Green Tax Incentives for the Home (Part II)

In Part I we covered the Non-business Energy Homeowner Credit provided in IRC Sec. 25C. In this post we'll cover the Residential Energy Efficient Property Credit provided in IRC Sec. 25D.

Like the IRC Sec. 25C Credit, this is available to individual taxpayers and is based on the cost of energy efficiency improvements made to their United States residence. The nonrefundable credit is for 30% of certain expenditures. With one exception however, the expenditures under 25D need not be made to a principle residence, making the credit available on multiple residences located in the United States.

It should be noted that 25D credits can offset both regular and AMT tax. Any credit allowed under 25D reduces the basis of the property by the amount of the credit.

In general, this tax credit covers:

• Qualified solar electric property expenditures;
• Qualified solar water heating property expenditures;
• Qualified fuel cell property expenditures;
• Qualified small wind energy property expenditures;
• Qualified geothermal heat pump property expenditures;

It should be noted that many of these credits had limits between $500 and $2,000 prior to 2009. A number of new laws eliminated the limits on everything but the fuel cell property for the years 2009 through 2016.

Labor costs to prepare, assemble and install the property is included in the credit calculation. Expenditures to heat a swimming pool or hot tub are not allowed.

Taxpayers should get documentation from the manufacturer to claim the credit. The credit can be claimed by properly completing Form 5695 (Residential Energy Credits) and attaching it to the taxpayer's Form 1040.

Tax breaks for the green community

The latest tax bill has some nice benefits for the sustainability community to help us green our economy. For instance, starting in 2009, employers can give bicycle commuters a tax free fringe benefit of up to $20 per month to cover the cost of pedaling to work including repairs, storage, accessories and even the cost of a bike. Employers and employees should act now to put this in place starting January 1st.

Also, the credit for residential energy saving improvements will return in 2009. The 10% tax credit has been expanded to include biomass fuel stoves as well. You may want to delay the installation of skylights, windows, outside doors and high-efficiency furnaces, water heaters and central a/c units until next year in order to claim the credit. This credit will be on the books through 2017 so you can use it in 2010 and beyond if you don’t get your project done next year.

One of the challenges for the alternative energy market is financing, and tax policies can make or break projects. Trying to determine long-term cash flows with unpredictable tax policies makes the challenge even harder so it is good news that many existing energy tax breaks have been extended:

• Coal and wind energy credits as well as the biodiesel credit have been extended through 2009.
• Energy credits for biomass and landfills lapse after 2010, as will a new credit for energy from waves and tides.
• The 30% solar energy and fuel cell credits however get a long-term extension through 2016. 
• The residential solar credit also lasts through 2016, and the $2,000 cap is repealed. 
• The law that allows commercial realty to expense energy saving improvements will run through 2013.

Residential Energy Tax Credits Set to Expire

Hurry!! At the end of 2008, without Congressional action, the only remaining federal residential energy tax incentives available for homeowners will expire. You must act soon if you want to take advantage of the following tax credits:

FUEL CELL POWER PLANT – A credit of 30 percent, to a maximum of $500 per ½ kilowatts of electricity generated by electrochemical means from a qualified fuel cell plant installed in the taxpayer’s primary home located in the United States.

SOLAR ELECTRIC AND/OR SOLAR WATER HEATING SYSTEMS - The credit is 30 percent of the cost, with a maximum cap of $2000, for the installation of a qualified system in the taxpayer’s primary or secondary home located in the United States.

These credits are nonrefundable and can only be used to offset your income tax in the current year. Any unused credit can be carried forward to future years. No credit is allowed for expenditures related to hot tubs or swimming pools. You may lose part or all of the credit if you are taxed by the alternative minimum tax.

The House passed H.R. 5351 (Renewable Energy and Energy Conservation Tax Act of 2008) back in February 2008, which would have extended these credits as well as others to 2009 and beyond. Unfortunately, the bill is stuck in the Senate and faces a threatened veto so it looks unlikely to pass this year. The cost of the extended credits would have been funded by reducing subsidies to the oil and gas industry. Hmmm, I wonder if that has anything to do with the hangup?