September 21, 2010

Federal Energy Tax Incentives: What Credits and Deductions Are You Missing?

By William Smith, Manager - Tax & Business Services

Federal Energy Tax Incentives: What Credits and Deductions Are You Missing?

Due to the increased cost of energy and dependence on foreign oil and the environmental impact of current energy usage, many companies and individuals are seeking ways to “go green.” The Energy Policy Act of 2005 (EPAct) was passed by Congress in 2005, and signed into law by President Bush. The Act, which was heavily lobbied by the Department of Energy, was an attempt to combat growing energy problems and conserve the nation’s energy resources. EPAct changed U.S. energy policy by providing tax incentives for greener and cleaner energy production and use. The American Recovery and Reinvestment Act of 2009 extended many consumer tax incentives originally introduced in EPAct and later amended in the Emergency Economic Stabilization Act of 2008.

Under each of these Acts, the U.S. Government, offers various tax incentives and programs for the use of renewable energy sources to sustain business operations or reduce personal consumption.

Solar Energy Property
The 2009 Act is the most significant federal policy ever enacted for the solar industry. Under current law, taxpayers may be eligible for a federal income tax credit for energy-efficient improvements such as furnaces, water heaters and solar energy property to the end of 2016. (For a comprehensive list of qualified improvements see The credit is equal to 30% of the cost of the solar energy property placed in service during the tax year.

Solar energy property is equipment that satisfies two tests. The first test is satisfied if the equipment uses solar energy to generate electricity to:

  • heat or cool a structure,
  • provide hot water for use in a structure, or
  • provide solar process heat.

The second test is met if the property is not used to generate energy for heating a swimming pool. A permanently installed active solar energy system that supplements an existing oil-fired hot water system also qualifies as solar energy property.

In addition to the above tests, solar energy property must also meet the following additional requirements to qualify for the credit.

  • The taxpayer must be the original user of the property.
  • The property must be depreciable property.
  • The property must meet any performance and quality standards prescribed by the IRS after consultation with the Department of Energy. (See
  • The property must not be used outside the United States.

The credit provides for a dollar for dollar reduction of tax liability and is combined with other credits to comprise the General Business Credit. Utilization of the Energy Credit and certain of the other components of the General Business Credit is limited to 100% of the taxpayer’s tax liability up to $25,000 plus 75% of the excess of the taxpayer’s tax liability over $25,000. The Energy Credit is fully creditable, as calculated above, against both the regular tax liability and the alternative minimum tax liability. For solar property used in business, the depreciable basis of the solar property is reduced by 50% of the Energy Credit amount.

Grant In Lieu of Energy Credit
Alternatively, the Treasury Department is authorized to issue grants to qualified taxpayers in lieu of the Energy Credit. The amount of the grant, which is determined by the Treasury Department, is not includible in gross income for federal income tax purposes.

The grant is available only for specified energy property and includes solar property. The depreciable basis of the property is reduced by 50% of the grant amount. The Treasury Department must receive the grant application before October 1, 2011.

A grant in lieu of the Energy Credit makes sense for taxpayers generating losses. The grant results in cash in hand as opposed to the credit which would be carried forward until the taxpayer was in a taxpaying position.

Deduction for Energy Efficiency Improvement
One of the more significant provisions of EPAct included the creation of Internal Revenue Section 179D which provides for taxpayers to deduct the cost of certain energy efficient improvements installed on or in a depreciable building before January 1, 2014.

Energy efficient property is defined as depreciable property installed as part of a building’s
(1) interior lighting systems,
(2) heating, cooling, ventilation and hot water systems, or
(3) building envelope
as part of a certified plan to reduce total annual energy and power costs of these systems by at least 50% in comparison to a reference building that meets specified minimum standards. The minimum standards are determined by computer simulated modeling compared to a government based standard that is required to be used by the Department of Energy. This computer simulation certification must be maintained as part of the taxpayer’s records.

Section 179D provides for a deduction limited to the total square footage of the building times $1.80. A $0.60 per square foot deduction is available for certain lesser reductions that meet certain energy savings targets. This deduction reduces the basis of eligible property. The 50% of basis of the solar equipment remaining after reduction for the Energy Credit may also qualify for this deduction.

The benefits listed above include a brief summary of some of the many incentives offered by the federal government. These benefits are also supplemented by state programs and utility company programs. Other sources of information include and In addition, please contact any Marcum Advisor for additional information about this timely topic.