Summary:
The federal tax credit for energy efficient home improvements was established by the Energy Policy Act of 2005. After expiring on December 31, 2007, the credit was extended by The Energy Improvement and Extension Act of 2008 (H.R. 1424, Division B), and now applies to eligible equipment purchased between January 1, 2009 and December 31, 2009. Equipment purchased during calendar year 2008 is not eligible for the tax credit. In addition to extending the credit, H.R. 1424 modified the efficiency requirements for water heaters; removed the geothermal heat pump credit from 26 USC § 25C and moved it to 26 USC § 25D; and extended the credit to stoves that use biomass fuel and asphalt roofs with appropriate cooling granules.
The credit applies to energy efficiency improvements in the building envelope of existing homes and for the purchase of high-efficiency heating, cooling and water-heating equipment. Efficiency improvements or equipment must serve a dwelling in the United States that is owned and used by the taxpayer as a primary residence. The maximum amount of homeowner credit for all improvements combined is $500 during the three year period of the tax credit (2006, 2007 and 2009). Geothermal heat pumps were originally included with these credits and subject to a $300 cap. Geothermal heat pumps are now covered by the Residential Renewable Energy Tax Credit, with a $2,000 cap.
Building Envelope Improvements Owners of existing homes can receive tax credits of up to 10% of the cost of upgrading the efficiency of the building's envelope. Components eligible for the credit include:
Credits for windows may not exceed $200, and the total amount of credits for building envelope measures and other qualified energy property outlined below must not exceed $500.
Improvements should be expected to remain in use for at least five years. Metal roofs and asphalt roofs must meet Energy Star requirements, and all other improvements must meet 2000 International Energy Conservation Code criteria, including supplements. Manufactured homes conforming to Federal Manufactured Home Construction and Safety Standards also qualify.
Heating, Cooling, and Water Heating Equipment Purchasers of qualified energy efficient property are eligible for tax credits up to the total expenditures on such property. The credit can also be applied to labor costs for assembly and original installation of this property. Eligible property and maximum credit amounts are as follows:
Performance and quality standards for tax credit eligibility vary by technology. See 26 USC § 25C and H.R. 1424 above for details. Additionally, the Internal Revenue Service (IRS) has provided the following guidance relating to the credit: IRS Notice 2006-26.
For more detailed information on qualifying products, visit the Energy Star web site.
Contact: Public Information - IRS Internal Revenue Service 1111 Constitution Avenue, N.W. Washington, DC 20224 Phone: (800) 829-1040 Web site:http://www.irs.gov
Note:
Established by the Energy Policy Act of 2005, the federal tax credit for residential energy property initially applied to solar electric systems, solar water heating systems and fuel cells. The Energy Improvement and Extension Act of 2008 (H.R. 1424, Division B) extended the tax credit to small wind energy systems and geothermal heat pumps, effective January 1, 2008. Other key revisions included an eight-year extension of the credit to December 31, 2016, the ability to take the credit against the alternative minimum tax, and the removal of the $2,000 credit limit for solar electric systems beginning in 2009.
The maximum allowable credit, equipment requirements, and other details vary by technology as outlined below.
Solar electric property
Solar water heating property
Fuel cell property
Small wind energy property
Geothermal heat pumps
History : The Energy Policy Act of 2005 (Section 1335) established a 30% tax credit up to $2,000 for the purchase and installation of residential solar electric and solar water heating property and a 30% tax credit up to $500 per 0.5 kilowatt for fuels cells. Initially scheduled to expire at the end of 2007, the tax credits were extended through December 31, 2008 by Section 206 of the Tax Relief and Health Care Act of 2006.
In October 2008, through the Energy Improvement and Extension Act of 2008(Division B, Section 106), the tax credits were extended once again –- until December 31, 2016 –- and a new tax credit for small wind energy systems and geothermal heat pump systems was created.
Contact: Public Information - IRS Internal Revenue Service 1111 Constitution Avenue, N.W. Washington, DC 20224 Phone: (800) 829-1040 Web site: http://www.irs.gov
According to Section 136 of the IRS Code, energy conservation subsidies provided by public utilities,* either directly or indirectly, are nontaxable: "Gross income shall not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure."
The term "energy conservation measure" includes installations or modifications primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand. Eligible dwelling units include houses, apartments, condominiums, mobile homes, boats and similar properties. If a building or structure contains both dwelling and other units, any subsidy must be properly allocated.
Given the definition of "energy conservation measure," there is strong evidence that utility rebates for residential solar thermal and solar electric projects may be nontaxable. However, the IRS has not ruled definitively on this issue. For taxpayers considering using this provision for renewable energy systems, consultation with a tax attorney is advised.
Other types of utility subsidies that may come in the form of credits or reduced rates may also be nontaxable, according to IRS Publication 525:
"Utility rebates. If you are a customer of an electric utility company and you participate in the utility’s energy conservation program, you may receive on your monthly electric bill either: a reduction in the purchase price of electricity furnished to you (rate reduction), or a nonrefundable credit against the purchase price of the electricity. The amount of the rate reduction or nonrefundable credit is not included in your income."
* The term "public utility" is defined as an entity "engaged in the sale of electricity or natural gas to residential, commercial, or industrial customers for use by such customers." The term includes federal, state and local government entities.
The federal Energy Policy Act of 2005 established a tax deduction for energy-efficient commercial buildings applicable to qualifying systems and buildings placed in service from January 1, 2006, through December 31, 2007. This deduction was subsequently extended through 2008, and then again through 2013 by Section 303 of the federal Energy Improvement and Extension Act of 2008 (H.R. 1424, Division B), enacted in October 2008.
A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install (1) interior lighting; (2) building envelope, or (3) heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2001. Energy savings must be calculated using qualified computer software approved by the IRS. Click here for the list of approved software.
Note that the eligible technologies listed above are provided as examples and do not represent an official list specified in the statute.
Deductions of $0.60 per square foot are available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems meet target levels that would reasonably contribute to an overall building savings of 50% if additional systems were installed.
The deductions are available primarily to building owners, although tenants may be eligible if they make construction expenditures. In the case of energy efficient systems installed on or in government property, tax deductions will be given to the person primarily responsible for the systems’ design. Deductions are taken in the year when construction is completed.
The IRS released interim guidance (IRS Notice 2006-52) in June 2006 to establish a process to allow taxpayers to obtain a certification that the property satisfies the energy efficiency requirements contained in the statute. IRS Notice 2008-40 was issued in March of 2008 to further clarify the rules. NREL published a report (NREL/TP-550-40228) in February 2007 which provides guidelines for the modeling and inspection of energy savings required by the statute.
Click here for answers to frequently asked questions provided by the Commercial Building Tax Deduction Coalition.
For more information, visit the Energy Star Web site.
Note: The former 50% first-year bonus depreciation allowance expired December 31, 2008, however, the basic accelerated depreciation schedules remain in effect.
Under the federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain property through depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from three to 50 years, over which the property may be depreciated. For solar, wind and geothermal property placed in service after 1986, the current MACRS property class is five years. For certain biomass property, the MACRS property class life is seven years. Eligible biomass property generally includes assets used in the conversion of biomass to heat or to a solid, liquid or gaseous fuel, and to equipment and structures used to receive, handle, collect and process biomass in a waterwall, combustion system, or refuse-derived fuel system to create hot water, gas, steam and electricity.
The federal Energy Policy Act of 2005 (EPAct 2005) classified fuel cells, microturbines and solar hybrid lighting technologies as five-year property as well. The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% bonus depreciation provision for eligible renewable-energy systems acquired and placed in service in 2008. To qualify for bonus depreciation, a project must satisfy these criteria:
If property meets these requirements, the owner is entitled to deduct 50% of the adjusted basis of the property in 2008. The remaining 50% of the adjusted basis of the property is depreciated over the ordinary depreciation schedule. The bonus depreciation rules do not override the depreciation limit applicable to projects qualifying for the federal business energy tax credit. Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies.
For more information on the federal MACRS, see IRS Publication 946, IRS Form 4562: Depreciation and Amortization, and Instructions for Form 4562. The IRS web site provides a search mechanism for forms and publications. Enter the relevant form, publication name or number, and click "GO" to receive the requested form or publication.
The federal business energy tax credits available under 26 USC § 48 were expanded significantly by the Energy Improvement and Extension Act of 2008 (H.R. 1424), enacted in October 2008. The new law extended the duration -- by eight years -- of the existing credits for solar energy, fuel cells and microturbines; increased the credit amount for fuel cells; established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems; extended eligibility for the credits to utilities; and allowed taxpayers to take the credit against the alternative minimum tax (AMT), subject to certain limitations.
Credits are available for eligible systems placed into service on or before December 31, 2016:*
In general, the original use of the equipment must begin with the taxpayer, or the system must be constructed by the taxpayer. The equipment must also meet any performance and quality standards in effect at the time the equipment is acquired. The energy property must be operational in the year in which the credit is first taken.
If the project is financed in whole or in part by subsidized energy financing or by tax-exempt private activity bonds, the basis on which the credit is calculated must be reduced. (The formula is described in the tax credit instructions.) Subsidized energy financing means "financing provided under a federal, state, or local program, a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy." Therefore, a business must reduce the basis for calculating the credit by the amount of any such incentives received. Businesses who receive other incentives are advised to consult with a tax professional regarding how to calculate this federal tax credit.
History The federal Energy Policy Act of 2005 (EPAct 2005) expanded the existing federal business energy tax credit for solar and geothermal energy property to include fuel cells, microturbines and hybrid solar lighting systems installed on or after January 1, 2006, and raised the credit for solar to 30%. Prior to the provisions of EPAct 2005, a 10% credit was available to businesses that invested in or purchased solar or geothermal energy property.
* Note that the credit for geothermal property, with the exception of geothermal heat pumps, has no stated expiration date. The credit for solar energy property reverts to 10% after December 31, 2016.
The Energy Policy Act of 2005 established tax credits for manufacturers of high-efficiency residential clothes washers, refrigerators, and dishwashers produced in calendar years 2006 and 2007. The Energy Improvement and Extension Act of 2008 (H.R. 1424, Division B) extended the credits for additional years depending on the efficiency rating of the manufactured appliance. Manufacturers only receive these credits for the increase in production of qualifying appliances over a two-year rolling baseline, and only appliances produced in the United States are eligible.
Credits available to manufacturers are as follows:
Dishwashers
Clothes washers
Refrigerators
Each manufacturer is limited to a total of $75 million for all credits under this provision. However, refrigerators manufactured in 2008, 2009, or 2010 which consume at least 30% less energy than the 2001 energy conservation standards will not add to the aggregate credit amount and have no separate credit limit. Residential and commercial clothes washers manufactured in 2008, 2009 or 2010 which meet or exceed a 2.2 MEF and do not exceed a 4.5 WCF also will not add to the aggregate limit and have no separate credit limit.
The 2007 IRS Form 8909 is available here. For more information on qualifying products, visit the Energy Star Web site.
The federal Energy Policy Act of 2005 established tax credits of up to $2,000 for builders of all new energy-efficient homes, including manufactured homes constructed in accordance with the Federal Manufactured Homes Construction and Safety Standards. Initially scheduled to expire at the end of 2007, the tax credit was extended through 2008 by Section 205 of the Tax Relief and Health Care Act of 2006 (H.R. 6111), and then extended again through December 31, 2009 by Section 304 of The Energy Improvement and Extension Act of 2008 (H.R. 1424).
The home qualifies for the credit if:
Energy Saving Requirements
Site-built homes qualify for a $2,000 credit if they are certified to reduce heating and cooling energy consumption by 50% relative to the International Energy Conservation Code standard and meet minimum efficiency standards established by the Department of Energy. Building envelope component improvements must account for at least one-fifth of the reduction in energy consumption.
Manufactured homes qualify for a $2,000 credit if they conform to Federal Manufactured Home Construction and Safety Standards and meet the energy savings requirements of site-built homes described above.
Manufactured homes qualify for a $1,000 credit if they conform to Federal Manufactured Home Construction and Safety Standards and reduce energy consumption by 30% relative to the International Energy Conservation Code standard. In this case, building envelope component improvements must account for at least one-third of the reduction in energy consumption. Alternatively, manufactured homes qualify if they meet Energy Star Labeled Homes requirements.
Certification
The Internal Revenue Service (IRS) has issued guidance to provide information about the certification process that a builder must complete to qualify for the credit. The guidance also provides for a public list of software programs that may be used in calculating energy consumption for purposes of obtaining a certification.
IRS Notice 2006-27 provides guidance for the credit for building energy-efficient homes other than manufactured homes. IRS Notice 2006-28 provides guidance for the credit for building energy-efficient manufactured homes. Click here to access IRS Form 8908: Energy Efficient Home Credit.
For more information on this and other energy efficiency tax credits, visit the Energy Star web site..
The federal Renewable Electricity Production Tax Credit (PTC) is a per-kilowatt-hour tax credit for electricity generated by qualified energy resources and sold by the taxpayer to an unrelated person during the taxable year. The PTC was originally enacted in 1992 but has been renewed and expanded numerous times, most recently by H.R. 1424 in October 2008. This legislation extended the in-service deadlines for all qualifying renewable technologies; expanded the list of qualifying resources to include marine and hydrokinetic resources, such as wave, tidal, current, and ocean thermal; and made changes to the definitions of several qualifying resources and facilities.
The effective dates of these changes vary. Marine and hydrokinetic energy production is eligible as of the date the legislation was enacted (October 3, 2008), as is the incremental energy production associated with expansions of biomass facilities. A change in the definition of "trash facility" no longer requires that such facilities burn trash, and is also effective immediately. One further provision redefining the term "non-hydroelectric dam", will take effect December 31, 2008.
The tax credit amount is 1.5¢/kWh (in 1993 dollars and indexed for inflation) for some technologies, and half of that amount for others. The rules governing the PTC are currently different for different types of resources and facilities. The table below outlines two of the most important characteristics of the tax credit -- in service deadline and credit amount -- as they apply to different facilties. The table includes changes made by H.R. 1424 (see History section for information on prior rules) and the inflation adjusted credit amounts are current for the 2008 tax year.
The duration of the credit is generally 10 years after the date the facility is placed in service, but there are two exceptions:
It is important to note that owners of geothermal projects who claim the federal business energy tax credit may not also claim the federal PTC. In addition, the tax credit is reduced for projects that receive other federal tax credits, grants, tax-exempt financing, or subsidized energy financing. A business can take the credit by completing Form 8835, "Renewable Electricity Production Credit," and Form 3800, "General Business Credit." For more information, contact IRS Telephone Assistance for Businesses at 1-800-829-4933.
History
As originally enacted by the Energy Policy Act of 1992, the PTC expired at the end of 2001, and was subsequently extended in March 2002 as part of the Job Creation and Worker Assistance Act of 2002 (H.R. 3090). The tax credit then expired at the end of 2003 and was not renewed until October 2004, as part of H.R. 1308, the Working Families Tax Relief Act of 2004, which extended the credit through December 31, 2005. The Energy Policy Act of 2005 (H.R. 6) modified the credit and extended it through December 31, 2007. In December 2006, the credit was extended for yet another year -- through December 31, 2008 -- by Section 201 of the Tax Relief and Health Care Act of 2006 (H.R. 6111).
Section 710 of the "American Jobs Creation Act of 2004" (H.R. 4520), expanded the PTC to include additional eligible resources -- geothermal energy, open-loop biomass, solar energy, small irrigation power, landfill gas, and municipal solid waste combustion -- in addition to the formerly eligible wind energy, closed-loop biomass, and poultry-waste energy resources. The Energy Policy Act of 2005 (EPAct 2005) further expanded the credit to certain hydropower facilities. As a result of EPAct 2005, solar facilities placed into service after December 31, 2005 are no longer eligible for this incentive. Solar facilities placed in-service during the roughly one year window in which solar was eligible are permitted to take the full credit (i.e., 2.1¢/kWh) for five years.
*H.R. 1424 added marine and hydrokinetic energy as eligible resource and removed "small irrigation power" as an eligible resource effective October 3, 2008. However, the definition of marine and hydrokinetic energy encompasses the resources that would have formerly been defined as small irrigation power facilities. Thus H.R. 1424 effectively extended the in-service deadline for small irrigation power facilities by 3 years, from the end of 2008 until the end of 2011.