Few things in life exceed the pleasure of qualifying for a tax credit. A credit is money in the bank because it reduces a taxpayer’s taxes, dollar for dollar. When the government wants to do some social engineering, it turns to the almighty credit.
Individuals can rack up tax credits by saving energy in their homes and vehicles and substituting new, energy-saving home products for older and less efficient ones. Tax preferred activities include improving existing residences (e.g., insulation or high-efficiency air conditioners with sealed ducts); purchasing alternative energy equipment such as solar heating systems or residential wind turbines; purchasing or leasing alternative fuel cars and trucks, hybrid gas-electric systems, and vehicles powered by fuel cells; and converting traditional vehicles to plug-in electric power.
Businesses are also looking to benefit from boosting the nation’s use of renewable and alternative sources of energy through development and investment in alternative energy sources including bio-fuels, forest biomass, wind, solar and geothermal.
Except where noted, California has no corresponding tax credit.
While some of these credits expired January 1st of this year, they are included here since certain individuals may be able to recapture these credits by amending returns and Congress may well extend these credits in the near future.
In addition to tax credits, there are a number of incentive, financing and rebate programs for alternative energy and energy-efficiency equipment, measures and programs. These are beyond the scope of this article. More information about such programs can be obtained from such sources as:
- Go Solar California
- Flex Your Power
- Energy Upgrade California, and
- The Clean Energy Business Financing Program
Credits for Individuals
Let’s start with the credits for individuals:
The Nonbusiness Energy Property Credit for Energy-efficient Improvements to Principal Residence. (Internal Revenue Code §25C). Usually associated with double paned windows, this credit, 30% of cost up to $2,500, covers the amount paid for qualified efficiency improvements to the residence or for residential energy property expenditures. Improvements include any insulation material or system that is designed to reduce the dwelling unit’s heat loss or gain when installed and meets the 2009 International Energy Conservation Code in effect on February 17, 2009, as well as exterior doors, any metal or asphalt roof designed to reduce the dwelling unit’s heat gain. Property expenditures include air circulating fans; gas, propane and natural gas or oil hot water boilers; and energy efficient building property which meet specified energy efficiency standards.
The Residential Energy Efficient Property credit (§25D). This credit is equal to the sum of 30% of taxpayer’s (1) qualified solar electric property expenditures, (2) qualified solar water heating property expenditures, (3) qualified fuel cell property expenditures, (4) qualified small wind energy property expenditures, and (5) qualified geothermal heat pump electric property expenditures. Geothermal heat pumps use ground water as a thermal energy source to heat or as a thermal sink to cool a dwelling and must comply with the Energy Star program.
The Qualified Plug-in Vehicles Credit. (§30). This credit provides a credit of 10% of the cost of any qualified plug-in electric vehicle up to $2,500. The credit requires certification by the manufacturer. The original use of the vehicle must begin with the taxpayer and the vehicle must be propelled to a significant extent by an electric motor that draws electricity from a battery that has a capacity of at least four kilowatt hours and is capable of being recharged from an external source. The treatment of the credit varies somewhat depending on whether the vehicle is used for personal or business use.
The Alternative Motor Vehicle credit (§30B). This code section seeks to encourage taxpayers to improve the fuel efficiency of automobiles and help the environment by purchasing vehicles that qualify for the alternative motor vehicle credit. The credit is the total of five different credits allowed under the section. Common to each credit are the requirements that (1) the original use of the vehicle must commence with the taxpayer; (2) the vehicle must be acquired for use or lease by the taxpayer and not for resale; (3) the vehicle must be made by a manufacturer; and (4) the vehicle must be primarily used in the United States. The credits are:
The qualified fuel cell motor vehicle credit. (§30B(b)). To be a qualified fuel cell motor vehicle, the vehicle must be propelled by power derived from one or more cells which convert chemical energy directly into electricity by combining oxygen with hydrogen fuel. If the vehicle is a passenger vehicle or light truck, it must be certified to meet specific environmental emission standards. The amount of the credit is calculated based on the gross vehicle weight rating (GVWR) of the vehicle, supplemented by the fuel efficiency of the vehicle. The credit can range from $8,000 up to $40,000 (plus increases up to $4,000 for “passenger automobiles” or “light truck” vehicles).
The advanced lean burn technology motor vehicle credit ( §30B(c)). An advanced lean burn technology motor vehicle is a passenger vehicle or light truck with an internal combustion engine that: (1) is designed to operate primarily using more air than is necessary for complete combustion of the fuel, (2) incorporates direct fuel injection, and (3) achieves at least 125 percent of the 2002 model year city fuel economy. The credit ranges from $400 to $2,400. The advanced lean burn technology motor vehicle credit begins to phase out after a manufacturer sells a specific quantity of qualifying vehicles, so be sure to inquire of remaining availability from the manufacturer.
The qualified hybrid motor vehicle credit (§ 30B(d)). Most often associated with the Prius, the qualified hybrid motor vehicle credit ranged from $400 up to $2,400 (increased to $3,400 by a conservation credit for qualifying vehicles). The credit terminated on December 31, 2009, or December 31, 2010, depending on weight. The vehicle must draw propulsion energy from both an internal combustion or heat engine and a rechargeable energy storage system and must have received a certificate of conformity that it meets or exceeds specific environmental emission standards. The qualified hybrid motor vehicle credit phases out after a manufacturer sells a specific quantity of qualifying vehicles.
The qualified alternative motor vehicle credit (§ 30B(e)). To be a qualified alternative fuel motor vehicle, the vehicle must be placed in service before 2010. The vehicle must be capable of operating on an alternative fuel (e.g. compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen or any liquid consisting of at least 85-percent methanol). The amount of the credit allowed is 50 percent (plus 30 percent for certified vehicles) of the incremental cost (amount by which the manufacturer’s suggested retail price of the vehicle exceeds that of a gasoline- or diesel-powered version of the same model), subject to maximum limitations of $5,000 to $40,000 based on vehicle weight.
The plug-in conversion credit (§ 30B(a)(5)). The plug-in conversion credit, available to taxpayers for the cost of converting an existing motor vehicle into a “qualified plug-in electric drive motor vehicle” for property placed in service after February 17, 2009, is equal to 10 percent of the cost of converting the vehicle, up to $40,000, for a maximum credit of $4,000, but will not apply to conversions made after December 31, 2011.
Under Section 30B, taxpayers with qualified motor vehicles that are used in a trade or business and subject to depreciation will claim the alternative motor vehicle credit as a part of, and subject to, the rules of the general business credit (§38). Thus, any unused credit in a tax year will be eligible to be carried back three years and forward 20 years. If the alternative motor vehicle credit is claimed by an individual as a personal credit, the credit cannot exceed the excess of their regular income tax liability reduced by the sum of the nonrefundable personal credits, the foreign tax credit, and the credit for electric automobiles, over the individual’s tentative minimum tax (§30B(g).
The Alternative Fuel/Vehicle refueling credit (§30C). This credit for the installation of qualified alternative fuel refueling property placed in service before 2011 (before 2015 for refueling property related to hydrogen) is claimed on Form 8911, Alternative Fuel Vehicle Refueling Property Credit, regardless of whether the property is personal or used in a trade or business. The credit is equal to 50 percent of the cost for non-hydrogen-related property and 30 percent of the cost of hydrogen-related property placed into service by the taxpayer during the tax year. For property of a character that is subject to depreciation, the credit cannot exceed $50,000 for non-hydrogen-related property for 2009 and 2010 ($200,000 for hydrogen-related property). For all other instances (such as residential), the credit cannot exceed $2,000 for non-hydrogen-related property for 2009 and 2010 ($1,000 for hydrogen-related property).
Credits for Businesses
The Plug-in Electric Vehicle credit (§30D). Business taxpayers that place in service new qualified plug-in electric drive motor vehicles that are considered depreciable property are entitled to the new qualified plug-in electric drive motor vehicle credit which is a component of the general business credit. The credit is allowed for 10 percent of the cost of acquiring certain electrically powered two-wheeled, three-wheeled and low-speed vehicles after February 17, 2009. For a vehicle to qualify for the credit, which is capped at $2,500, a vehicle must be a “qualified plug-in electric vehicle” which has a similar definition to new qualified plug-in electric drive motor vehicle under Section 30.
The Gasoline & Special Fuel credit (§34). A credit for federal excise taxes on gasoline and special fuels may be taken where the fuel item is used for: (1) farming purposes; (2) non-highway purposes of a trade or business; (3) operation of intercity, local, or school buses; or (4) certain nontaxable purposes. The credit is computed on Form 4136, Credit for Federal Tax Paid on Fuels, which is attached to Form 1040 or Form 843, Claim for Refund and Request for Abatement.
The Investment Credit (§46). This business credit is the sum of the rehabilitation credit, energy credit, the qualified advanced coal project credit, the qualified gasification project credit, the qualifying advanced energy project credit and the qualifying therapeutic discovery project credit. The investment credit is claimed on Form 3468, Investment Credit, and is one of the components of the general business credit, subject to the tax liability limitation and the carryover rules under §§38 and 39. The basis of property for which an investment credit is claimed is reduced by the full amount of the credit except for the energy credit property whose basis is reduced by 50 percent of the credit amount (§ 50(c)). The investment credit is the sum of the following green credits:
The Business Energy Credit (§48(a)). The business energy investment credit is generally equal to 10 percent of the taxpayer’s basis in qualified energy property placed in service during the tax year. However, effective for property placed in service before 2017, the credit percentage is increased to 30 percent for (1) qualified fuel cell property, (2) equipment that uses solar energy to generate electricity, to heat or cool a structure, or provide solar process heat (except used to heat a swimming pool), (3) equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, and (4) qualified small wind energy property. The energy property must meet performance and quality standards prescribed by IRS regulations. The energy credit may be claimed against the alternative minimum tax in tax years.
The Qualifying Advanced Coal Project Credit (§48A). A qualifying advanced coal project credit is available only to taxpayers who have applied for and received certification that their project satisfies the relevant requirements outlined by the IRS, in consultation with the Secretary of Energy. Up to $2.55 billion in credits will be allocated among taxpayers whose applications for a certification are approved.
The Qualifying Gasification Project Credit (§48B). The credit is available only to taxpayers who have applied for and received certification that their project satisfies the relevant requirements outlined by the IRS, in consultation with the Secretary of Energy.
The Qualifying Advanced Energy Project Credit (§48C). A qualified Advanced Energy Project is a project that re-equips, expands, or establishes a manufacturing facility for the production of property that produces green energy, produces energy storage systems, produces energy grids, captures carbon emissions, refines renewable fuels, builds electric vehicles, or reduces green house gas emissions. Projects must be certified by the Secretary of Energy. The tax credit is equal to 30 percent of a taxpayer’s qualified investment for the tax year.
The Alcohol Fuels Credit (I.R.C.§40). Controversial because of the purported increase in the cost of feedstock, this credit is the sum of the alcohol mixture credit, the alcohol credit, the small ethanol producer credit, and the cellulosic bio-fuel producer credit. The alcohol fuels credit computed on Form 6478, Alcohol and Cellulosic Bio-fuel Fuels Credit. Taxpayers are allowed a credit for selling or using certain fuels in which alcohol is an ingredient. The credit is not available after 2010, except for the cellulosic bio-fuel producer credit, which expires December 31, 2012.
The Renewable Electricity Production Credit (§ 45). Taxpayers are allowed a tax credit under Section 45 for the production of electricity from certain renewable energy sources at qualified facilities. Qualified energy resources include wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Qualified facilities are generally those that generate electricity from qualified energy resources. To qualify for the credit, the electricity must be sold to unrelated parties. The amount of the credit depends on the type of energy facility (and that amount is indexed annually for inflation). A taxpayer can generally claim the credit for the 10-year period commencing with the date the facility is placed into service. The credit is reduced by the amount of grants, tax-exempt bonds, subsidized energy financing, and other credits and is phased out over a 3-cent margin as the market price for electricity exceeds a certain threshold level, based on the average contract price per kilowatt-hour sold in the previous year.
The Biodiesel and Renewable Diesel Fuels Credit (§40A). This credit is equal to $1.00 for each gallon of biodiesel fuel used by the taxpayer pared back for certain biodiesel fuels.
The Low Sulfur Diesel Fuel Production Credit (§45H). Small business refiners are allowed a credit of 5 cents per gallon for low sulfur diesel fuel produced during the tax year at the refiner’s facility. The credit is limited to 25% of the qualified costs incurred for the refiner’s facility, reduced by the aggregate credits for all prior tax years for the facility. California has a similar 5 cent credit for facilities located in California.
The Nonconventional Fuel Source Production Credit (§45K). Taxpayers are allowed a credit for qualified fuels attributable to production of the taxpayer and sold to an unrelated person.
The Million dollar Energy efficient appliance credit (§45). Eligible manufacturers are allowed a credit for the manufacture of energy efficient home appliances for tax year after 2005 and before 2011. The credit amount for each type of qualified appliance is determined by multiplying the eligible production for that type of appliance by the type’s applicable amount. The maximum amount of the credit that may be claimed by a home appliance manufacturer is $75 million, with sub-limits for each type of home appliance.
The Energy Efficient Home Credit (§45L). Before 2010, eligible contractors and manufacturers of energy-efficient manufactured homes are allowed a credit of up to $2,000 for the construction of qualified new energy-efficient homes that are acquired for use as a residence if the homes achieve a specific energy savings. A residence qualified as an energy-efficient home if it was: (1) located in the United States, (2) substantially completed after August 8, 2005, and (3) certified to have an annual heating and/ or cooling saving at least 50-percent less than a comparable house and that at least 10 percent of the 50 percent saving must come from the building envelope. The credit was claimed on Form 8908, Energy Efficient Home credit.
There is no question that tax credits are a direct government subsidy for those that modify their behavior in the manner preferred by the government. Their impact has led to heated debate over the correct level of allocation of resources to meet green goals. While the impact of these credits is debated, the true benefit of these subsidies probably won’t be clear for many years to come.
Ms. Moozoun is an associate in the Walnut Creek office of Youngman, Ericsson LLP where she focuses on the tax compilation and tax controversies. She is an executive member of San Francisco Bar Association and is pursuing her CPA accreditation.
Mr. Ericsson practices taxation, business and estate planning law as a partner in the Walnut Creek firm Youngman & Ericsson and is a past president of both the Contra Costa County Bar and its taxation section.
 All subsequent references are to the Internal Revenue Code, unless otherwise indicated.
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