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Energy Credits - February 2008
- 1. Tax Benefits for going "GREEN" By Douglas G. Schultz, CPA and Jacob I. Chung, CPA up to a maximum tax credit of $500. The For those of you who made financial credit is a lifetime credit such that if you decisions during the year 2007 to acquire have already made qualifying energy saving home improvements, improvements in 2006 and claimed the $500 appliances or other purchases to help Mother maximum credit on your 2006 tax return, no Nature, you may realize some tax benefits more credit is available on your 2007 tax when filing your 2007 tax returns. Through return for the additional improvements. the Energy Tax Incentives Act of 2005 the However, if you have not claimed the entire federal government provides tax incentives credit, you can still claim the unclaimed for taxpayers who made qualifying portion of the $500 maximum credit. purchases and improvements to conserve energy and other ways that would help the Many types of improvements qualify for the environment. However, there are drawbacks tax credits, such as insulation, replacement to these tax incentives. The credits and of windows, exterior doors, metal roof, etc. deductions available are limited in their To qualify these purchases require either availability to certain taxpayers and limited "Energy Star" label or meet the International in amount. Unfortunately, the tax incentives Energy Conservation Code (IECC). available apply only to homeowners or Components must be new and must have commercial property. For the most part, useful life of at least five years. Of the $500 residential rental property is excluded. Most maximum credit, no more than $200 of the of the current credits expired December 31st. credit can be claimed for windows Congress has indicated that it will try to expenditures for all years. extend these incentives in 2008 legislation. There are currently no California energy tax In addition to home improvements, credits. purchases of specific energy-saving property, including installation costs, can There are three main tax credits available to qualify for the credit, such as electric heat most taxpayers for tax year 2007: pumps, geothermal heat pumps, energy efficient central air conditioners and natural 1. Residential Energy Property Credit gas or propane water heaters. These energy (Non-Business Property Credit) properties must meet minimum performance 2. Residential Energy Efficient and quality standards. For more information Property Credit and the details of the standards, please visit 3. Alternative Motor Vehicle Credit the website at http://www.energystar.gov and click the button for tax credits. 1. Residential Energy Property Credits 2. Residential Energy Efficient Property Credit - Claimed on Form 3468, Investment If you made energy saving improvements to Tax Credit your principal residence located in the United States between 1/1/2006 to In addition to the Non-Business Energy 12/31/2007, individual taxpayers are entitled Property Credit (Residential Energy Credit) to a credit of 10% of qualifying expenditures described above, taxpayers may receive a
- 2. credit for qualified energy property. The of the 60,000th vehicle, the purchasers in the credit is based on 30% of the qualifying cost following two calendar quarters can only of the property with a maximum credit of claim 50% of the full credit, then 25% of the $2,000. The credit again applies to full credit on purchases made in the next two individuals who install such property related calendar quarters. After the fifth calendar to their principal residence. Qualifying quarter, the credit is completely phased out. property includes solar electric property, You can search for a specific vehicle on the solar water-heating property (other than IRS website to determine the available credit swimming pools) and qualifying fuel cell using the following link: property. In the case of qualifying fuel cell http://www.irs.gov/newsroom/article/0,,id=1 property, the credit is $500 per half kilowatt 57557,00.html. Be aware that the IRS of electricity generated. Unlike the publishes information whether the IRS has lifetime credit, the Residential Energy withdrawn any certification that would Efficient Property Credit is computed based disallow the credit for any specific qualified on the expenditures made during the tax vehicle. . year and can be earned in succeeding years. Energy Credit 3. Alternative Motor Vehicle Credit - Claimed on Form 8910 One credit that may be available to owners of residential rental property may be the Taxpayers who purchased or placed in Energy Credit for production of energy by service an alternative motor vehicle may alternative means. It is also a credit that claim a tax credit related to the purchase. may provide a tax planning opportunity First, the vehicle must meet the criteria for since it is the one energy credit that was the credit - the vehicle must be one of the previously extended to property placed in following four types: advanced lean burn service before January 1, 2009. technology vehicle; qualified hybrid vehicle; qualified alternative fuel vehicle; and Prior to year 2006, the government allowed qualified fuel cell vehicle. In general, energy credit for 10% of the costs of the manufacturer's certification will determine if equipment 1) used to produce, distribute, or the vehicle will be eligible for the credit, used geothermal energy stored in rocks, except for the qualified fuel cell vehicle. water, or steam, and 2) that uses solar Second, the vehicle must be placed in energy to create electricity, heating or service during the tax year to claim the tax cooling system, or provide hot water or solar credit. Third, the usage of the vehicle process heat. The Energy Tax Incentives should be primarily in the United States. Act of 2005 had two major updates starting Fourth, the taxpayer is the original owner. 2006: 1) increased the business investment credit from 10% to 30%, for solar energy The amount of available credit varies by the property and hybrid solar lighting systems type of vehicle acquired; a 2007 Honda and 2) expanded the definition of energy Civic CVT generates a $2,100 credit and a property to include qualified fuel cell 2007 Ford Escape Hybrid 2WD generates a property at 30% energy credit and stationary $2,600 credit, The tax credit is also subject microturbine property at 10% energy credit. to a phase out. The credit starts to phase out once the vehicle manufacturer sells 60,000 To qualify for the energy credit, the taxpayer units of the qualified vehicles. After the sale must construct, reconstruct, or erect the
- 3. qualifying property, or acquire the property energy efficient home and IRS Notice 2006- as part of the original use. The property 28 for manufactured homes. must meet the minimum performance and quality standards set by IRS Regulations, Low Sulfur Diesel Fuel Production Credit and must be used in the taxpayers trade or Taxpayers who produce sulfur diesel fuel business as depreciable property. are entitled to a five cents credit for each gallon for qualified small business refiners Finally there are energy credits for that do not exceed 205,000 barrels per year. production of energy from alternative sources that one normally would receive as All of the available energy credits are an investor in an entity that produces energy subject to a limitation based on tax. The from alternative sources. Some of these maximum amount of credit a taxpayer may credits are: take is the amount of the tax due or the amount of credit that would reduce the Renewable Resources Electricity Production amount of the regular tax to the tentative Credit. This credit is allowed for taxpayers minimum tax. Thus the Alternative that generate electricity, refined coal, or Minimum Tax may also play a role in how Indian coal from a qualified resources and much energy credit may be taken for 2007. facility, and then sell in the United States. Qualified resources are defined on the instructions for Form 8835. Samples of the qualified resources are electricity produced from wind, open-loop and closed-loop The opinions expressed in this article are those of the biomasses, poultry waste, solar energy, and authors and do not necessarily reflect the viewpoint landfill gas. of SFAA or SF Apartment Magazine. Douglas Schultz is a CPA and partner in the tax practice in the San Francisco office of Burr, Pilger, & Mayer. LLP. Enhanced Oil Recovery Credit . Taxpayers Jacob Chung is a CPA and manager in the San Jose who operate mineral interest and incurred office of Burr, Pilger, & Mayer, LLP. Both can be expenses for qualified enhanced oil recovery contacted at 415.421.5757. are entitled to claim 15% of the costs for the year as tax credit. Credit for Alcohol Used as Fuel. Taxpayers producing alcohol fuels or mixtures of other special fuel or gas with alcohol can claim a tax credit when a sale or usage of such alcohol occurs by the producer. Energy Efficient Home. For contractors who construct energy efficient home or manufacture new home and meet the energy saving requirements can claim up to $2,000 tax credit. For more details, guidelines are provided in the IRS Notice 2006-27 for