There are two types of tax breaks available to purchasers of alternative-fuel vehicles.

• If you purchase certain types of electric vehicle, you may be entitled to a tax credit.
• If a vehicle qualifies as an alternative fuel vehicle, you may be eligible for a tax credit.

While vehicles don't have to be used in a business to qualify for these tax benefits, you may want to keep these incentives in mind if you're purchasing a vehicle for use in your business.

Alternative motor vehicle credit. Starting in 2006, the Energy Tax Incentives Act of 2005 creates a series of new tax credits to encourage the development, manufacture and use of alternative fuel motor vehicles. The credits are collectively claimed under the title of the "Alternative Motor Vehicle Credit." This credit is equal to the sum of the four original separate credit components plus a fifth added by Congress in 2009:

• the qualified fuel cell motor vehicle credit (available through December 31, 2014);
• the advanced lean burn technology motor vehicle credit (available December 31, 2010);
• the qualified hybrid motor vehicle credit (available through December 31, 2010, for passenger automobiles or light trucks with a gross vehicle weight rating (GVWR) of no more than 8,500 pounds and through December 31, 2009, for qualified hybrid motor vehicles that are not passenger automobiles or light trucks and have a GVWR of more than 8,500 pounds);
• the qualified alternative fuel motor vehicle credit (available through December 31, 2010); and
• the plug-in conversion credit.

The amount of the credit may be as much as $3,400 for those who purchase the most fuel-efficient hybrid or lean burn passenger automobiles and light trucks, or as much as $4,000 for a high-priced plug-in conversion. Calculating the credit, however, can be extremely challenging because of the complexity involved.

Form 8910, Alternative Motor Vehicle Credit, is used to compute all components of the alternative motor vehicle credit, including the hybrid credit. If the vehicle is used for business purposes, the credit amount is also reported on Form 3800, General Business Credit. The credit amount for vehicles used for personal purposes is reported on line 55 of Form 1040.

Tax credits for electric vehicles. A 10 percent tax credit (based on your purchase price) has been allowed for certain plug-in electric vehicles for several years. It was partially phased out until the maximum credit in 2008 was limited to $1,000. Congress amended the credit in 2009 to increase the maximum to $2,500. In addition, a new credit was initiated in 2009 for plug-in electric drive motor vehicles that is bigger and better that the existing credit. Under the new provision, the base amount of the credit is $2,500. However, the credit amount increases as much as $5,000 as the capacity of the battery increases. In short, a $7,500 tax credit is possible with the right vehicle. This credit is phased out as the volume of sales of qualifying vehicles reaches certain levels.