Energy Policy Act of 2005 Offers Significant Tax Breaks

After four years, the energy bill has finally become law. The Energy Policy Act of 2005 (EPA ’05) contains $14.5 billion in tax cuts, benefiting both individuals and businesses. While much of the emphasis has been focused on the business portions, this item discusses the incentives for individuals. (For a discussion of some of the business portions, see Muntean, “Congress’s Tax Double Header,” p. 674, this issue.)

Purchases and Improvements to Primary Residences

Two nonrefundable credits are available to homeowners for certain property purchased and improvements made to a primary residence—the nonbusiness energy property (NEP) credit and the residential energy-efficient property (REEP) credit. These credits are available for property placed in service after 2005 and before 2008; the property’s basis is reduced by the credit(s) taken.

NEP credit: The Sec. 25C NEP credit, added by EPA ’05 Section 1333, is a $500 lifetime credit across all tax years, comprised of two parts: (1) 10% of significant energy-efficiency improvements made to existing homes and (2) residential energy property expenditures.

As long as certain energy conservation codes are met, improvements that qualify for the first part of the credit are as follows:

• Insulation material or system primarily designed to reduce heat loss or gain;

• Exterior windows, including skylights and doors (limited to a $200 credit); and

• Metal roofs coated with heat-reducing pigments.

Property that qualifies for the second part of the credit is as follows (100% of cost up to overall $500 credit limit, limited by each category):

• Advanced main air circulating fans (limited to $50);

• Natural gas, propane or oil furnace or hot water boilers (limited to $150); and

• Energy-efficient building property, such as electric and geothermal heat pumps and central air conditioners (limited to $300).

REEP credit: The Sec. 25D REEP credit, added by EPA ’05 Section 1335, can be claimed by individuals who install solar hot water, photovoltaic equipment or fuel cell property in their homes. The credit is 30% of the installation cost, limited to $2,000 for solar water heating equipment, $2,000 for photovoltaic equipment and $500 for certain fuel cell property.

Purchases of Alternative Vehicles

To encourage the purchase of environmentally friendly vehicles (i.e., those propelled by clean-burning fuel), EPA ’05 Section 1341(a) introduced a one-time per vehicle credit in Sec. 30B to replace the deduction currently available. These credits are allowed for individuals and businesses and apply to purchases and leases made beginning in 2006. Pre-EPA ’05 Sec. 179A allowed a maximum $2,000 deduction for these purchases, but the new credits will allow for a much greater tax benefit, including expanding it to leased, as well as purchased, vehicles. There are several eligible vehicles to pick from, including a hybrid vehicle, an advanced lean-burn technology vehicle, a fuel cell-powered vehicle and an alternative fuel vehicle.

Hybrid/lean-burn vehicles: The credit for hybrid and advanced lean-burn vehicles is made up of two parts—the fuel economy credit and the conservation credit; see Sec. 30B(c)(2)(A) and (B) and (d)(2)(A). The fuel economy credit ranges from $400–$2,400, de-pending on how much greater the mileage is compared to a similar 2002 conventional model, under Sec. 30B (c)(2)(A). The conservation credit is calculated on the vehicle’s lifetime fuel savings and ranges from $250–$1,000, under Sec. 30B(c)(2)(B). (The reasonable average credit should range from $1,500–$2,250.) These credits expire on Dec. 31, 2009 for heavy hybrid trucks and on Dec. 31, 2010 for cars, light trucks and clean-burn vehicles. Once a manufacturer has sold 60,000 of these vehicles, the credit is phased out.

Fuel cell vehicles: These vehicles qualify for a credit of up to $12,000 for cars and light trucks, under Sec. 30B(b). However, they are still in their infancy and are not readily available yet. The credit is based on weight class and fuel economy, and expires on Dec. 31, 2014.

Alternative fuel vehicles: Lastly, alternative fuel vehicles qualify for a Sec. 30B(e) credit of up to $4,000 for cars and light trucks and up to $32,000 for trucks, vans and buses over 26,000 pounds. This credit expires Dec. 31, 2010. Alternative fuel vehicles are those that run on compressed natural gas, hydrogen, liquefied petroleum gas, liquefied natural gas, and liquid fuels that are 85% methanol. A reduced credit is available for fuel mixes that are no more than 25% gasoline.

Summary

As detailed above, the EPA ’05 has added several new tax credits for individuals. As always, timing is everything; if a client wishes to take advantage of these benefits, it should be advised that they do not begin until 2006.

From Heather Leggiero, CPA, J.D., Dorfman–Robbie CPAS PC, Albany, NY