Last year's Energy Act could save you tax dollars
You may remember hearing about the 2005 Energy Tax Act, which was signed into law last year. It includes several key provisions encourages energy companies to boost production and efficiency.
What you might not know is that the act opens the door to potential tax savings for contractors as well. Specifically, homebuilders may be eligible to claim the New Energy Efficient Home Credit for each qualifying new energy-efficient home they build and that's acquired from the contractor for residential use.
How can you qualify?
The act defines an eligible contractor as anyone who constructs a qualifying new energy-efficient home or who produces an eligible manufactured home. Qualified dwellings must:
Be located in the United States and "substantially completed" (presumably meaning basic construction has been finished and the residence is livable) after Aug. 8, 2005, and
Reduce annual heating and cooling energy consumption by 50% (otherwise known as a "50% home") or, for manufactured homes, by 30% (otherwise known as a "30% manufactured home").
Depending on these qualifications, the credit amount is either $2,000 per residence for 50% homes or $1,000 per residence for most 30% manufactured homes. As of this writing, there's no limit on the number of homes on which you may claim the credit.
What other rules apply?
A 50% home is eligible for the $2,000 credit if it annually consumes at least 50% less energy than a comparable dwelling. The comparable unit must be constructed in accordance with the standards of Chapter Four of the 2003 International Energy Conservation Code as issued on Aug. 8, 2005.
In addition, the comparable dwelling's heating and cooling efficiencies need to comply with the minimums in effect at the time of construction allowed under the National Appliance Energy Conservation Act of 1987. And the comparable unit's building envelope (insulation materials, systems specifically designed to reduce heat loss or gain, exterior windows, doors, and any duct sealing) must account for one-fifth of the 50% savings.
A 30% manufactured home qualifies for the $1,000 credit if it either satisfies the energy savings requirements for 50% homes, substituting 30% for the 50% energy consumption amount and substituting one-third for the one-fifth building envelope require ment, or is eligible under the Environmental Protection Agency's Energy Star Labeled Homes program.
A manufactured home may qualify for the full S2,000 credit if it conforms to the federal manufactured home construction and safety standards and meets all other requirements for a 50% home.
The IRS must certify your energy savings under its own guidelines and in consultation with the Secretary of Energy. Unfortunately, as this article went to press, the agency has yet to establish these guidelines. Nonetheless, it's clear you'll need to submit written specifications of the heating or cooling equipment installed and of the building envelope components, along with details of their respective energy-efficient performances.
What's the catch?
If you do claim the credit, the act mandates that you adjust the tax basis of each dwelling in question. More specifically, you crust reduce the basis by the amount of credit taken. Additionally, you may not carry hack the credit to any tax year ending before the enactment date. Assuming no specific guidance arises advising otherwise, you may presumably carry forward the credit for 20 years under the general business credit rules.
Is this for real?
Although the IRS has vet to issue many specifics regarding this tax credit, it still appears to be a very real taxplanning opportunity for homebuilders nationwide. And if you're able to design a dwelling your company can construct many times over, you'll enjoy an even greater benefit. Even though you'll have to reduce the tax basis of each energy-efficient residence for which you claim the credit, the tax savings should usually make up for it.
