Congress Passes Energy and Highway Bills
Tax Provisions Impact Individuals, Businesses and Energy Producers
After
several years of contentious debate, the Energy Policy Act of 2005 and
the Highway Transportation Act of 2005 finally were approved by
Congress on July 29, immediately before the summer recess. President
Bush said in his weekly radio address on July 30 that he looks forward
to signing the energy bill.
The
Energy 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 energy
transmission infrastructure, and greater domestic energy production.
Most of the tax breaks, however, do not take effect until
January 1, 2006
more than $3 billion in revenue raisers are also included in the form
of increased fuel taxes as well as greater amortization recapture of
intangibles.
The
tax title of the Safe, Accountable, Flexible, Efficient Transportation
Equity Act: A Legacy for Users (2005 Highway Act) extends most of the
excise taxes that fund the Highway Trust Fund and Aquatic Resources
Trust Fund and modifies other vehicle-related excise taxes.
Impact on Consumers
Aside
from the indirect economic benefits that will flow from a more
coordinated national energy policy, individual consumers stand to
benefit directly from tax-subsidized incentives directed toward
improving energy consumption in their homes and in what they drive. The
new 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.
* The
new law allows the credit for solar water heating and electricity at a
site "used as a residence by the taxpayer;" therefore, it is allowed
for vacation and other second homes. Fuel cell property, however, must
be 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 for
nonbusiness energy property, such as energy-efficient residential
exterior doors and windows, insulation, heat pumps, furnaces, central
air conditioners and water heaters installed in 2006 and 2007. The
credit is equal to:
* Residential energy property expenditures, plus
* 10 percent of the cost of qualified energy efficiency improvements.
"Qualified
energy efficiency improvements" include energy-efficient envelope
components satisfying the 2000 IEC Code, including: insulation
materials; exterior windows, including skylights; exterior doors; and
metal roofs with special pigmented coatings.
Qualifying
property must be installed in the taxpayer's principal residence in the
U.S. Vacation and other second homes do not qualify. No more than $200
of the credit may be allocated to windows ($2,000 in window
replacements).
While
residential energy property expenditures are available at a 100 percent
rate rather than being made part of the 10 percent credit, they are
subject to dollar limits that are imposed on each type of "residential
energy 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
* $300
for any item of energy-efficient building property, including electric
and geothermal heat pumps, open loop, direct expansion, central AC, and
natural gas, propane or oil water heaters.
* Solar
equipment and fuel cells are not taken into account for this credit but
rather qualify for the 30 percent residential energy efficient property
credit.
"Green"
vehicles. New tax credits are available for hybrid, fuel cell, advanced
lean burn diesel and other alternative power vehicles, replacing the
current deduction for clean fuel (including hybrid) vehicles. The
credits are collectively claimed under the title of the "Alternative
Motor Vehicle Credit." This credit is equal to the sum of the four
separate 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.
A
qualified hybrid motor vehicle no longer includes any vehicle which is
not a passenger automobile or light truck if the vehicle has a gross
vehicle weight rating of less than 8,500 pounds; this new definition
rules out a number of SUVs. The amount of the credit is based upon the
percentage increase in fuel economy from an all-gasoline model and
varies from $400 to $2,400, based on fuel savings ranging from 125 to
250 percent of a base amount. An additional conservation credit is
awarded 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 an
energy-efficient commercial building property placed in service after
2005 and before 2008. The maximum deduction is $1.80 per square foot of
the building, less any prior year deductions. Several criteria must be
met:
The
property for which costs are claimed must be depreciable (or
amortizable) property, installed in a domestic building, and within the
scope of Standard 90.1-2001;
The
property must be installed as part of: the interior lighting system,
the heating, cooling, ventilation and hot water systems, or the
building envelope; and
The
property must be installed pursuant to a plan to reduce total annual
energy and power costs by 50 percent or more when referenced against a
building meeting certain minimum requirements.
The IRS has been instructed to issue regs to allow a reduced deduction if specific energy efficiency targets are met.
Energy
costs are very real bottom line concerns for small businesses today.
"Seventy-six percent of small business owners reported in a recent
survey that the first step they took to compensate for their energy
increases was to lower earnings or profits," the National Federation of
Independent Business (NFIB) told CCH INCORPORATED. Conservation
measures came in a distant second. The business tax incentives in the
new energy bill could encourage more businesses to invest in
conservation 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 a
qualified new energy-efficient home that a person acquires for use as a
residence from the contractor during 2006 and 2007. An eligible
contractor is a person who constructs a new energy-efficient home, or a
manufacturer that produces a qualified new energy-efficient
manufactured 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 that
the statute creating this credit is enacted, and it must meet specified
energy saving requirements.
Business solar investment tax credit. The
business investment credit for solar energy property is increased from
10 percent to 30 percent. The increased credit applies to (1) equipment
which uses solar energy to generate electricity, to heat or cool (or
provide hot water for use in) a structure, or to provide solar process
heat, and (2) equipment which uses solar energy to illuminate the
inside of a structure using fiber-optic distributed sunlight. Property
that 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 stationary
microturbine property for purposes of the business energy credit. The
credit is 30 percent of the basis of qualified fuel cell property
placed in service during the tax year. The energy credit for any
qualified fuel cell property cannot exceed $500 for each 0.5 kilowatt
of capacity.
New credit for manufacturing energy efficient appliances. The
Energy Tax Incentives Act of 2005 adds a new credit for the manufacture
of energy-efficient appliances, such as dishwashers, clothes washers
and 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 energy
suppliers/transporters. The provisions to improve infrastructure
reliability include treating natural gas gathering lines as 7-year
property and distribution lines as 15-year property; treating electric
transmission property as 15-year depreciable property; amortizing
pollution control equipment at coal-fired power plants generally over 7
years; adding a production tax credit for new nuclear power facilities;
temporary expensing of up to 50 percent of some refinery equipment that
increases capacity; enhancing the oil recovery credit; and designating
underground storage tanks as 10-year property.
Domestic energy production.
Tax breaks to encourage increased domestic energy production are
numerous. They include new investment tax credits for clean coal
facilities, two-year amortization of all geological and geophysical
costs in domestic oil and gas exploration or development; extension of
the credit for production of certain nonconventional fuels; encouraging
the production of biodiesel fuels and ethanol made from renewable
resources; broadening the small refiner exception to the oil depletion
deduction; and more. The new law also enhances the existing research
tax credit for qualified energy research. The change is targeted to
R&D expenses incurred by energy research consortia.
