Energy Credits in the American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act of 2009 put in place a number of provisions designed to help American’s through this period of economic disruption. As part of the Act, in order to encourage American’s to become more energy conscious, a number of provisions were added to provide tax breaks for those who take the opportunity to make their homes and business more energy efficient. I want to go over a few of these provisions so you have an idea of items that may help reduce your tax burden this year.

Residential Credits

Residential Energy Property Credit: The Act increases the energy tax credit for homeowners who make energy efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to improvements such as adding insulation, energy efficient exterior windows and energy-efficient heating and air conditioning systems.

In 2007 there was a similar credit available, but it was eliminated in 2008. You should be aware that the standards in the new law are higher than the standards for the credit that was available in 2007 for products that qualify as “energy efficient” for purposes of this tax credit. The IRS has issued guidance to manufacturers to certify that their products meet these new standards, so we taxpayers don’t have to worry. You can continue to rely on manufacturers’ certifications that were provided under the old standards. For example, with exterior windows and skylights, homeowners may continue to rely on Energy Star labels in determining whether property purchased before June 1, 2009, qualifies for the credit. The burden is now on the manufacturers to ensure their products meet the certifications for the new standards.

Residential Energy Efficient Property Credit: This nonrefundable energy tax credit will help individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps and wind turbines. The new law removes some of the previously imposed maximum amounts and allows for a credit equal to 30 percent of the cost of qualified property. How does this section differ from the previous? It’s a question of what equipment is being installed. In the first section, the improvements are being made as part of the structure of the home, in the second it’s about the appliances that help generate energy for the home. It’s important to keep track, lest your credits be denied.

Vehicle Credits

Plug-in Electric Drive Vehicle Credit: The new law also modifies the credit for qualified plug-in electric drive vehicles purchased after Dec. 31, 2009. Originally a part of the Emergency Economic Stabilization Act of 2008, the new Act extends the credit for another year and is limited to the first 200,000 vehicles sold be a manufacturer. To qualify, vehicles must be newly purchased, have four or more wheels, have  a gross vehicle weight rating of less than 14,000 pounds, and draw propulsion using a battery with at least four kilowatt hours that can be recharged from an external source of electricity. The minimum amount of the credit for qualified plug-in electric drive vehicles is $2,500 and the credit tops out at $7,500, depending on the battery capacity. The law also creates a special tax credit for two types of plug-in vehicles — certain low-speed electric vehicles and two- or three-wheeled vehicles, which were initially excluded from the credit. The amount of the credit is 10 percent of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after Feb. 17, 2009, and before Jan. 1, 2012. To qualify, a vehicle must be either a low speed vehicle propelled by an electric motor that draws electricity from a battery with a capacity of 4 kilowatt hours or more or be a two- or three-wheeled vehicle propelled by an electric motor that draws electricity from a battery with the capacity of 2.5 kilowatt hours. A taxpayer may not claim this credit if the plug-in electric drive vehicle credit is allowable.

Have you considered converting your current vehicle to a plug-in electric? Well, the Act also provides a tax credit for plug-in electric drive conversion kits. The credit is equal to 10 percent of the cost of converting a vehicle to a qualified plug-in electric drive motor vehicle and placed in service after Feb. 17, 2009 and the conversion must be done by Dec. 31, 2011. The maximum amount of the credit is $4,000. And if you are converting a hybrid car, you can still claim the credit if you took the hybrid credit in the past.

Treatment of Alternative Motor Vehicle Credit as a Personal Credit Against AMT: Starting in 2009, the new law allows the Alternative Motor Vehicle Credit, including the tax credit for purchasing hybrid vehicles, to be applied against the Alternative Minimum Tax. Prior to the new law, the Alternative Motor Vehicle Credit could not be used to offset the AMT. This means the credit could not be taken if a taxpayer owed AMT or was reduced for some taxpayers who did not owe AMT, but that’s all over now or at least for now. 

Business Credits

One of the best ways for businesses and local governments to raise money is the issuing of bonds. With the American Recovery and Reinvestment Actthe national limits for funding bonds has been raised.  

New Clean Renewable Energy Bonds: The law increases the amount of funds available to issue new clean renewable energy bonds from the one-time national limit of $800 million to $2.4 billion. These qualified tax credit bonds can be issued to finance certain types of facilities that generate electricity from renewable sources (for example, wind and solar).

Qualified Energy Conservation Bonds: The Act also increases the amount of funds available to issue qualified energy conservation bonds from the one-time national limit of $800 million to $3.2 billion. These qualified tax credit bonds can be issued to finance governmental programs to reduce greenhouse gas emissions and other conservation purposes.

Extension of Renewable Energy Production Tax Credit: The new law generally extends the “eligibility dates” of a tax credit for facilities producing electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower and marine and hydrokinetic renewable energy.  The new law extends the "placed in service date"   for wind facilities to Dec. 31, 2012.  For the other facilities, the placed-in-service date was extended from December 31, 2010 (December 31, 2011 in the case of marine and hydrokinetic renewable energy facilities) to Dec. 31, 2013.

Election of Investment Credit in Lieu of Production Credit: Businesses who build and begin operations of facilities that produce electricity from wind and some other renewable resources after Dec 31, 2008 can choose either the energy investment tax credit, which generally provides a 30 percent tax credit for investments in energy projects or the production tax credit, which can provide a credit of up to 2.1 cents per kilowatt-hour for electricity produced from renewable sources.  A business may not claim both credits for the same facility, so make sure that you speak with your tax professional to determine which will reduce your tax burden the most.

Repeal of Certain Limits on Business Credits for Renewable Energy Property: The law also repeals the $4,000 limit on the 30 percent tax credit for small wind energy property and the limitation on property financed by subsidized energy financing. The repeal applies to property placed in service after Dec. 31, 2008. 

Coordination With Renewable Energy Grants: Business taxpayers also can apply for a grant instead of claiming either the energy investment tax credit or the renewable energy production tax credit for property placed in service in 2009 or 2010.  In some cases, if construction begins in 2009 or 2010, the grant can be claimed for energy investment credit property placed in service through 2016, and for qualified renewable energy facilities, the grant is 30 percent of the investment in the facility,  and the property must be placed in service before 2014 (2013 for wind facilities). The advantage of the grant, of course, is that the funds are available immediately, without tying up your existing capital.

Temporary Increase in Credit for Alternative Fuel Vehicle Refueling Property: And finally, the new law modifies the credit rate and limit amounts for property placed in service in 2009 and 2010. Qualified property (other than property relating to hydrogen) is now eligible for a 50 percent credit, and the per-location limit increases to $50,000 for business property (increases to $2,000 for other/residential locations). Property relating to hydrogen keeps the 30 percent rate as before, but the per-business location limit rises to $200,000.

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