While the driving force behind the Emergency Economic Stabilization Act of 2008 may have been the need to find an immediate solution to the current financial crisis, the new law added energy tax provisions at the eleventh hour that might be viewed - in retrospect, if not at the time of passage - as an integral part of a longer-term national solution. The energy title of the new law, the Energy Improvement and Extension Act of 2008, provides a host of tax incentives for alternative energy use and development, as well as for general energy conservation.Some sections of the energy title to the EESA are extensions of existing provisions, while others provide new opportunities. Together, they present a plan to strengthen the economy by minimizing foreign oil dependency. Viewed by its parts, the act adds to the matrix of ways that individuals and businesses alike can lower their net costs of energy consumption.

Collectively, the energy provisions that exist after the smoke has cleared on the Energy Improvement and Extension Act have become far too numerous for most practitioners to commit to memory.

Instead, energy tax incentives now ought to be methodically reviewed, and then periodically re-evaluated, for a wide variety of clients. Whether the taxpayer is an individual, a business consumer or an alternative energy producer, the energy provisions in the new law provide "something for almost everyone" and ought to start to be seriously considered as a significant factor within each client's overall tax strategy.

RESIDENTIAL GENERATION

Solar and wind energy are given tremendous boosts under the new law. Geothermal heat pumps also have become more tax-favored.

The residential energy efficient property credit (also known as the Code Sec. 25D residential alternative energy credit), has been extended and enhanced through Dec. 31, 2016. Through 2008, the 30 percent residential alternative energy credit will continue to be limited to a maximum of $2,000, plus $500 for each half kilowatt of solar-generated fuel cell or wind turbine electric capacity, as it had been in 2007.

For the 2009-2016 period, however, the credit's $2,000 cap is removed for qualified solar electric property. As a result, homeowners should consider delaying solar installations with more than a $6,667 price tag until 2009 in order to maximize their credit when the cap becomes unlimited.

Geothermal heat pumps, too, have received a promotion under the new law. They had been eligible for a lower "residential energy property credit" in 2007, but now qualify for a higher credit under the residential alternative energy credit, which begins in 2008.

The 30 percent residential energy property credit for the cost of geothermal heat pumps may be taken for the 2008-2016 period, up to a maximum annual credit of $2,000 per individual (with a cap of $6,667 for all individuals in the residence). This applies to equipment that uses the ground or ground water as a heat source. Any excess credits can be carried forward to the succeeding year.

RESIDENTIAL PROPERTY

Congress has re-instated, expanded and clarified the Code Sec. 25C residential energy property credit for property placed in service in 2009. A lifetime credit of up to $500 is available for non-business energy property that meets the requirements for qualified energy efficiency improvements or qualified residential energy property expenditures. The credit, subject to the $500 cap, is equal to the cost of residential energy-efficient building property (heat pumps, air conditioners and water heaters), plus 10 percent of the cost of qualified building envelope components. Up to $200 of the credit can be taken for the cost of windows.

One notable change made by the new law is the addition of asphalt roofs with cooling granules to the list of property qualifying for the credit. Metal roofs with cooling pigment continue to qualify. Another change involves the addition of qualified biomass fuel property for energy-efficient biomass fuel stoves.

The "placed in service" date for an asphalt roof as specified under the new law is "after Oct. 3, 2008," while the credit itself is not made effective until 2009, creating some confusion as to what date might override the other. The safest course is to install the roof in 2009.

Two planning tips worth highlighting in connection with the Code Sec. 25C credit are:

* The residential energy property credit skipped 2008, making property qualifying in 2008 without tax benefit and, therefore, making delaying some year-end projects to end in 2009 worthwhile; and,

* The $500 credit (and the $200 cap on windows) is a lifetime credit for which pre-2008 use of the credit counts.

One caution is also in order for those who remember the homeowner energy credit available in the early 1980s: caulking, fireplace screens and overhead fans do not qualify this time around under the current Code Sec. 25C credit.

WIND POWER

The new law seeks to consumerize wind energy by providing incentives to put up a smaller wind turbine version of those huge propellers-on-a-pole versions now commonplace on many rural hillsides.

A 30 percent credit has been created on the installation costs of small wind turbines (those with capacities of 100 kilowatts or less). This credit applies to both residential and commercial use. The credits for wind turbines ("small wind energy property") are limited to 30 percent of their cost and are capped at $4,000 annually. For a residence occupied by two or more individuals, the maximum wind energy expenditure is $1,667 per year per half kilowatt and a total of $13,333.

TRANSPORTATION AND FUEL

* Bicycling to work. The new law has added a tax break for commuting to work by bicycle as one of the tax-favored transportation fringe benefits that can be provided by employers or covered under a pre-tax flexible spending account. The new exclusion is capped at $20 per month for tax years beginning after Dec. 31, 2008, and can cover the purchase price of a bike, maintenance, storage and parking.

With little time left until this new provision begins on Jan. 1, 2009, the assumption (unless stated otherwise) should be that the IRS will disallow depreciation allocations for pre-2009 purchased bikes, the fair market value of storage at the employee's residence, rather than actual storage costs, or a plan simply to pay the employee up to $20 per month to commute by bicycle. Aside from creating a deduction for the employer, providing this fringe benefit may help free up employer-provided vehicle parking or meet local community "green-transit" quotas.

* Electric cars. Plug-in electric drive vehicles have finally moved from the golf links to the open road. Under Code Section 30D, a new credit applies to a plug-in electric drive car or vehicle placed in service from 2009 to 2014. The credit is in addition to the existing encouragement to purchase "green vehicles" by way of the alternative motor vehicle credit that applies to hybrids and advanced lean-burn technology vehicles.

Consumers stand to collect a minimum of $2,500 and a maximum of $7,500 under this new electric car credit, depending on battery capacity. The new credit is $2,500 plus $417 per kilowatt hour of traction battery capacity exceeding four kilowatts, the required minimum capacity of the battery. The maximum credit is $7,500 for a vehicle of 10,000 pounds or less, up to $15,000 for a vehicle weighing more than 26,000 pounds. The credit will begin to phase out when more than 250,000 vehicles are sold.

The electric-car credit is available to both individuals and businesses. For individuals, the purchase date would appear to be the placed-in-service date. General Motors is developing the Chevrolet Volt plug-in and hopes to unveil it by 2010. Mazda is also working on a plug-in model.

* Non-hydrogen alternative fuel. The 30 percent non-hydrogen alternative fuel vehicle refueling property credit under Code Sec. 30C. has been extended through the end of 2010. (The credit for hydrogen refueling property continues through 2014.) Both individuals and businesses can take the credit for storing or dispensing a clean-burning fuel (although individuals might investigate local zoning rules before putting a tank in their backyards).

Alternative fuels must be either: 85 percent ethanol, natural gas, liquefied petroleum, or hydrogen; or a mixture of biodiesel, diesel and kerosene that is at least 20 percent biodiesel. The credit is capped at $30,000 for business property and $1,000 for non-business property.

BUSINESS-ONLY

* Producers. The new law includes several extended incentives to encourage the production of renewable energy (and the job-creation that it brings). Substantial benefits are provided for solar energy, wind energy and biomass. Congress extended the Code Section 45 credits for producing electricity from qualified wind facilities through Dec. 31, 2009, as well as an extension for producing electricity through biomass and other qualifying renewable sources (including currents, tides and waves).

* Business consumers. The existing 30 percent credit for solar energy and fuel-cell property and the 10 percent credit for microturbine property were extended eight years, through Dec. 31, 2016. The solar credit had been scheduled to decrease to 10 percent after 2008. This extension has been hailed as a tremendous benefit to the development of solar energy, since the eight-year extension allows for long-term investments that can safely factor the existence of this credit into their cost-benefit analysis.

The credit is available for equipment that uses solar energy to generate electricity to heat or cool a structure (or provide hot water) or to light the inside of a structure using fiber-optic-distributed sunlight. For fuel cells, the $500-per-half-kilowatt credit is increased to $1,500. Public utility property is now eligible for the credit.

* Biodiesel fuel. Congress increased the business credit under Code Sec. 40A for using biodiesel fuel from 50 cents to $1 per gallon, matching the credit for agri-biodiesel and renewable diesel, and modified the definition of these alternative fuels. The credit also has been extended through 2009. Biodiesel is diesel with vegetable oil or animal fats. Agri-biodiesel is derived solely from virgin oils or animal fats. Renewable diesel consists of biomass fuel.

* Other alternative fuels. The new law also provides for a separate credit of 50 cents for alternative fuels such as liquefied petroleum gas, natural gas, hydrogen, coal and biomass. Fuels used in aviation, as well as a motor vehicle or boat, will qualify for the credit.

* Recycling programs. Many local governments have mandatory recycling programs. The new law benefits both those forced to comply with recycling and those who adopt it voluntarily. Under new Code Sec. 168(m), 50 percent bonus depreciation can be claimed on new re-use/recycling property purchased and placed in service after Aug. 31, 2008. Furthermore, no Alternative Minimum Tax adjustment is required. Self-constructed property also qualifies. However, this provision prevents "double dipping" by those who have property that also qualifies for the regular 2008 bonus depreciation. In those cases, a default to regular bonus depreciation is required.

The deduction applies to machinery and equipment (not including a building or transportation equipment) used to collect, distribute or recycle qualified materials. Materials include scrap plastic, glass, textiles, rubber, packaging, metal, fiber and electronic scrap. The property must have a "useful life" of at least five years.

* Measuring devices. Accelerated depreciation for smart electric meters/grids allows electricity suppliers to depreciate smart electric meters and grid systems over 10 years, instead of 20. Providers of energy services also qualify. Among the specifications, the meter must provide net metering, i.e., a credit to the customer for providing electricity to the supplier or provider (i.e., putting excess power "onto the grid"). The rules apply to property placed in service after October 3, 2008.

* Homebuilders. Congress, ever hopeful that the economy will pick up and make certain tax incentives meaningful, extended the credit for construction of a new energy-efficient home for one year, through 2009. A contractor may claim a credit of $1,000 or $2,000 per home, depending on the energy savings.

* Owners of commercial buildings. More realistic than the energy-efficient home credit for new construction, the new law continues to allow owners of commercial buildings (whether owner- or tenant-occupied) to continue to deduct the cost of energy-efficient improvements. A five-year extension of this deduction continues through Dec. 31, 2013.

CONCLUSION

There are a considerable number and variety of energy tax incentives that have been put into play by the Energy Improvement and Extension Act of 2008. Whether the new law will jumpstart alternative energy into the mainstream of American life remains to be seen. Part of the equation is the "payback" factor that is dependent on the unknown future price of fossil fuels.

If taxpayers forecast correctly, however, the new law can provide not only the immediate capital needed to set up alternative energy use, but future savings through lower energy costs. Those two financial incentives, enhanced by the new energy provisions found in the new law, clearly have put energy tax planning on a new, higher level of consideration from here on out.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.

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