The IRS is Going Green: Save energy today and taxes tomorrow

According to the EPA, reducing the amount of natural resources buildings consume and the amount of pollution given off is crucial for our environment. The IRS is on board and encouraging taxpayers to make environmentally friendly changes by offering new and expanded tax benefits.

For years, homeowners have been renovating their homes for a variety of reasons, these may be to create more space, increase curb appeal, or make their home kid friendly. Whatever the case may be, Americans are still renovating their homes. In our current environment, there is no better time to use this opportunity to be green and save the green!

Beginning January 1, 2009, The American Recovery and Reinvestment Act of 2009 (ARRA) tripled the tax credit established by Energy Tax Incentives Act of 2005 (ETIA). The 2005 Act established a tax credit equal to 10% of the money spent on energy efficient improvements, not to exceed a lifetime maximum of $500. This credit is now equal to 30% of money spent on energy efficient improvements to a maximum of $1,500. The new rules give taxpayers until December 31, 2010 to make energy efficient improvements on their primary residences and qualify for the tax credits. For those taxpayers that already took the $500 lifetime credit in 2006 or 2007, you are still eligible for the entire $1,500 tax credit under ARRA.

Examples of improvements that qualify for the credit include:

• Improved efficiency in the building envelope (i.e. roof, windows, walls, and doors)
• Upgrades in heating, ventilation, and air conditioning
• Optimized energy performance in lighting and power

Renewal energy systems such as geothermal heat pumps, solar water heaters, solar panels, fuel cells and small wind energy systems are not capped at the $1,500 maximum. In addition, these can be placed in service on a taxpayer’s second home (as well as their primary residence) to receive the credit. Taxpayers building a new home can qualify for the tax credit for installing the renewal energy systems but not for energy efficient doors, windows, insulation, roofs, etc.

New credits inevitably lead to more standards. The IRS will soon issue new standards for improvements placed in service after February 17, 2009, but until the new ones are released, homeowners may rely on the manufacturer’s certifications that were provided under the old guidelines and the Energy Star labels for property purchased before June 1, 2009.

The Commercial Building Deduction was enacted in 2005, and has been extended by the Emergency Economic Stabilization Act of 2008 (EESA). The deduction can be claimed by a taxpayer who owns or leases a building and installs part of the building’s interior lighting systems, heating, cooling, ventilation and hot water systems or the building envelope itself.

The amount of the deduction can be as much as $1.80 per square foot of the building floor area. In order to receive the maximum deduction, the building must achieve a 50% reduction in energy and power costs. Improvements that do not achieve a 50% reduction may qualify for a deduction of $0.60 per square foot if the building achieves at least a 16- 2/3% reduction in energy costs.

Once the taxpayer qualifies and takes the deduction for the energy savings, a basis reduction in the building for the amount of the deduction is required. For example, if a 200,000 square foot the building qualifies for the 50% energy savings deduction of $1.80 per square foot, then $360,000 will be deducted from taxable income in the current year and subsequently subtracted from the basis for depreciating the building. However, since most buildings are depreciated over 39 years, the current year savings significantly outweigh the reduction in tax from the foregone depreciation - not to mention the energy savings received each day!

Homebuilders are getting a benefit from the green initiatives as well. The IRS has continued to extend the time period for contractors that construct qualified, new energy efficient homes to receive up to $2,000 in tax credits per dwelling unit. The amount of the credit is $2,000 per for non-manufactured homes and $1,000 to $2,000 for manufactured homes. The tax credit is now scheduled to sunset on December 31, 2009. The following requirements must be achieved to qualify for the credit:

1. Located in the United States
2. Construction is substantially complete by August 5, 2005 (non-manufactured) December 31, 2005 (manufactured)
3. Meets the energy saving requirements of Section 45L(c)(1) (non-manufactured) and 45L(c)(2)or(3) (manufactured)
4. It is acquired from the contractor before January 1, 2010 to be used as a residence

Reduce your energy costs and pay less tax - it’s a win! win!

To take advantage of these tax savings contact your PKM advisor today.

Porter Keadle Moore, LLP is a founding member of ProfitCrew, an association of accountants and business advisors dedicated to helping construction companies build profitable businesses. For information, contact Adam Polakov at apolakov@pkm.com or visit www.pkm.com.