Congress Passes Energy and Highway Bills
Tax Provisions Impact Individuals, Businesses and Energy Producers
Afterseveral years of contentious debate, the Energy Policy Act of 2005 andthe Highway Transportation Act of 2005 finally were approved byCongress on July 29, immediately before the summer recess. PresidentBush said in his weekly radio address on July 30 that he looks forwardto signing the energy bill.
TheEnergy Tax Incentives Act of 2005 (Title XIII of the Energy Policy Act,H.R. 6) contains $14.5 billion in tax cuts to encourage conservation,development of alternative energy sources, a more robust energytransmission infrastructure, and greater domestic energy production.Most of the tax breaks, however, do not take effect until January 1, 2006more than $3 billion in revenue raisers are also included in the formof increased fuel taxes as well as greater amortization recapture ofintangibles.
Thetax title of the Safe, Accountable, Flexible, Efficient TransportationEquity Act: A Legacy for Users (2005 Highway Act) extends most of theexcise taxes that fund the Highway Trust Fund and Aquatic ResourcesTrust Fund and modifies other vehicle-related excise taxes.
Impact on Consumers
Asidefrom the indirect economic benefits that will flow from a morecoordinated national energy policy, individual consumers stand tobenefit directly from tax-subsidized incentives directed towardimproving energy consumption in their homes and in what they drive. Thenew law provides tax breaks, effective January 1, 2006, including:
(1) The residential energy efficient property credit,
(2) The credit for nonbusiness energy property, and
(3) A credit for the purchase or lease of alternative fuel vehicles.
Residential energy efficient property credit. The new law makes available a 30 percent credit up to a maximum credit each year of:
* $2,000 for the purchase and installation of residential solar water heating (up to $6,666 in expenses);
* $2,000 for the purchase of photovoltaic equipment for solar-generated electricity (up to $6,666 in expenses); and
* $500 for each 0.5 kilowatt of fuel cell property capacity.
The credit is in effect for 2006 and 2007 only, for property placed in service in those tax years.
* Thenew law allows the credit for solar water heating and electricity at asite "used as a residence by the taxpayer;" therefore, it is allowedfor vacation and other second homes. Fuel cell property, however, mustbe installed on or in connection with a principal residence.
Home improvement energy credit.A "lifetime" tax credit of up to $500 is available to individuals fornonbusiness energy property, such as energy-efficient residentialexterior doors and windows, insulation, heat pumps, furnaces, centralair conditioners and water heaters installed in 2006 and 2007. Thecredit is equal to:
* Residential energy property expenditures, plus
* 10 percent of the cost of qualified energy efficiency improvements.
"Qualifiedenergy efficiency improvements" include energy-efficient envelopecomponents satisfying the 2000 IEC Code, including: insulationmaterials; exterior windows, including skylights; exterior doors; andmetal roofs with special pigmented coatings.
Qualifyingproperty must be installed in the taxpayer's principal residence in theU.S. Vacation and other second homes do not qualify. No more than $200of the credit may be allocated to windows ($2,000 in windowreplacements).
Whileresidential energy property expenditures are available at a 100 percentrate rather than being made part of the 10 percent credit, they aresubject to dollar limits that are imposed on each type of "residentialenergy property expenditure:"
* $50 for an advanced main air circulating fan
* $150 for any qualified natural gas, propane, or oil furnace or hot water boiler, and
* $300for any item of energy-efficient building property, including electricand geothermal heat pumps, open loop, direct expansion, central AC, andnatural gas, propane or oil water heaters.
* Solarequipment and fuel cells are not taken into account for this credit butrather qualify for the 30 percent residential energy efficient propertycredit.
"Green"vehicles. New tax credits are available for hybrid, fuel cell, advancedlean burn diesel and other alternative power vehicles, replacing thecurrent deduction for clean fuel (including hybrid) vehicles. Thecredits are collectively claimed under the title of the "AlternativeMotor Vehicle Credit." This credit is equal to the sum of the fourseparate credit components:
* The new qualified fuel cell motor vehicle credit;
* The new advanced lean burn technology motor vehicle credit;
* The new qualified hybrid motor vehicle credit;
* The new qualified alternative fuel motor vehicle credit.
Aqualified hybrid motor vehicle no longer includes any vehicle which isnot a passenger automobile or light truck if the vehicle has a grossvehicle weight rating of less than 8,500 pounds; this new definitionrules out a number of SUVs. The amount of the credit is based upon thepercentage increase in fuel economy from an all-gasoline model andvaries from $400 to $2,400, based on fuel savings ranging from 125 to250 percent of a base amount. An additional conservation credit isawarded to hybrid vehicles with certain lifetime fuel savings ratings,ranging from $250 to $1,000.
Impact on Businesses
Deduction for energy-efficient commercial property.Taxpayers may claim a deduction for costs associated with anenergy-efficient commercial building property placed in service after2005 and before 2008. The maximum deduction is $1.80 per square foot ofthe building, less any prior year deductions. Several criteria must bemet:
Theproperty for which costs are claimed must be depreciable (oramortizable) property, installed in a domestic building, and within thescope of Standard 90.1-2001;
Theproperty must be installed as part of: the interior lighting system,the heating, cooling, ventilation and hot water systems, or thebuilding envelope; and
Theproperty must be installed pursuant to a plan to reduce total annualenergy and power costs by 50 percent or more when referenced against abuilding meeting certain minimum requirements.
The IRS has been instructed to issue regs to allow a reduced deduction if specific energy efficiency targets are met.
Energycosts are very real bottom line concerns for small businesses today."Seventy-six percent of small business owners reported in a recentsurvey that the first step they took to compensate for their energyincreases was to lower earnings or profits," the National Federation ofIndependent Business (NFIB) told CCH INCORPORATED. Conservationmeasures came in a distant second. The business tax incentives in thenew energy bill could encourage more businesses to invest inconservation technologies to help keep costs down and earnings up.
Homebuilder's credit for new energy-efficient homes.An eligible contractor may claim a tax credit of $1,000 or $2,000 for aqualified new energy-efficient home that a person acquires for use as aresidence from the contractor during 2006 and 2007. An eligiblecontractor is a person who constructs a new energy-efficient home, or amanufacturer that produces a qualified new energy-efficientmanufactured home.
To be a qualified new energy-efficient home: the home must be located in the U.S.,its construction must be substantially completed after the date thatthe statute creating this credit is enacted, and it must meet specifiedenergy saving requirements.
Business solar investment tax credit. Thebusiness investment credit for solar energy property is increased from10 percent to 30 percent. The increased credit applies to (1) equipmentwhich uses solar energy to generate electricity, to heat or cool (orprovide hot water for use in) a structure, or to provide solar processheat, and (2) equipment which uses solar energy to illuminate theinside of a structure using fiber-optic distributed sunlight. Propertythat generates solar energy to heat swimming pools is not eligible.
Credit for qualified fuel cell property/stationary microturbines.Energy property includes qualified fuel cell property and stationarymicroturbine property for purposes of the business energy credit. Thecredit is 30 percent of the basis of qualified fuel cell propertyplaced in service during the tax year. The energy credit for anyqualified fuel cell property cannot exceed $500 for each 0.5 kilowattof capacity.
New credit for manufacturing energy efficient appliances. TheEnergy Tax Incentives Act of 2005 adds a new credit for the manufactureof energy-efficient appliances, such as dishwashers, clothes washersand refrigerators. The credit is a part of the general business credit.
Impact on Energy Industry
Blackout prevention.The new law targets tax breaks for utilities and other energysuppliers/transporters. The provisions to improve infrastructurereliability include treating natural gas gathering lines as 7-yearproperty and distribution lines as 15-year property; treating electrictransmission property as 15-year depreciable property; amortizingpollution control equipment at coal-fired power plants generally over 7years; adding a production tax credit for new nuclear power facilities;temporary expensing of up to 50 percent of some refinery equipment thatincreases capacity; enhancing the oil recovery credit; and designatingunderground storage tanks as 10-year property.
Domestic energy production.Tax breaks to encourage increased domestic energy production arenumerous. They include new investment tax credits for clean coalfacilities, two-year amortization of all geological and geophysicalcosts in domestic oil and gas exploration or development; extension ofthe credit for production of certain nonconventional fuels; encouragingthe production of biodiesel fuels and ethanol made from renewableresources; broadening the small refiner exception to the oil depletiondeduction; and more. The new law also enhances the existing researchtax credit for qualified energy research. The change is targeted toR&D expenses incurred by energy research consortia.
