the car must be reduced by the amount of the $2,000 deduction; and

If you are in the market for a vehicle and a new hybrid model looks interesting either because it will save you gas or simply because it looks “cool,” see your tax advisor before you buy—especially if you are planning to use the vehicle for business, you may want to know how much tax you will be “really” saving in the long run.