Energy Incentives Act of 2005

On August 8, 2005, President Bush signed into law the "Energy Incentives Act of 2005", which is designed to promote domestic energy production and conservation. The act addresses four major areas:

1. Conservation,

2. Alternative energy,

3. Energy infrastructure, and

4. Domestic energy production.

This new bill is aimed at providing incentives to energy producers, business owners and manufacturers of energy-efficient consumer goods. However, there are a several tax breaks for consumers who purchase or install energy efficient products in their homes.

Energy Efficient Home Improvements

The bill creates a new personal tax credit for individuals for the purchase of certain energy efficient property installed in their principal residence. The credit will be available for property placed in service after December 31, 2005 and before January 1, 2008. The tax credit cannot be greater than $500 and is available to individuals for nonbusiness energy property, such as residential exterior doors and windows, insulation, heat pumps, furnaces, central air conditioners and water heaters.

The credit is equal to:

1. The residential energy property expenditures, plus

2. 10% of the cost of qualified energy efficiency improvements installed during the year at the taxpayer’s principal residence in the United States.

The residential energy property credit is limited to a maximum of $500 for all tax years and no more than $200 of the credit can be based on expenditures for windows.

Eligible improvements include:

• Insulation materials

• Exterior windows (including certain storm windows and skylights)

• Exterior doors (including certain storm doors)

• Metal roofs with special pigmented coatings

• Electric heat pump water heaters

• Electric and geothermal heat pumps

• Central air conditioners

• Natural gas, propane, or oil water heaters or furnaces

• Hot water boilers

• Advanced main air circulating fans.

The residential energy property credit is a $500 lifetime credit. The credit is equal to 10% of the cost of qualified energy efficiency improvements (windows, doors, insulation) plus the cost of qualified energy property (heat pumps, water heaters, furnaces, central air units) up to the $500 lifetime maximum, subject to the following specific credit amount limits:

• $200 for window components

• $50 for an advanced main air circulating fan

• $150 for any qualified natural gas, propane, or oil furnace or hot water boiler

• $300 for any item of energy efficient building property

The energy-efficient property must be expected to remain in use for at least 5 years. The nonrefundable credit reduces the basis of the property and unused credits cannot be carried forward. The credit is not available for vacation homes or residential rental property.

Credit for Solar and Fuel Cell Equipment Installed on a Personal Residence

A tax credit is available to help individual taxpayers pay for residential alternative energy equipment. The residential alternative energy credit is 30% of the cost of eligible solar water heaters, solar electricity equipment (photovoltaics) and fuel cell plants.

The maximum credit is $2,000 per tax year for each category of solar equipment, and $500 for each half kilowatt of capacity of fuel cell plants installed per tax year.

Cooperative and condominium dwellers can claim the credit by splitting the cost of installing equipment with other unit owners.

Eligible equipment must be placed in service after December 31, 2005, and before January 1, 2008.

The residential alternative energy credit is a nonrefundable personal credit. It can be used to offset the excess of the individual’s regular tax liability over any alternative minimum tax liability, but cannot be used to get a refund if the tax liability drops below zero. Unused credits may be carried forward and added to a residential alternative energy credit for the succeeding tax year.

Credits for the Purchase of Energy Efficient Motor Vehicles

The 2005 Energy Tax Incentives Act essentially repealed Internal Revenue Code Section 179A, effective as of January 1, 2006, and replaced it with new Internal Revenue Code Section 30B, which authorizes a set of new motor vehicle credits.

Energy efficient motor vehicles are designed to use less fuel than most gas powered vehicles. To claim any of the new vehicle credits, the vehicle MUST:

1. Be Approved by the United States Treasury Department, AND

2. Be made by a manufacturer, AND

3. Meet certain Clean Air Act and maximum available power specifications (which vary based on the gross vehicle weight rating "GVWR" of the vehicle), AND

4. Be NEW (original use) property acquired for the use or lease of the taxpayer and not for resale, AND

5. The vehicle must be used primarily in the United States.

NOTE: The vehicle does not need to be used for business purposes to qualify for any of the vehicle credits.

There are FOUR alternative motor vehicle credits:

1. Qualified Fuel Cell Motor Vehicle Credit

A fuel cell vehicle uses hydrogen as its main source of power. The amount of the credit is based on the gross vehicle weight rating (GVWR) and ranges from $8,000 to $40,000. Qualified fuel cell vehicles that meet the definition of either a passenger automobile or light truck and meet certain standards for increased fuel efficiency will be allowed to increase the credit based on the increase in fuel efficiency over the year 2002 city fuel economy standards. The additional amount can range from $1,000 to $4,000.

The fuel cell motor vehicle credit is available for vehicles placed in service between January 1, 2006 and December 31, 2014. After December 31, 2009, the base credit decreases to $4,000 for cars and light trucks.

2. Advanced Lean Burn Technology Motor Vehicle Credit

This type of vehicle has a combustion engine designed to use more air than necessary for complete combustion of the fuel. The amount of the credit is based on overall fuel economy and ranges from $400 to $2,400. In addition, a conservation credit is also available and it is based on the vehicle's estimated lifetime fuel savings and ranges from $250 to $1,000.

The advanced lean burn technology motor vehicle credit is available for vehicles placed in service between January 1, 2006 and December 31, 2010.

NOTE: See "Phase-Out and Other Special Rules for Motor Vehicle Credits" below.

3. Qualified Hybrid Motor Vehicle Credit

A hybrid vehicle uses both gas and electricity to propel the vehicle. The amount of the credit is based on overall fuel economy and ranges from $400 to $2,400. In addition, a conservation credit is also available and it is based on the vehicle's estimated lifetime fuel savings and ranges from $250 to $1,000.

The qualified hybrid motor vehicle credit is available for vehicles placed in service between January 1, 2006 and December 31, 2010, if the vehicle weighs less than 8,500 pounds. If the vehicles weighs more than 8,500 pounds, the credit expires December 31, 2009.

NOTE: See "Phase-Out and Other Special Rules for Motor Vehicle Credits" below.

4. Qualified Alternative Fuel Motor Vehicle Credit

This type of vehicle is designed to use alternative fuels such as compressed or liquefied natural gas, liquefied petroleum gas, hydrogen or other liquid fuels that are at least 85% methanol. Hybrid vehicles may qualify under this definition. However, electric vehicles that qualify for the electric vehicle credit are specifically excluded from the definition. The amount of the credit is based on a percentage of the incremental cost (equal to the excess of the manufacturer's suggested retail price (MSRP) for the vehicle over the MSRP for a gasoline or diesel fuel motor vehicle of the same model) of the vehicle and ranges from $5,000 to $40,000. A reduced credit is available for vehicles that use a fuel mixes that are no more than 25% gasoline.

For more information on qualifying vehicles visit the following websites:

• IRS - Hybrid & Alternative Motor Vehicles

• IRS - News Releases & Fact Sheets - Hybrid & Alternative Motor Vehicles

• IRS - Summary - Credit for Qualified Hybrid Vehicles

• www.EnergyTaxIncentives.org

Phase-Out and Other Special Rules for Motor Vehicle Credits

The credits for hybrid and lean burn vehicles will be phased out over a period of four calendar quarters once the manufacturer has sold over 60,000 qualifying vehicles. The phase-out period will begin with the second calendar quarter following the quarter in which the 60,000 milestone is reached. The phase-out will be complete starting with the sixth quarter after that milestone is reached, which means that no further credits will be allowed for vehicles from that manufacturer.

Specifically, during the first two quarters of the four-quarter phase-out period, the credits will be reduced to 50% of the otherwise allowable amount. During the last two quarters of the phase-out period, the credits will be reduced to only 25% of the otherwise allowable amount.

Furthermore, these vehicle credits cannot be used to reduce the taxpayer's federal income tax liability below the alternative minimum tax amount, and the depreciable basis of vehicles used for business will be reduced by the credit amounts and the amount eligible for the credit must be reduced by any Internal Revenue Code Section 179 expense claimed on the property.

The credits will not be phased out for high-income taxpayers, and will be available for personal-use and for business-use property.

Home Construction Contractors

A new credit is available to home construction contractors for qualified new energy efficient homes acquired between January 1, 2006 and December 31, 2007. An eligible contractor can claim either a $2,000 or $1,000 tax credit for each qualified new energy-efficient home that the contractor builds and which is acquired by a person from the contractor for use as a principal residence.

An eligible contractor is a person who constructs a new energy efficient home, or a manufacturer that produces a qualified new energy-efficient manufactured home. To be a qualified new energy-efficient home:

• The home must be located in the United States,

• Its construction must be substantially completed after the date that the statute creating this credit is enacted, AND

• It must meet the energy saving requirements.

The term “construction” includes substantial reconstruction and rehabilitation.
The $2,000 credit is available if the home meets the following energy-savings requirements:

1. The home must be certified to have a level of annual heating and cooling energy consumption at least 50 percent below the annual heating and cooling energy consumption of a comparable dwelling unit, AND

2. The home must be certified to have building envelope component improvements that account for at least one-fifth of that 50 percent improvement in heating and cooling energy consumption.

A manufactured home can also qualify for the $2,000 credit if it meets these same tests and conforms to the Federal Manufactured Home Construction and Safety Standards. A manufactured home that does not meet these tests can nevertheless qualify for a $1,000 credit if it conforms to the Federal Manufactured Home Construction and Safety Standards, and:

• It is certified to have a level of annual heating and cooling energy consumption at least 30 percent below the annual heating and cooling energy consumption of a comparable dwelling unit, and to have building envelope component improvements that account for at least one-third of that 30-percent improvement, OR

• It meets the requirements established by the Environmental Protection Agency under the Energy Star Labeled Homes Program.

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