Green Tax Incentives - What You Can Benefit From It
In the past two years there have been five pieces of tax legislation that have included tax provisions targeting energy conservation. Through these tax incentives, the federal government is trying to change (socially engineer) the way people and businesses act with respect to energy use. Here is a summary of each one of the five tax incentives recently legislated:
The Energy Efficient Commercial Building Deduction (179D):
This came to us through The Economic Stimulus Act of 2008 and applies to commercial buildings, as well as multifamily residential structures with more than three above-ground stories. It provides a tax deduction equal to 60 cents per square foot for each of three categories ($1.80 deduction maximum) in which energy consumption is reduced from a “baseline” set forth by the American Society of Heating, Refrigerating and Air Conditioning Engineers. This standard is widely used by the commercial building industry. The taxpayer must secure an analysis from a professional engineer or licensed contractor along with a certification from this same professional. The certification is not required to be attached to the taxpayer’s tax return but must be maintained in a file and made available in the event of an IRS inquiry or audit. The three categories are:
Category #1 - Interior Lighting Systems
Category #2 - HVAC systems
Category #3 - Building Envelope (outer shell of building)
This deduction reduces the taxpayer’s tax basis for purposes of depreciation. In effect it equals accelerated depreciation. Like a first-year expensing of the associated energy-saving costs. This incentive expires at the end of 2013.
New Energy Efficient Home Credit (45L):
This is a federal tax credit of $2,000 available to home builders for each new home sold, which meets the definition of an energy-efficient home. An energy-efficient home must satisfy two conditions. Condition #1- It is certified to consume at least fifty percent less energy for heating and cooling than a comparable home constructed in accordance with older standards dictated by the 2004 Supplement of the 2003 International Energy Conservation Code. Condition #2 - The new home’s envelope (outer shell) must reduce energy consumption by ten percent or more than that of comparable homes. Again, a comparable home is one constructed in accordance with standards dictated by the 2004 Supplement. In addition to satisfying these two conditions, the new home must also meet a Federal Manufactured Home Construction and Safety Standards condition. A certification is required by an unrelated licensed professional engineer or a contractor. The certification is not required to be attached to the taxpayer’s tax return but must be maintained in a file and made available in the event of an IRS inquiry or audit. Unused credits may be carried back one year or carried forward twenty years. This credit is set to expire by the end of 2010. The credit reduces the home builder’s basis in the new home being manufactured for sale.
Residential Home Improvement Credit (25C):
This provision provides a thirty percent tax credit, up to $1,500, for qualifying residential improvements. Such improvement include insulation materials, exterior windows, skylights, exterior doors, oil water heaters and furnaces, central air conditioners, exterior doors, propane water heaters, hot water boilers, electric heat pump water heaters, metal roofs, stoves and circulating fans. These improvements must meet certain energy efficiency standards established by the IRS. You must check with the vendor to verify if the equipment used in the home improvement meets such standards.
Residential Credit For Certain Energy-Efficient Items (25D):
This provision provides another additional thirty percent tax credit for geothermal heat pumps, solar panels, wind energy systems, solar water heaters, small wind energy systems and fuel cells. There is no cap on the amount of qualifying expenditures. Qualifying expenditures include not only the cost of equipment but also the cost of labor to install the equipment. All improvements, other than fuel cell improvements, are available for new homes, existing homes, rental properties and second homes. Qualifying fuel cell improvements are eligible only for existing homes.
Accelerated Depreciation For “Smart” Electrical Systems (168):
This provision provides for accelerated depreciation of a ten-year life on smart electric meters and electric grid systems, which typically requires depreciation over a twenty-year period. Qualifying property includes property placed in service after October 3, 2008. Most taxpayers qualifying for this tax benefit will be utility companies, however, other non-utility taxpayers may qualify for “smart” meters which show energy consumption over time and allow taxpayers to monitor and adjust their power use.