The Energy Policy Act of 2005, a major piece of legislation containing more than $14.5 billion in tax incentives for energy conservation and production, was signed into law by President George W. Bush on August 8 in Albuquerque, New Mexico. The bill finally won approval from both the House and the Senate in late July after years of protracted negotiations.
The tax title of the omnibus bill, the Energy Tax Incentives Act of 2005, includes tax breaks and subsidies promoting conventional forms of energy production, alternative forms of energy production, energy efficiency and conservation, and improvements to the energy infrastructure. Consumers and businesses, especially those in the oil and energy production industries, stand to benefit from the new and enhanced tax breaks included in the legislation.
Conservation and Efficiency Incentives for Consumers
Among the tax incentives aimed at individuals are:
- A $500 lifetime personal tax credit for qualifying energy-efficiency improvements and property purchases for a principal residence, including items such as windows and doors, insulation, heating and air-conditioning systems, hot water boilers, and furnaces. Applies to property placed in service in 2006 and 2008.
- A 30% tax credit up to $2,000 for the purchase and installation of residential solar, photovoltaic, and fuel cell systems. Applies to property placed in service in 2006 and 2008.
- Tax credits for the purchase or lease of hybrid and advanced lean-burn technology vehicles, which could be as much as $4,000 for cars, and $32,000 for very heavy trucks. Applies to vehicles placed into service starting in 2006; expires in 2011 for lighter vehicles, and 2010 for heavier hybrid trucks.
- Tax credits for fuel cell powered vehicles ranging from $8,000 for cars to $40,000 for very heavy trucks. Applies to vehicles placed in service starting in 2006. These credits are reduced in 2010 and expire in 2015.
These tax incentives make adding energy-efficient improvements and property to principal residences more attractive for homeowners, but the law places limits on the amount of credit that can be claimed for specific types of improvements and property. For example, the maximum allowable credit for windows is $200, while for hot water boilers it is $150. To qualify, the energy efficiency improvement must have a life span of at least five years.
The 30% credit for the installation of solar, photovoltaic, and fuel cell equipment may be claimed up to a maximum of $2,000 per year for solar water heating and photovoltaic systems, but only up to $500 for each 0.5 kilowatt of capacity for fuel cell property. The credit may only be used for personal residences, and the equipment purchased may not be used to heat swimming pools or hot tubs.
The new tax credits for the purchase of energy efficient vehicles are much more generous than the $2,000 deduction they replace. The amount of the credit varies, however, depending on the weight class, fuel efficiency, and lifetime fuel savings of each vehicle.
Conservation and Efficiency Incentives for Businesses
The tax incentives for non-energy industry businesses include:
- A $2,000 tax credit to eligible contractors for the construction of each new energy-efficient home that meets certain standards. Applies to homes purchased in 2006 and 2008.
- A tax credit for manufacturers of energy efficient appliances, including refrigerators, dishwashers, and washing machines. Applies to appliances produced in 2006 and 2008.
- A tax credit of up to 30% for the business installation of qualified fuel cell power plants and a 10% credit for purchasing stationary microturbine power plants. Applies to plants placed in service in 2006 and 2008.
- Expansion of the Code Sec. 45 renewable energy production credit—currently applicable to the production of electricity from wind, closed- and open-loop biomass, geothermal, small irrigation, landfill gas, and trash combustion—to include hydropower and Indian coal. Expiration dates have been extended, and vary according to facility type.
- A tax credit of up to 30% for businesses investing in solar energy property. May be claimed in 2006 and 2008.
- A maximum deduction of $1.80 per square foot for the cost of major energy-savings improvements to, and property purchased for, commercial buildings. Applies to property placed in service in 2006 and 2008.
- A 30% tax credit for the installation of alternative fueling stations to be used in trade or business.
Businesses can benefit from the new law when making energy efficiency improvements, buying alternative energy equipment, purchasing "green" vehicles, and using alternative fuels.
Contractors may claim the full $2,000 tax credit per new home provided the heating and cooling systems of the house use at least 50% less energy than those of conventional houses. A credit of $1,000 may be claimed for dwellings with energy efficiency levels of at least 30% above those of standard houses.
Tax Breaks for the Energy and Oil Industries
Among the tax breaks for the energy and oil industries (expiration dates vary) are:
- Tax incentives for utilities and other energy suppliers to maintain and upgrade plants and equipment, including a reduction in depreciation periods.
- Tax credits for investments in clean coal technology.
- Incentives for refineries to make investments resulting in capacity increases.
- Tax credits for electricity production at advanced nuclear power facilities.
- A refund for refiners of diesel-water fuel equal to the difference between the regular diesel tax rate and a new incentive rate.
- Modification of the definition of small refiner eligible for the exception to the oil depletion deduction to include independent refiners with certain production levels.
- Enhancement of the research and development credit for energy research.
- Two-year amortization of geological and geophysical costs incurred in domestic oil and gas exploration.
The law also contains a number of incentives for the production of alternative fuels, including biodiesel and ethanol. In addition, it creates a new category of tax-exempt bonds—Clean Renewable Energy Bonds—that will enable electric cooperatives and others to pay for capital expenditures for renewable energy facilities.
These tax breaks are offset in part by around $3 billion in revenue-raising measures, including the reinstatement of the Oil Spill Liability Trust Fund, the extension of the Leaking Underground Storage Tank Trust Fund, and a change in rules for the amortization recapture of intangible assets purchased by a business.
For more information and specific advice, please give us a call. As always, we look forward to helping you develop appropriate tax-efficient strategies for your situation
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