The Energy Tax Incentives Act of 2005 created a number of new tax breaks for individuals, with respect to their homes and cars, and for businesses, with respect to their commercial buildings and the construction of homes and appliances.Throughout the act, there is extensive reliance on the promulgation by the Treasury of regulations to flesh out the criteria to qualify for the new tax breaks. With the Treasury and Internal Revenue Service also having been saddled with a lot of last-minute changes affecting the 2005 tax year filing season in the Gulf Zone Opportunity Act of 2005, guidance with an impact on the 2005 tax year had to take precedence.
Now, however, with the 2005 guidance out the door, guidance is starting to trickle out with respect to the energy tax breaks that are effective generally starting Jan. 1, 2006.
Taxpayers already are being required to make decisions that may be influenced by these tax breaks, so tax practitioners can do their clients a service by making them aware of these developments as they are issued.
Hybrid and lean-burn vehicles
Notice 2006-9 was released on Jan. 13, 2006. It describes the process by which a manufacturer of hybrid and lean-burn vehicles will make a certification submission to the IRS containing information specified in Notice 2006-9, including the amount of the credit and how it was calculated.
The IRS will then have 30 days from receipt of the submission to review the request and issue an acknowledgment letter stating whether purchasers may rely on the certification. Once a favorable acknowledgement is received, the manufacturer may then certify to the public that the particular model of vehicle involved qualifies for the specified credit.
For purposes of tracking vehicle sales to determine the 60,000-vehicle limit that starts the phase-out of the credits, manufacturers are also required to submit to the IRS quarterly reports of vehicle sales to retail dealers. These reports are due within 30 days of the end of each quarter.
Penalties are specified for erroneous certifications and reports, and for untimely reports. Although the IRS did certify certain 2006 model hybrid vehicles as qualifying for the clean-fuel vehicle deduction if purchased in 2005, no official announcements have yet been made as of this writing of certifications of models for the credits in 2006. Some Web sites have promulgated estimates of the likely credits available for these vehicles, but so far those numbers are not official.
Home energy credits
Notice 2006-26, issued Feb. 21, 2006, provides guidance on certifications for the credit for energy-efficient improvements to home envelopes and systems. For the credit for the home, taxpayers are again permitted to rely on a manufacturer's certification that a building envelope component or system qualifies for the credit.
The notice again provides guidance to the manufacturer as to what is required to be included in the certification statement. The certification is required to be signed under penalties of perjury, and penalties are specified for an erroneous certification. Unlike the vehicle credits, the certification is not required to be submitted to the IRS before it can be promulgated to the public. Documentation must be preserved and made available to the IRS on request.
The certification must be reasonably made available to the taxpayer, so that the taxpayer can retain the certification in their records to support the claimed credit. The certification is not required to be attached to the tax return.
Of special interest with respect to the home envelope portion of the credit is that exterior windows, skylights, doors and storm windows are to be certified only with respect to particular climate zones, so taxpayers will have to make certain not only that a certification is made for the product, but also that it applies to the climate zone in which the installation will take place. Also, a storm window certification is tied to the certification of an exterior window, so a taxpayer installing storm windows will have to verify that the exterior windows comply with the requirements of the certification statement.
The notice permits a taxpayer to treat an exterior window or skylight bearing an Energy Star label as if it had the required certification if the installation is in the region identified on the label. The building envelope components are required to have an expected useful life of at least five years, with a two-year manufacturer's warranty meeting the requirements specified in the notice providing a presumption of a five-year useful life.
The notice specifies the particular performance requirements for heat pumps, central air conditioners, water heaters, furnaces and boilers required for certification. As was clear from the statute, the notice spells out that preparation, assembly and installation costs count as part of the credit for these systems, but do not count as part of the credit for building envelope components.
Home construction and manufacturing credit
Notices 2006-27 and 2006-28 specify the certification requirements for a contractor constructing new energy-efficient homes and a manufacturer building new energy-efficient homes, respectively, to qualify for the new energy-efficient homes credit. In both cases, the certification is required to be provided by an independent certifier; however, in the case of manufactured homes, compliance with the certification requirements under the Energy Star program of the Environmental Protection Agency is also an option.
As with the other notices, the certification requirements and related penalties are specified in the notice. The IRS will maintain a list of approved software that may be utilized to calculate the energy consumption of homes.
Manufacturers of homes may rely on the statements of dealers as to the date a manufactured home was acquired, the fact that it is located in the U.S., and its use as a residence.
The IRS also promulgated, on Feb. 21, 2006, Notice 2006-24 with respect to the qualifying advanced coal project credit and Notice 2006-25 with respect to the qualifying gasification project credit.
Taxpayers may rely on the guidance in all of these notices until more detailed regulations are promulgated.
Tax practitioners will want to alert their clients to the requirements for these credits, so that they can be intelligent shoppers when searching for energy-efficient cars or energy-efficient home improvements. They will also want to alert their home-building clients as to these new certification requirements.
While most of the burden for the certification has been placed on the manufacturer, there are still plenty of traps for the unwary, such as installing a certified window in the wrong climate zone or installing an apparently certified storm window over an exterior window that does not meet the certification requirements.
A continuing flow of additional guidance is expected to further clarify these and additional energy tax breaks in effect for 2006.
George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH, a WoltersKluwer company.
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