RSM Resources

The lion’s share of tax incentives included in therecently enacted Energy Policy Act of 2005 goes to oil and gas companies,electric utilities and alternative energy producers. However, savvy midsizedcompanies and executives can also benefit from new tax credits and otherincentives contained in the energy package.

The wide-ranging law, signed by President Bush inAugust, provides approximately $14.5 billion to stimulate energy production andencourage conservation. It also includes various regulatory reforms — from newreliability standards for the nation’s electricity grid to simplified licensingprocedures. Here’s a look at how businesses and individuals can leverage theenergy act to save tax dollars when making energy-efficient investments.

Business incentives
Many energy act incentives target specificindustries. For example, the act provides tax credits to homebuilders whoconstruct energy-efficient homes and manufacturers who produce energy-savingappliances. Homebuilders may qualify for a $1,000 credit per house that reducesenergy consumption 30 percent compared to a similar home without energy-savingimprovements, or a $2,000 credit per home that uses 50 percent less energy.Appliance manufacturers may qualify for tax credits for producing certainenergy-efficient dishwashers, clothes washers and refrigerators.

A broad range of midsized businesses may beeligible for the following three tax incentives:

Energy-efficient commercial property taxdeduction. If you own commercial property,you may be eligible for a tax deduction for improving your building’s energyconsumption. While the maximum deduction is $1.80 per square foot of theproperty, eligible deductions must meet several criteria. First, theimprovements claimed for deduction must be depreciable or amortizable,installed in a building located in the United States, and within the scopeof acceptable building standards. Second, the improvements must be installed aspart of an interior lighting system; a heating, cooling, ventilation or hotwater system; or the building envelope. Finally, the improvements must beinstalled as part of a plan to reduce annual energy and power costs by 50percent or more. The deduction applies to improvements made in 2006 and 2007.

Solar investment tax credit. The energy act triples the business investment credit forsolar energy to 30 percent from 10 percent. The increased credit applies toequipment that uses solar energy to create electricity; to heat, cool orprovide hot water for a structure; or to provide solar process heat. It alsocovers equipment that uses solar energy to illuminate the inside of a structureusing fiber-optic-distributed sunlight.

Renewable energy tax credits. The energy act extends for two years the placed-in-servicedates for wind facilities, geothermal facilities, small irrigation powerfacilities, landfill gas facilities and trash combustion facilities. Refinedcoal and solar facilities no longer qualify for the renewable energy credit.Hydropower and Indian-owned coal facilities will become eligible for therenewable energy credit.

Individual incentives
Individuals who invest in moreenergy-efficient homes and vehicles also will be able to trim their tax bills,thanks to the Energy Policy Act of 2005. Tax credits for energy-efficientinvestments include:

Home improvements. Homeowners may qualify for a 10 percent tax credit forenergy-efficient property improvements. These improvements may include newdoors and windows, insulation, and heating and cooling systems. However, thetotal lifetime limitation is $500, and the credit applies only for the 2006 and2007 tax years. The credits are capped at $300 for central air conditioners,heat pumps or water heaters; $200 for windows; and $150 for boilers or furnaces.

Hot water and electricity. The new energy law provides a 30 percent tax credit forenergy-efficient investments to heat water or generate electricity. The creditsare limited to $2,000 for solar power. Solar energy systems that heat hot tubsand swimming pools are not eligible.

"Green" vehicles. Starting in 2006, individuals who buy hybrid cars orvehicles that use fuel cells or certain other alternative power sources fornonbusiness purposes may be eligible for fuel-economy credits of up to $1,600and conservation credits of up to $1,000. Alternative-fuel vehicles may qualifyfor a credit of up to $4,000. This credit replaces a $2,000 tax deduction,which was scheduled to fall to $500 this year. Tax credits are worth more thandeductions, because the credit comes directly off the final tax bill.

Future energy policy
The wide-ranging Energy Policy Act of 2005seems to include something for every business and consumer. However, withenergy prices escalating and influenced by mounting geopolitical and environmentalpressures, U.S.energy policy has been widely criticized for avoiding some of the mostimportant issues of the day.

The new law helps in some areas but "doeslittle to tackle essential challenges such as petroleum conservation,"says Gregg Easterbrook, visiting fellow in economic studies at The BrookingsInstitution, a nonpartisan think tank. For example, he says, the policy lacksany provision to improve the fuel economy of cars, pickup trucks and SUVs.

According to political observers, midsized businessesand others likely can count on lawmakers to soon revisit U.S. energypolicy, including incentives for energy efficiencies. That’s because theAmerican public, deeply divided on many issues, is united in thinking that the United Statesis too dependent on foreign oil. According to a recent survey by Yale University,92 percent of Americans say they are worried about dependence on foreign oil.The survey also found that the vast majority of Americans want to seegovernment action to develop new "clean" energy sources, includingsolar and wind power as well as more fuel-efficient cars.

Whatever your views on energy policy, experts advise that you take advantageof the tax incentives included in the 2005 energy act. Many of those benefitsare buried in fine print, so be sure you invest the time and resources tounderstand how to maximize tax savings for your business and yourself.