New energy-efficiency tax breaks

The recently enacted Energy Tax Incentives Act of 2005 provides significant tax breaks for individual homeowners who spend money in 2006 and 2007 to install specific energy-saving devices. In addition, starting in 2006, a new tax credit will be available for the purchase of some hybrid vehicles, as well as the purchase of some other, more exotic "green" vehicles. Businesses that install energy savings equipment will also be entitled to generous energy tax credits or deductions. Clearly, the Energy Tax Incentives Act of 2005 is not just for "Big Oil."

Like all tax laws, there are rules that must be followed to get the benefit of these new energy tax breaks. Some of them are quite complex. This outline is intended to introduce you to the basic energy tax credits and deductions that will be available to you. Please contact our office for additional information. We can be reached by telephone at 781-453-8700 or email to: lknscpa@lknscpa.com.

Impact on consumers
Three new energy credits available to individual consumers:
(1) The residential energy efficient property credit,
(2) The home improvement energy credit, and
(3) The alternative fuel vehicles credit.
All of these credits are in effect for 2006 and 2007 only, for property placed in service in those tax years.

Going solar. The "residential energy efficient property credit" is all about converting your home to solar energy. There are three ways to take the credit and three separate amounts allowed for doing it:

Although there is some debate in Washington over exactly what Congress meant, apparently the $2,000 credits for solar water and electricity apply to any residence, including vacation homes, while the fuel cell credit is restricted to installation in your principal residence.

Home improvement energy credit. Uncle Sam is offering you $500 to install certain energy saving improvements in your home. Energy conservation property, such as energy-efficient residential exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters installed in 2006 and 2007, qualify.

The $500 credit may be taken in any one of two ways, or in combination:

"Residential energy property expenditures" include:

"Qualified energy efficiency improvements" - for which 10 percent of your purchase and installation costs are allowed to count toward the $500 home improvement energy credit - consist of "energy-efficient envelope components satisfying the 2000 IEC Code."
They include insulation materials; exterior doors; and metal roofs with special pigmented coatings. Exterior windows, including skylights, are also on the list, but they are subject to a special expense limit. The list specifically does not include insulated drapes. It also does not include any improvement that doesn't meet 2000 IEC Code. The IRS is expected to come out with a more detailed list soon.
Qualifying property must be installed in your principal residence. Vacation, second homes, rental properties or a foreign residence do not qualify for any part of this credit. Moreover, while most do-it-yourself installations are allowed, you will need to prove date of installation and you will not be able to add in the cost of your own time.

"Green" vehicles. New tax credits are available for hybrid, fuel cell, advanced lean burn diesel and other alternative power vehicles, replacing current deduction for clean fuel (including hybrid) 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 separate credit components:

Most individuals will only be able to take advantage of the qualified hybrid motor vehicle credit since only they are being mass-produced by the major automakers. Unlike the rules for 2005, however, a qualified hybrid motor vehicle no longer includes many heavy SUVs. Nor will it include many high performance hybrids that do not appreciably decrease fuel consumption from their smaller-engine gasoline counterparts. Also unlike the 2005 hybrid deduction, however, the new credit is available whether you buy or lease.

The amount of the credit for a hybrid vehicle is based upon the percentage increase in fuel economy from an all-gasoline model and varies from $400 to $2,400, based on fuel savings ranging from 125 to 250 percent of a base amount. An additional conservation credit is awarded to hybrid vehicles with certain lifetime fuel savings ratings, ranging from $250 to $1,000.

Impact on businesses
Deductions of energy-efficient commercial property. If you own commercial buildings property, the IRS is offering you an energy deduction for improving your building's energy consumption. The maximum deduction is $1.80 per square foot of the building. Several criteria must be met:

The property for which costs are claimed must be depreciable (or amortizable) property, installed in a domestic building, and within the scope of Standard 90.1-2001;
The property must be installed as part of; the interior lighting system, the heating, cooling, ventilation and hot water systems, or the building envelope; and
The property must be installed based on a plan to reduce total annual energy and power costs by 50 percent or more when referenced against a building meeting certain minimum requirements. (The IRS has been instructed to issue rules to allow a reduced deduction if specific energy efficiency targets are met but the 50-percent mark is not reached.)

Business solar investment tax credit. The business investment credit for solar energy property is increased from 10 percent to 30 percent. The increased credit applies to equipment, which uses solar energy to:

Credit for qualified fuel cell property/stationary micro turbines. Energy property includes qualified fuel cell property and stationary micro turbine property for purposes of the business energy credit. The credit is 30 percent of the basis of qualified fuel cell property placed in service during the tax year. The energy credit for any qualified fuel cell property cannot exceed $500 for each 0.5 kilowatt of capacity.

New credit for manufacturing energy efficient appliances. The Energy Tax Incentives Act of 2005 adds a new credit for the manufacture of energy-efficient appliances, such as dishwashers, clothes washers and refrigerators. The credit is a part of the general business credit.

Homebuilder's credit for new energy-efficient homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for a qualified new energy-efficient home that a person acquires from the contractor during 2006 and 2007 for use as a residence during the tax year. An eligible contractor is a person who constructs a new energy-efficient manufactured home. The credit applies to new homes and those substantially reconstructed. While the contractor, rather than the homeowner, gets the credit, the purchasers may benefit from a price reduction since the contractor's net costs are less if the credit is factored in.

Effective dates
A word about effective dates. The energy tax incentives apply to equipment placed in service after December 31, 2005 and before January 1, 2008. Some complex issues surround these 2006 and 2007 benefits. Time of installation rather than payment controls. An installation taking place right now might still qualify for the credit if it is not completed sufficiently to be substantially ready for use until 2006.

Maximizing your tax benefits

There are many tax benefits available in the new energy law and lots of fine print that, if you are not careful, can prevent you from maximizing your savings. Logistically, of course, you not only need to keep your eye on the tax rules, but also on what improvements will maximize your energy savings, the price for the improvements, and the availability of a contractor to install them. Give our office a call today. We can help lighten the load on the tax side of your plans when you are ready. We can be reached at 781-453-8700.

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