Congress Passes Energy Tax Incentives Act of 2005

In late July, Congress passed the Energy Tax Incentive Act of 2005.  The tax goodies have an advertised value of $14.5 billion, and there's a very good chance some of them will favorably affect you, your business or members of your family.  The new tax breaks are intended to reward both domestic energy production and conservation.  In general, the conservation measures (such as tax credits for qualifying fuel-efficient vehicles) will impact more taxpayers.  The following are some of the changes we think are most likely to be important to you.

1. Credit for Builders of Energy Efficient Homes - Contractors that build new energy-efficient homes in the U.S. are eligible for a credit of $2,000 per housing unit.  To qualify, the unit must have annual energy consumption for heating and cooling that is at least 50% less than comparable units.  The credit can also apply to a substantial reconstruction and rehabilitation of an existing home.  These credits only apply to homes sold by contractors for use as personal residences. Construction must be substantially completed after the 2005 Energy Act is signed into law by President Bush, and the home must be purchased after 12/31/05 and before 2008. 

2. Deduction for Energy Efficient Commercial Building Improvements - An immediate deduction (as opposed to multi-year depreciation) is allowed for the cost of qualified energy-savings improvements to commercial buildings in the U.S. The maximum deduction is generally limited to $1.80 per square foot on a lifetime basis. The improvements must be installed as part of interior lighting systems; heating, cooling and ventilation systems; hot water systems; or the building envelope.  To qualify, the improvements must also meet a 50% reduced energy consumption standard.  In some circumstances, a reduced deduction amount of $.60 per square foot may apply.  The deduction is available for qualified energy efficient commercial building improvements put to use after 12/31/05 and before 2008.

3. Personal Energy Property Credit - The personal tax credit for residential energy property expenditures will benefit many people.  This new credit is limited to a lifetime amount of $500, and it only applies to items put to use after 12/31/05 and before 2008.  The credit only applies to expenditures on your principal residence (no vacation homes). Qualified home improvement include the following:

• Metal roofs coated with heat-reduction pigments
• Exterior windows, including those in skylights (however, the lifetime credit amount for windows is limited to $200)
• Exterior doors
• Insulation materials or systems designed to reduce heat loss or gain
• Energy efficient electric heat pumps, electric heat pump hot water heaters, geothermal heat pumps, and central air conditioners. The credit for expenditures for these items cannot exceed $300 per item
• Qualified natural gas, propane, and oil furnaces and qualified hot water boilers - The credit for expenditures on these items cannot exceed $150 per item
• Advanced main air circulating fans.  The credit for expenditures on these cannot exceed $50 per item

4. New Tax Credits for Vehicles - After this year, the 2005 Energy Act essentially repeals the tax deduction for new hybrid gas-electric passenger autos such as the Toyota Prius and Ford Escape.  However, the law creates a new batch of so-called alternative motor vehicle tax credits.  These credits are available for both purchased and leased vehicles.  Credit amounts are determined under a complicated set of rules and are allowed for the following four types of vehicles:

• Hybrid     
• Advanced Lean Burn Technology
• Fuel Cell
• Alternative Fuel

*You generally won't be able to determine vehicle credit amounts on your own.  You will have to rely on information provided by the car manufacturers. In addition, vehicle credits cannot be used to reduce your federal income tax liability below the alternative minimum tax amount.*

This list only scratches the surface of the new rules in the massive 2005 Energy Act.  Please call us at 615-661-6599 if you have questions or want more information.

Adapted from the National Tax Advisory by Thomson PPC (August 9, 2005).