Can Going Green Give You Some Green? Several Programs Can Provide Individuals and Businesses with Tax Credits

Going green is the current rave. When was the last time you looked at a newspaper or magazine without noticing businesses advertising their green products or policies?

Aside from the benefits to our environment, going green offers other benefits — green cash at tax time. Businesses that acquire certain ‘energy property’ are eligible to claim a tax credit for up to 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the cost of such property.

Individuals can get a credit against their federal income tax for certain energy-efficient improvements made to their home. A tax credit is different from a tax deduction in that it directly reduces the amount of tax you will pay, as opposed to a deduction that reduces the taxable income from which you will pay income taxes.

This means that, if you have invested in making your business or home more energy-efficient, you can directly reduce your tax liability or get an additional refund. What follows is a broad overview of the business and home credit-eligible items that you should look for that effectively reward you for going green.

Business Energy Credit

Business energy credits can be claimed by an owner of depreciable or amortizeable energy property that meets one of the required tests and is property constructed, reconstructed, or erected by the taxpayer, or acquired by the taxpayer if the original use begins with that taxpayer. The following is a list of credit-eligible items. Since these items tend to be very specific, contact your tax advisor for additional information.

Credit-eligible Items

Solar-energy property is used to generate electricity, heat, or cool a structure, or provide solar heat process.

Solar-illumination property (equipment) uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, but only for periods ending before Jan. 1, 2017.

Qualified geothermal-energy property (equipment) uses the ground instead of the outside air to provide heating, air conditioning, and hot water. These systems must meet certain energy ratios to qualify for the credit.

Qualified fuel-cell property converts a fuel into electricity using electrochemical means.

Qualified microturbine property is property that satisfies numerous conditions, and must not be for any period after Dec. 31, 2016.

Heat and power-system property is property comprising a system that satisfies various conditions including simultaneous or sequential generation of electrical power.

Qualified small wind-energy property is property that uses a qualifying small wind turbine to generate electricity. Qualified small wind-energy property does not include any property for any period after Dec. 31, 2016 and uses the ground or ground water as a thermal energy source to heat or cool a structure (for periods ending before 2017).

Qualified geothermal heat-pump system is equipment that uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure.

Computation of the Credit

The credit equals 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the basis of each energy property placed in service during the year for items 1, 2, 4, and 7 above and 10{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} for items 3, 5, 6, and 8. The energy percentage does not apply to the portion of the basis of any property that is attributable to qualified rehabilitation expenditures.

The basis of the property on which the credit is claimed must be reduced by 50{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the energy credit (even if the full amount is not used in the current year). The credit is claimed by completing IRS Form 3498 when filing your tax return.

Non-business Energy Credit

Individuals can also benefit from some very generous incentives. Consumers who purchase and install specific energy-efficient products in their principal residence can receive a tax credit for 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the cost, up to $1,500, for improvements made to their home through Dec. 31, 2010. Second homes and rentals do not qualify for this credit. The credit is limited to improvements on existing homes, so new construction and additions are not credit eligible.

Credit-eligible Items

Insulation: Typical bulk insulation products can qualify, such as batts, rolls, blow-in-fibers, rigid boards, expanding spray, and pour-in-place. Products that reduce air leaks may also qualify, as long as they come with a manufacturer’s certification statement. This includes items such as weather stripping, spray foam, caulk, and house wrap. Labor costs to install such materials are not eligible for the credit.

Metal and asphalt roofs: Metal roofs with appropriate pigmented coatings and asphalt roofs with appropriate cooling granules that also meet Energy Star requirements are eligible. However, roof coatings are not eligible for the tax credit. The roofs that are eligible are ‘reflective roofs.’ Reflective roofs are not for everyone. They will provide the most benefit in hot, sunny climates where air conditioning is used often. Only material costs are credit-eligible.

Windows and doors: This includes skylights, sliding glass doors, garage and storm doors. Windows and exterior doors have to be energy-efficient, meaning they have a U-factor of 0.3 or less. The U-factor is used to measure the heat transfer through the object, and determines how well it insulates. The lower the U-factor, the better it insulates. Again, only material costs qualify for the credit.

Heating, ventilating, and air conditioning (HVAC): Efficient natural gas, propane, and oil furnaces and water boilers are all eligible for a tax credit. Each of the furnaces must have an annual fuel utilization efficiency (AFUE) rate of 95{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} or more, and each of the hot-water boilers must have an AFUE over 90{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5}.

Stoves that use biomass fuel qualify. Biomass fuel includes agricultural crops and trees, wood, wood waste and residues (including wood pellets), plants, grasses, residues, and fibers.

Advanced main air-circulating fans qualify. This is an efficient fan, or blower motor, that blows the air from your furnace through the duct system. The fan must use no more than 2{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} of the furnace’s total energy. Central air conditioners that meet certain energy efficiency ratios are also eligible. Installation costs of HVAC-eligible items also qualify for the credit.

Residential Energy-efficient Property Credits

The residential energy-efficient property credit provides a 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} credit for the cost of qualified geothermal heat-pump property, solar-electric or water-heating property, small wind-energy property, and fuel-cell property placed in service prior to Dec. 31, 2016.

In contrast to the non-business property credit, there is no limit on the credit. Also, labor costs and some on-site preparation costs are eligible for the credit. The property does not have to be installed in your main home to qualify for this credit. Therefore, a vacation home will qualify. However, rentals do not qualify.

Credit-eligible Items

Geothermal heat pumps that use the earth’s natural heat to generate heating and cooling qualify if the system meets certain energy-efficiency ratios.

Small wind turbines that collect kinetic energy from the wind and covert it to electricity, providing power to the home’s electrical system. They must have a nameplate capacity of no more than 100 kW to qualify for the credit.

Solar energy systems. Solar water-heating systems must have at least half of the energy generated by the ‘qualifying property’ come from the sun. Systems must be certified by the Solar Rating and Certification Corp. or a comparable entity endorsed by the government of the state in which the property is installed. The credit is not available for expenses related to the heating swimming pools or hot tubs. The water must be used in the dwelling.

Solar-power-generating systems must provide electricity for the residence, and must meet applicable fire and electrical code requirement.

Fuel-cell property or electrochemical cell devices capable of deriving electrical energy from chemical reactions. The system must have an efficiency of at least 30{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} and must have a capacity of at least 0.5 kW. This credit applies to your principal residence only and is limited to $500 per 0.5 kW of power capacity.

Both the non-business energy property credit and the residential energy-efficient property credit are claimed by completing IRS Form 5695 when filing your tax return. These credits are non-refundable credits, so they cannot reduce your tax liability below zero. Be sure to save your receipts and the manufacturer’s certification statement for your records.

In addition to federal tax incentives, some consumers will also be eligible for utility or state rebates, as well as state tax incentives for energy-efficient homes, vehicles, and equipment. Each state’s energy-office Web site may have more information on specific state tax information. Please see the Energy Star page on federal tax credits for energy efficiency for more details on federal incentives, and the Database of State Incentives for Renewables and Efficiency for information on federal, state, local, and utility incentives.

Colleen Berndt is a senior tax manager with Meyers Brothers Kalicka, P.C. Working primarily with for-profit entities, She specializes in multi-state and consolidated tax returns, as well as complicated tax issues; (413) 536-8510.