The American Recovery and Reinvestment Act’s Energy Provisions for Individuals

Editor: Anthony S. Bakale, CPA, M. Tax.

On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009, P.L. 111-5 (ARRA), which provides energy incentives for individuals. Unlike many of the ARRA provisions, the energy incentives are available to all individual taxpayers and do not phase out based on adjusted gross income. Here are some of the key energy provisions in ARRA that affect individuals.

Residential Energy Property Credit (Sec. 25C)

The new law increases the energy tax credit for homeowners who make energyefficient improvements to their existing homes. It increases the credit rate from 10% to 30% 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 additional insulation, energyefficient exterior windows, and energyefficient heating and air conditioning systems.

A similar credit was available for 2007 but was not available in 2008. Individuals should be aware that the standards in ARRA’s version of the credit are higher than the standards for the 2007 credit for products to qualify as energy efficient for purposes of the credit. The IRS will issue guidance that will allow manufacturers to certify that their products meet these new standards. If the previous $500 lifetime maximum has already been used by an individual for qualifying expenditures in 2006 and/or 2007, that person can now incur additional qualifying property costs in 2009 and/or 2010 and be eligible for a residential energy property credit of up to $1,500 over both years.

The IRS has released interim guidance providing procedures for manufacturers to follow to certify property as either eligible building envelope components or qualified energy property (Notice 2009-53). The notice also tells taxpayers who are claiming the Sec. 25C credit when they can rely on a manufacturer’s certification.

For 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. Manufacturers should not continue to provide certifications for property that fails to meet the new standards.

Residential Energy-Efficient Property Credit (Sec. 25D)

The nonrefundable residential energyefficient property 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. ARRA removes some of the previously imposed maximum amounts and allows for a credit equal to 30% of the cost of qualified property. This section applies to qualified equipment placed into service through December 31, 2016.

The IRS has released guidance on how manufacturers can certify that their products meet the requirements of Sec. 25D and when purchasers can rely on those certifications (Notice 2009-41).

Many state and local governments and public utilities also offer incentives for investment in renewable energy property, such as solar electric and solar heating systems. The most common incentives are rebates of a portion of the system’s cost. Other incentives include state income tax credits, property tax exemptions, and state sales tax exemptions.

Plug-in Electric Drive Vehicle Credit (Sec. 30D)

The new law modifies the credit for qualified plug-in electric drive vehicles purchased after December 31, 2009. 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 a capacity of at least 4 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 full amount of the credit will be reduced for a manufacturer’s vehicles after the manufacturer has sold at least 200,000 vehicles.

Plug-in Electric Vehicle Credit (Sec. 30)

ARRA also creates a special tax credit for two types of plug-in vehicles— certain low-speed electric vehicles and two- or three-wheeled vehicles. The amount of the credit is 10% of the cost of the vehicle, up to a maximum credit of $2,500 for purchases made after February 17, 2009, and before January 1, 2012. To qualify, a vehicle must either be 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 a capacity of 2.5 kilowatt-hours. The amount of any other deduction or credit allowable for a vehicle is reduced by the amount of the plug-in electric vehicle credit the taxpayer takes for the vehicle.

Conversion Kits (Sec. 30B)

The new law also provides a tax credit for plug-in electric drive conversion kits (Sec. 30B(i)). The credit is equal to 10% of the cost of converting a vehicle to a qualified plug-in electric drive motor vehicle after February 17, 2009. The maximum amount of the credit is $4,000. The credit does not apply to conversions made after December 31, 2011. A taxpayer may claim this credit even if the taxpayer claimed a hybrid vehicle credit for the same vehicle in an earlier year.

Alternative Motor Vehicle Credit as a Personal Credit Allowed Against AMT (Sec. 26)

Starting in 2009 and extending until January 1, 2011, the new law allows the alternative motor vehicle credit, including the tax credit for purchasing qualified fuel cell, qualified advanced lean burn technology, qualified hybrid, and certain other qualified alternative motor vehicles, to be applied against the alternative minimum tax (AMT). Prior to ARRA, a taxpayer could not use the alternative motor vehicle credit to offset the AMT. This means that a taxpayer who owed AMT could not take the credit, and some taxpayers who did not owe AMT could take only a reduced credit. The alternative motor vehicle credit also includes a credit for the cost of converting an existing motor vehicle into a qualified plug-in electric drive motor vehicle.

EditorNotes

Anthony Bakale is with Cohen & Company, Ltd., Baker Tilly International, Cleveland, OH.

Unless otherwise noted, contributors are members of or associated with Baker Tilly International.

For additional information about these items, contact Mr. Bakale at (216) 579-1040 or tbakale@cohencpa.com.