Going Green under the New Tax Law

Transcription

1 SELF-STUDY CONTINUING PROFESSIONAL EDUCATION Going Green under the New Tax Law Gary M. Steinberg, CPA Fort Worth, Texas (800) cl.thomsonreuters.com/q

2 Copyright 2010 Thomson Reuters/Gear Up All Rights Reserved This course, or parts thereof, may not be reproduced in another document or manuscript in any form without the permission of the publisher. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought From a Declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations. Gear Up is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN Website: Gear Up is registered with the National Association of State Boards of Accountancy (NASBA) as a Quality Assurance Service (QAS) sponsor of continuing professional education. State boards of accountancy have final authority on acceptance of individual courses for CPE credit. Complaints regarding QAS program sponsors may be addressed to NASBA, 150 Fourth Avenue North, Suite 700, Nashville, TN Website: CFP, CERTIFIED FINANCIAL PLANNER, and are certification marks owned by the Certified Financial Planner Board of Standards, Inc. These marks are awarded to individuals who successfully complete CFP Board's initial and ongoing certification requirements. Registration Numbers New York Texas NASBA Registry NASBA QAS 017 ii

3 INTRODUCTION Going Green under the New Tax Law is an interactive self-study CPE course designed to enhance your understanding of the latest issues in the field. To obtain credit, you must log on to our Online Grading System at OnlineGrading.Thomson.com to complete the Examination for CPE Credit by November 30, Complete instructions are included below and in the Testing Instructions on page 91. Taking the Course You are asked to read the material and, during the course, to test your comprehension of each of the learning objectives by answering self-study quiz questions. After completing each quiz, you can evaluate your progress by comparing your answers to both the correct and incorrect answers and the reason for each. References are also cited so you can go back to the text where the topic is discussed in detail. Once you are satisfied you understand the material, answer the examination questions which follow each lesson and record your answer choices by logging on to our Online Grading System. Qualifying Credit Hours QAS or Registry Gear Up is registered with the National Association of State Boards of Accountancy as a sponsor of continuing professional education on the National Registry of CPE Sponsors (Registry) and as a Quality Assurance Service (QAS) sponsor. Part of the requirements for both Registry and QAS membership include conforming to the Statement on Standards of Continuing Professional Education (CPE) Programs (the standards). The standards were developed jointly by NASBA and the AICPA. As of this date, not all boards of public accountancy have adopted the standards. This course is designed to comply with the standards. For states adopting the standards, recognizing QAS hours or Registry hours, credit hours are measured in 50-minute contact hours. Some states, however, require 100-minute contact hours for self-study. Your state licensing board has final authority on accepting Registry hours, QAS hours, or hours under the standards. Check with the state board of accountancy in the state in which you are licensed to determine if they participate in the QAS program and allow QAS CPE credit hours. This course is based on one CPE credit for each 50 minutes of study time in accordance with standards issued by NASBA. Note that some states require 100-minute contact hours for selfstudy. You may also visit the NASBA website at for a listing of states that accept QAS hours. Credit hours for CPE courses vary in length. Credit hours for this course are listed on the Overview page. CPE requirements are established by each state. You should check with your state board of accountancy to determine the acceptability of this course. We have been informed by the North Carolina State Board of Certified Public Accountant Examiners and the Mississippi State Board of Public Accountancy that they will not allow credit for courses included in books or periodicals. iii

4 Obtaining CPE Credit Log on to our Online Grading Center at OnlineGrading.Thomson.com to receive instant CPE credit. Click the purchase link and a list of exams will appear. You may search for the exam by selecting Gear Up/Quickfinder in the drop-down box under Brand. Payment of $49 for the exam is accepted over a secure site using your credit card. For further instructions regarding the Online Grading Center, please refer to the Testing Instructions located at the beginning of the examination. A certificate documenting the CPE credits will be issued for each examination score of 70% or higher. Obtaining CFP Credit To receive CFP credit, please provide your name and CFP license number to Thomson Reuters within the Online Grading Center. Upon successful completion of the course, we will submit the credit hours you ve earned directly to the CFP Board. The CFP Board will then send you a confirmation that includes the number of credits you have been awarded and the category in which they were earned. If we do not receive your name and license number within 30 days of completion, the CFP Board will not award you credit. Retaining CPE Records For all scores of 70% or higher, you will receive a Certificate of Completion. You should retain it and a copy of these materials for at least five years. PPC In-House Training A number of in-house training classes are available that provide up to eight hours of CPE credit. Please call our Sales Department at (800) for more information. iv

5 Going Green under the New Tax Law (DGRTG10) OVERVIEW COURSE DESCRIPTION: PUBLICATION/REVISION DATE: PREREQUISITE/ADVANCE PREPARATION: CPE CREDIT: CTEC CREDIT: This interactive self-study course covers energy saving provisions in recent tax laws affecting both individual and business taxpayers, how to implement, and the requirements for the tax saving credits. November 2010 Basic knowledge of taxation 4 QAS Hours, 4 Registry Hours 4 Federal CTEC Hours, 0 California Hours Check with the state board of accountancy in the state in which you are licensed to determine if they participate in the QAS program and allow QAS CPE credit hours. This course is based on one CPE credit for each 50 minutes of study time in accordance with standards issued by NASBA. Note that some states require 100-minute contact hours for self study. You may also visit the NASBA website at for a listing of states that accept QAS hours. Enrolled Agents: This CPE course is designed to enhance professional knowledge for Enrolled Agents. Gear Up is a qualified CPE Sponsor for Enrolled Agents as required by Circular 230 Section 10.6(g)(2)(ii). CFP CREDIT: FIELD OF STUDY: 2 CE Hours CFP credit hours are half the number of CPE credit hours. Taxes EXPIRATION DATE: November 30, 2011 KNOWLEDGE LEVEL: Basic LEARNING OBJECTIVES Lesson 1: Introduction and Background Completion of this lesson will enable you to: Recognize green initiatives included in the American Recovery and Reinvestment Act of 2009, the Emergency Economic Stabilization Act of 2008 and the Energy Policy Act of v

6 Lesson 2: Green Incentives for the Home Completion of this lesson will enable you to: Differentiate between the credits available to individual and business taxpayers for improving the energy efficiency of a residence, determine their application and identify their requirements. Lesson 3: Green Incentives for Travel Completion of this lesson will enable you to: Differentiate between the credits available to individual and business taxpayers for improving the energy efficiency associated with travel, determine their application and identify their requirements. Lesson 4: Other Green Incentives for Business Completion of this lesson will enable you to: Summarize the application and requirements for other credits and deductions available to business taxpayers for either improving or facilitating energy efficiencies. ADMINISTRATIVE POLICIES For information regarding refunds and complaint resolutions, dial (800) , select the option for Customer Service, and your questions or concerns will be promptly addressed. vi

7 CPE & Training Solutions Powered by Checkpoint Learning! cl.thomsonreuters.com Online Courses and Learning Management Checkpoint Learning New! Checkpoint Learning...a dream come true for CPE decision makers. With the combined power of MicroMash, PASS Online, PPC and Reqwired, we are pleased to introduce you to the next level in online learning! Checkpoint Learning provides reporting, learning reminders and prompts, CPE compliance tracking, and much more. You can purchase and complete courses directly from Checkpoint Learning, either individually or as part of a subscription package. Select from hundreds of online and downloadable courses on auditing, tax, management, yellow book, and staff training topics. Contact us today to discuss your training needs and begin building a learning plan that s right for you. MicroMash A trusted provider of technology-based CPE and training for over 20 years. Choose from more than 130 courses on hot topics that will help you stay on top of your field now available through Checkpoint Learning! PASS Online A CPE provider since 1990, PASS Online offers more than 180 courses covering a variety of accounting and tax topics, including industry-leading state ethics training courses for accountants. Now available through Checkpoint Learning! Live Seminars & Conferences Gear Up Seminars, Workshops and Conferences A leading provider of tax and accounting education for 39 years, Gear Up offers nationwide events designed for you! Seminars: Half-day to two-day seminars in states nationwide! Select from our 1040 and Business Entities seminars, plus specialty titles including the new Assisting Small Business from A to Z. Conferences: Our week-long CPE conferences are held at exciting vacation destinations! In 2010, join us at Royal Flush in Las Vegas (November 29 December 4), and Magic Week in Orlando (December 14 18), and looking ahead to 2011 join us at Jackpot in Las Vegas (May 16-21), Citrus Week in Orlando (June 13-16), and Windy City Week in Chicago (August 1-6). Workshops: Our 8-hour workshop format provides a streamlined learning experience at an affordable price! Accounting and tax titles available this year in Alabama, Florida, Illinois, North Carolina, and Texas. PPC and AuditWatch Conferences Practical guidance you need at locations you ll love! PPC and AuditWatch offer in-depth learning at conferences created to meet the needs of professionals nationwide. We gather field experts who bring attendees the most up-to-date, relevant information regarding a variety of important topics. Registration cost includes continental breakfast, luncheon and refreshment breaks, and all sessions, conference materials, and reception. Details about our 2011 PPC and AuditWatch Conferences will be online soon! Check back for early bird registration discounts and terrific room rates for attendees at our hotel locations. AuditWatch Live Seminars AuditWatch, the audit profession s premier training and consulting firm and recognized leader in audit productivity, offers specialized auditing seminars in locations nationwide. These live seminars include: AuditWatch University an intergrated development curriculum that provides your firm five levels of audit staff training AuditWatch University Yellow Book a three-day series. Choose to attend all or just the sessions most important to you. Day 1: Auditing Nonprofit Organizations, Day 2: Performing Efficient and Effective Single Audits, Day 3: Auditing State and Local Governments/Government Update. TaxWatch University core tax staff training covering: individual, corporate, pass-through, partnership, and more. CINS020

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9 Table of Contents Lesson 1: Introduction and Background... 1 The American Recovery and Reinvestment Act of 2009 (ARRA)... 1 Emergency Economic Stabilization Act of 2008 (EESA)... 2 The Energy Policy Act of Lesson 2: Green Incentives for the Home... 9 Incentives for the Individual Only... 9 Business Incentives Lesson 2 Appendix Lesson 3: Green Incentives for Travel Travel Incentives for the Individual Travel Incentives for Business Lesson 3 Appendix Lesson 4: Other Green Incentives for Business Energy Efficient Commercial Buildings Deduction (IRC Sec. 179D) Accelerated Depreciation for Qualified Smart Electric Meter and Qualified Smart Electric Grid System (IRC Sec. 168(e)(3)(D)(iii) and (iv)) Qualifying Advanced Energy Project Credit (IRC Sec. 48C) Energy Efficient Appliance Credit (IRC Sec. 45M) Other Energy Incentives (Various IRC Sections) Glossary Index To enhance your learning experience, the final examination questions are located throughout the course reading materials. Please look for the exam questions following each lesson. Testing Instructions for Examination for CPE Credit vii

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11 Lesson 1: Introduction and Background Learning Objectives Completion of this lesson will enable you to: Recognize green initiatives included in the American Recovery and Reinvestment Act of 2009, the Emergency Economic Stabilization Act of 2008 and the Energy Policy Act of Introduction In recent years, the federal government as well as many state and local governments have enacted legislation providing tax incentives for going green and conserving energy. This course will concentrate on energy incentives provided for in federal tax law. It might just as well have been titled, How to save both business and individual clients tax dollars while becoming more energy efficient. The American Recovery and Reinvestment Act of 2009 (ARRA) alone has provided more than a dozen new ways to save taxes for being energy efficient. With the volume of and publicity given the many going green incentives in current tax law, clients will be asking more questions that practitioners will need to be prepared to answer. More often than not, the practitioner will need to clear up mistaken interpretations because clients often gather information through informal discussions with other lay-taxpayers. Certainly, practitioners will need to help taxpayers properly interpret the law, and apply the law correctly, whether to a tax planning or tax compliance engagement. This course will focus on tax savings now available to both individual taxpayers and small business taxpayers through increased energy efficiency. In this lesson, we will take a brief look at some of the energy-related provisions contained in recent federal tax acts, including the American Recovery and Reinvestment Act of 2009, and the Emergency Economic Stabilization Act of We will also briefly look at the Energy Tax Act of 2005 where many of the incentives we will discuss in this course originated. The American Recovery and Reinvestment Act of 2009 (ARRA) On February 17, 2009, President Obama signed his first significant piece of tax legislation into law, the American Recovery and Reinvestment Act of 2009 (ARRA), P.L Although best known as The Stimulus Package, it contains many energy-related provisions, including: An extension of the Renewable Electricity Production Credit; The ability to elect an Investment Tax Credit rather than a Production Tax Credit; Repeal of the cap on the Small Wind Property Business Energy Credit; Repeal of Energy Credit Basis Reduction for Subsidized Energy Financing; Energy Credit and Electricity Production Credit coordinated with Renewable Energy Grants; The Non-business Homeowners Energy Credit modified and extended to 2010; 1

12 Elimination of the cap on Residential Energy Efficient Property Credit; The Alternative Fuel Vehicle Refueling Property Credit increased for 2009 and 2010; Modification of the Carbon Dioxide Sequestration Credit; Modification of the Plug-in Electric Motor Vehicle Credit; New Qualified Advanced Energy Manufacturing Project Credit; New Clean Renewable Energy Bonds are Expanded; Expansion of Qualified Energy Conservation Bonds. Note: Not only are all of the American Recovery and Reinvestment Act s green provisions for individual taxpayers allowed to all individuals no matter what their adjusted gross income (AGI) is, but none of the provisions phase out based on the taxpayer s AGI either. Emergency Economic Stabilization Act of 2008 (EESA) On October 3, 2008, President George W. Bush signed into law, the last major legislation of his two terms in office, H.R. 1424, best known as the bailout bill or the Emergency Economic Stabilization Act of 2008 (EESA), P.L At the last moment, to help get it passed, Congress tacked on a series of standalone tax bills. These bills included the Tax Extenders and Alternative Minimum Tax Relief Act of 2008, the Heartland Disaster Tax Relief Act of 2008, and the Energy Improvement and Extension Act of The following energy-related going green provisions may be found in H.R. 1424: Extension and modification of Renewable Energy Production Tax Credit; Long-term extension of Energy Investment Tax Credits; Long-term extension and modification of Residential Energy Efficient Property Credit; Extension and modification of credit for Energy Efficiency Improvements to Existing Home; Extension of Energy Efficient Buildings Deduction; Extension of credit for Energy Efficiency Improvements to New Homes; Plug-in Electric Drive Vehicle Credit; Bicycle commuters fringe benefit; Modification and extension of Energy Efficient Appliance Credit; Accelerated depreciation for Smart Meters and Smart Grid Systems; Extension and expansion of the Alternative Refueling Stations Credit; Modifications to energy-related Tax Credit Bonds; New Carbon Dioxide Sequestration Credit; Expansion of credit for Investments in Qualifying Advanced Coal and Gasification Projects; Extension and modification of Qualified Green Building and Sustainable Design Project Bond; First year 50% bonus depreciation for investments in recycling; Extension of Biodiesel Production Tax Credit; Gain deferral election for Qualifying Electric Transmission Transactions is extended retroactively; 2

13 New Clean Renewable Energy Bonds (CREBs); Expansion of Allowance for Cellulosic Biofuels Property; Extension and modification of Renewable Diesel Tax Credit; Extension and modification of the Alternative Fuels Credit; Incentives for Idling Reduction Units and Advanced Insulation for Heavy Trucks; Publicly Traded Partnerships income treatment of Alternative Fuels; Modification and reinstatement of Non-business Homeowners Energy Credit; Extension and modification of credit for Energy-efficiency Improvements to Existing Homes; Extension of Energy Efficient Buildings Deduction; Extension of credit for Energy Efficiency Improvements to New Homes; Credit for investment in qualifying advanced coal and gasification projects expanded. The Energy Policy Act of 2005 The Energy Policy Act of 2005, P.L , was also known as the Energy Tax Incentives Act of 2005 and included billions of dollars in tax incentives that were designed to improve energy production, transportation and efficiency. It included such tax incentives as tax credits for builders who build energy efficient homes and energy efficient buildings, and tax credits for individuals for making energy saving improvements to their residences or for purchasing a vehicle that uses alternative fuels. It also provided tax credits to manufacturers for manufacturing energy saving appliances, such as refrigerators and dishwashers. Finally, there were credits offered for businesses to purchase alternative fuel power plant equipment. Some of the energy saving tax breaks found in this piece of legislation include: New deduction for Energy Efficient Commercial Buildings; New tax credit for building Energy Efficient Homes; New tax credit for Energy Efficient Improvements to existing Homes; New tax credit for Residential Energy Efficient Property; Four new tax credits for Alternative Motor Vehicles; New Qualified Fuel Cell Motor Vehicle Credit; New Advance Lean-burn Technology Motor Vehicle Credit; New Qualified Hybrid Motor Vehicle Credit; New Qualified Alternative Fuel Motor Vehicle Credit; New credit for Qualified Alternative Fuel Vehicle Refueling Property; New Non-business Homeowners Energy Credit; Eighty-four-month amortization for certain Air-pollution Control Facilities; New tax credit for Manufacturing Energy Efficient Appliances; New credit for Qualified Fuel Cell Power Plants; New credit for Qualifying Stationary Microturbine Power Plants; 3

14 Nonconventional Fuel Production credit converted to an elective general business credit and extended to production of Coke and Coke Gas; New Small Agri-biodiesel Producer Credit; Expansion of the Small Ethanol Producer Credit; Extension of the tax incentives for Biodiesel and expanded to include Renewable Diesel; Expansion of the Credit for Electricity Produced from Renewable Resources to include electricity produced from certain Hydropower; Extension of the placed-in-service date for the Credit for Electricity Produced from Renewable Resources; Extension of the time period to obtain the Credit for Electricity Produced from Qualified Geothermal or Solar Energy, Small Irrigation Power, Municipal Solid Waste, or Open-loop Biomass Facilities; New credit for production of Indian Coal from Qualified Facilities; Expansion of the Investment tax credit to include a credit for Qualified Investment in a Qualifying Advanced Coal Project; Expansion of the Investment tax credit to include a 20% credit for Qualified Investment in Qualifying Gasification Projects; Taxpayers may claim a Research Credit for 20% of amounts paid or incurred for research by an Energy Research Consortium; Full amount paid or incurred to eligible small businesses, universities, and federal laboratories for Qualified Energy Research to qualify for the Research Credit; Companies investing in Electric Transmission Equipment or Pollution Control Facilities before 2008 may extend the carryback period for 2003, 2004, and 2005 NOLs to five years. You may have noticed that many of the green tax incentives have appeared in all three acts the American Recovery and Reinvestment Act of 2009, the Emergency Economic Stabilization Act of 2008, and the Energy Policy Act of The Energy Policy Act started many of the tax incentives allowed by law for obtaining certain levels of energy efficiency, and the 2008 and 2009 acts extended, modified, and added to that 2005 creation. Some of the changes may just reflect an extension of time for an expiring credit. Other times, as in the case of the Plug-in Electric Drive Vehicle, there is a change in philosophy and/or the way the credit is calculated. Changes in technology allowed for credits not included in the Energy Policy Act of 2005 to be added later, as with the Plug-in Electric Drive Vehicle Credit that was first added into the law as part of EESA. From EESA to ARRA, the Plug-in Electric Drive Vehicle Credit was expanded to include two-wheeled and three-wheeled vehicles and the maximum amount of the credit for an automobile was reduced by one-third. The maximum credit during 2009 for the purchase of the much awaited Chevrolet Volt was $7,500 under the Emergency Economic Stabilization Act. Unfortunately, the Volt was not be available for purchase until 2010 when the maximum credit for purchasing one will be $5,000 under changes made by the American Recovery and Reinvestment Act of Most of the incentives for obtaining energy efficiencies are in the form of credits rather than deductions, which is advantageous. A deduction reduces the taxable income on which tax is paid and its value depends on the tax bracket of the taxpayer. On the other hand, a tax credit lowers a taxpayer s tax liability dollar-for-dollar. 4

15 SELF-STUDY QUIZ Determine the best answer for each question below. Then check your answers against the correct answers in the following section. 1. In which tax act was the plug-in electric vehicle tax credit introduced? a. The American Recovery and Reinvestment Act of b. The Emergency Economic Stabilization Act of c. The Food Conservation and Energy Act of d. The Energy Policy Act of Which of the following tax credits or benefits first appeared in the Energy Policy Act of 2005? a. Bicycle Commuters Fringe Benefit. b. Accelerated Depreciation for Smart Meters and Smart Grid Systems. c. The Non-business Homeowners Energy Credit. 5

16 SELF-STUDY ANSWERS This section provides the correct answers to the self-study quiz. If you answered a question incorrectly, reread the appropriate material. (References are in parentheses.) 1. In which tax act was the plug-in electric vehicle tax credit introduced? (Page 2) a. The American Recovery and Reinvestment Act of [This answer is incorrect. The credit was modified under this act, but had already been added to the law by a prior tax act.] b. The Emergency Economic Stabilization Act of [This answer is correct. Although the first credits for energy savings for the use of alternative fuels were introduced in the Energy Policy Act of 2005, it wasn t until the technology became realistic that the plug-in electric vehicle credit was first introduced in this 2008 Tax Act, H.R ] c. The Food Conservation and Energy Act of [This answer is incorrect. The credit was first introduced into law some months later in 2008 with the passage of the Emergency Economic Stabilization Act of 2008.] d. The Energy Policy Act of [This answer is incorrect. The credit was not introduced into law until after 2005.] 2. Which of the following tax credits or benefits first appeared in the Energy Policy Act of 2005? (Page 3) a. Bicycle Commuters Fringe Benefit. [This answer is incorrect. This provision was not introduced into law until the passage of the Emergency Economic Stabilization Act of 2008.] b. Accelerated Depreciation for Smart Meters and Smart Grid Systems. [This answer is incorrect. This provision was not introduced into law until the passage of the American Recovery and Reinvestment Act of 2009.] c. The Non-business Homeowners Energy Credit. [This answer is correct. The credit first appeared in the Energy Policy Act of 2005, was modified and reinstated in the Emergency Economic Stabilization Act of 2008, and was modified and extended under the American Recovery and Reinvestment Act of 2009.] 6

17 EXAMINATION FOR CPE CREDIT Lesson 1 Determine the best answer for each question below. Then log onto our Online Grading Center at OnlineGrading.Thomson.com to record your answers. 1. Tax credits first became available for purchasing a hybrid vehicle by either an individual or business in which tax act? a. The Tax Reform Act of b. The Energy Policy Act of c. The Emergency Economic Stabilization Act of d. The American Recovery and Reinvestment Act of

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19 Lesson 2: Green Incentives for the Home Learning Objectives Completion of this lesson will enable you to: Differentiate between the credits available to individual and business taxpayers for improving the energy efficiency of a residence, determine their application and identify their requirements. Incentives for the Individual Only Non-business Homeowners Energy Credit (IRC Sec. 25C) Non-business Homeowners Energy Credits allowed under IRC Sec. 25C to individual taxpayers are based on the cost of energy efficient improvements taxpayers make to their principal residence. This Code Section and its credit made their first appearance in the Internal Revenue Code as a result of Section 1333(a) of the Energy Policy Act of 2005 and originally applied to property placed in service after December 31, Taxpayers were originally allowed a credit with a lifetime limitation of $500. The credit was calculated overall based on 10% of the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during such taxable year and the amount of the residential energy property expenditures paid or incurred by the taxpayer during such taxable year. There were also sub-limitations imposed based on differing types of residential energy property expenditures. For example, there was a $200 limitation to the credit for windows, a $50 limit for any advanced main air circulating fan, and $150 for any qualified natural gas, propane, or oil furnace or hot water boiler. This provision originally expired on January 1, Thus, for tax years beginning in 2008, there was no credit available whatsoever. The Emergency Economic Stabilization Act of 2008 reinstated the credit for tax years beginning in 2009 only. It also added biomass fuel stoves to the list of energy efficient building property that qualifies for the non-business energy credit and removed geothermal heat pumps. However, under the Act, geothermal heat pumps now qualify for the more generous residential energy efficient property credit under IRC Sec. 25D. Finally, the American Recovery and Reinvestment Act extended the credit one additional year by adding the year 2010 and allowing the credit for property placed in service through December 31, It changed the amount of the credit from 10% to 30% and eliminated the dollar limitations by category, such as the $200 credit limit for windows. It also eliminated the $500 lifetime limitation. Instead, it set a limitation of $1,500 aggregate amount of credits allowed to a taxpayer for tax years beginning in 2009 and Taxpayers who exhausted their $500 lifetime limitation during 2006 and 2007 can now claim an additional $1,500 of aggregate credits during 2009 and Also, some of the other rules and definitions have been modified. Note: The previous $500 lifetime cap ($200 for windows) is eliminated and replaced with the $1,500 aggregate cap. 9

20 Subject to the aforementioned limitations, the American Recovery and Reinvestment Act of 2009 provides that individuals are allowed a credit for the tax year equal to 30% of the sum of: The amount paid or incurred by the taxpayer during the tax year for qualified energy efficiency improvements, and The amount of the residential energy property expenditures paid or incurred by the taxpayer during the tax year. It is effective for tax years beginning after December 31, 2008, and will not be available for property placed in service after December 31, The term qualified energy efficiency improvements means any energy efficient building envelope component which meets the prescriptive criteria for such component as established by the 2000 International Energy Conservation Code, or in the case of a metal roof with appropriate pigmented coatings, or an asphalt roof with appropriate cooling granules, which meet the Energy Star program requirements, if such component is installed in or on a dwelling unit located in the United States and owned and used by the taxpayer as the taxpayer's principal residence (within the meaning of IRC Sec. 121), the original use of such component commences with the taxpayer, and such component reasonably can be expected to remain in use for at least five years. The term building envelope component means any insulation material or system which is specifically and primarily designed to reduce the heat loss or gain of a dwelling unit when installed in or on such dwelling unit and meets the prescriptive criteria for such material or system established by the 2009 International Energy Conservation Code as is in effect on the date of the enactment of the American Recovery and Reinvestment Tax Act of 2009, exterior windows (including skylights), exterior doors, and any metal roof or asphalt roof installed on a dwelling unit, but only if such roof has appropriate pigmented coatings or cooling granules which are specifically and primarily designed to reduce the heat gain of such dwelling unit. The qualifications for exterior windows, doors, and skylights are only included if they are equal to or below a U factor of 0.30 and SHGC of The term dwelling unit includes a manufactured home which conforms to Federal Manufactured Home Construction and Safety Standards. The term residential energy property expenditures means expenditures made by the taxpayer for qualified energy property which is installed on or in connection with a dwelling unit located in the United States and owned and used by the taxpayer as the taxpayer's principal residence (within the meaning of IRC Sec. 121), and originally placed in service by the taxpayer. It also includes expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of qualified energy property. The term qualified energy property means energy efficient building property, any qualified natural gas furnace, qualified propane furnace, qualified oil furnace, qualified natural gas hot water boiler, qualified propane hot water boiler, or qualified oil hot water boiler, or an advanced main air circulating fan. Qualified energy property must meet performance and quality standards, and any certification requirements that have been prescribed by the Secretary by regulations (after consultation with the Secretary of Energy or the Administrator of the Environmental Protection Agency, as appropriate), and are in effect at the time of the acquisition of the property, or at the time of the completion of the construction, reconstruction, or erection of the property, as the case may be. 10

21 Requirements and standards for air conditioners and heat pumps must meet the standards and requirements prescribed by the Secretary with respect to the energy efficiency ratio (EER) for central air conditioners and electric heat pumps and shall require measurements to be based on published data which is tested by manufacturers at 95 degrees Fahrenheit, and may be based on the certified data of the Air Conditioning and Refrigeration Institute that are prepared in partnership with the Consortium for Energy Efficiency. With IRS Notice , the IRS has issued interim guidance on certification procedures for IRC Sec. 25C credits that taxpayers may claim for costs of energy efficiency home improvements and other non-business energy property purchases. The guidance has been updated to reflect reinstatement of the credit for 2009, as well as the later extension to 2010, and defines qualifying energy efficiency home improvements as those relating to certain portions of the building envelope, including insulation materials, certain types of exterior windows, skylights, and doors, metal roofs, and asphalt roofs. Also, the IRS describes what qualifies as creditable residential energy property, and sets out specific procedures for manufacturers to follow in certifying foregoing improvements or properties and when taxpayers may rely on same for their credit claims. The IRS cautioned that Energy Star certification doesn't establish that product is qualified for credit, especially with regard to exterior windows and skylights placed in service after enactment of the American Recovery and Reinvestment Act of Taxpayers should make sure they receive a proper certification from the manufacturer for property on which they plan to take the credit. A taxpayer may rely on a manufacturer's certification in the case of a building envelope component only if the building envelope component is installed in a manner that is consistent with the manufacturer's certification. A manufacturer's certification must contain the following information: 1. The name and address of the manufacturer. 2. Identification of the class of eligible building envelope component or the class of qualified energy property in which the component or property is included. 3. The make, model number, and any other appropriate identifiers of the component or property. 4. A statement that the component is an eligible building envelope component or the property is qualified energy property. In the case of a certification provided after June 1, 2009, this statement may be provided only for components that are eligible building envelope components and property that is qualified energy property under the rules applicable to components and property placed in service after February 17, A manufacturer's certification statement must contain any of the following statements that are applicable: 1. In the case of an exterior window, skylight, or door (other than a storm window or storm door), a statement that the exterior window, skylight, or door has a U factor and SHGC of 0.30 or below. 2. In the case of a storm window, the classes of exterior window (e.g., single pane; double pane, clear glass; double pane, Low-E coating) over which the storm window may be installed and that, in combination with the storm window, will have a U factor and SHGC of 0.30 or below. 3. In the case of a storm door, the classes of exterior door (e.g., 1¾" insulated steel, 50% or less glazing, double pane, clear glass) over which the storm door may be installed and that, in combination with the storm door, will have a U factor and SHGC of 0.30 or below. 11

22 A manufacturer's certification statement must contain a declaration, signed by a person currently authorized to bind the manufacturer in these matters, in the following form: Under penalties of perjury, I declare that I have examined this certification statement, and to the best of my knowledge and belief, the facts are true, correct, and complete. The Energy Star label designates that the product has met energy efficiency guidelines set by the Environmental Protection Agency (EPA) and the Department of Energy (DOE). Not all Energy Star labeled building envelope components qualify for the tax credit under IRC Sec. 25C. The component must meet the definition of an eligible building envelope component in IRC Sec. 25C. Taxpayers can no longer rely on an Energy Star label in claiming the IRC Sec. 25C credit for exterior windows and skylights placed in service after the enactment of the American Recovery and Reinvestment Act of Similarly, an Energy Star label does not establish that a product is qualified energy property. The product must meet the definition of qualified energy property in IRC Sec. 25C. The term energy efficient building property includes the following: An electric heat pump water heater which yields an energy factor of at least 2.0 in the standard Department of Energy test procedure or an electric heat pump which achieves the highest efficiency tier established by the Consortium for Energy Efficiency, as in effect on January 1, A central air conditioner which achieves the highest efficiency tier established by the Consortium for Energy Efficiency, as in effect on January 1, A natural gas, propane, or oil water heater which has either an energy factor of at least 0.82 or a thermal efficiency of at least 90%. A stove which uses the burning of biomass fuel to heat a dwelling unit located in the United States and used as a residence by the taxpayer, or to heat water for use in such a dwelling unit, and which has a thermal efficiency rating of at least 75%, as measured using a lower heating value. The qualifications necessary to get treatment as a qualified natural gas, propane, and oil furnace, or hot water boiler are as follows: A qualified natural gas furnace means any natural gas furnace that achieves an annual fuel utilization efficiency rate of not less than 95. A qualified natural gas hot water boiler means any natural gas hot water boiler which achieves an annual fuel utilization efficiency rate of not less than 90. A qualified propane furnace means any propane furnace which achieves an annual fuel utilization efficiency rate of not less than 95. A qualified propane hot water boiler means any propane hot water boiler which achieves an annual fuel utilization efficiency rate of not less than 90. A qualified oil furnace means any oil furnace which achieves an annual fuel utilization efficiency rate of not less than 90. A qualified oil hot water boiler means any oil hot water boiler which achieves an annual fuel utilization efficiency rate of not less than

23 The term advanced main air circulating fan means a fan used in a natural gas, propane, or oil furnace and which has an annual electricity use of no more than 2% of the total annual energy use of the furnace (as determined in the standard Department of Energy test procedures). The term biomass fuel means any plant-derived fuel available on a renewable or recurring basis, including agricultural crops and trees, wood and wood waste and residues (including wood pellets), plants (including aquatic plants), grasses, residues, and fibers. For purposes of this credit, the taxpayer is required to reduce the basis of any property for which the credit was received by the amount of the credit. For 2009 and 2010, nonrefundable credits, including the Non-business Homeowners Energy Credits under IRC Sec. 25C, can offset both regular tax (net of any allowable foreign tax credit) and alternative minimum tax (AMT) (IRC Sec. 26(a)(2)). A taxpayer may obtain the Non-business Homeowners Energy Credit under IRC Sec. 25C by properly completing Form 5695 (Residential Energy Credits) and attaching it to the taxpayer s Form The calculation of the Non-business Homeowners Energy Credit is done on page 1 of the form under Part I, Non-business Energy Property Credit. Page 2 of the Form 5695 is used to calculate the Residential Energy Efficient Property Credit, which will be discussed in detail next in this lesson, and total the two credits for reporting on a single line, Line 52 of the 2009 Form The Appendix to this lesson contains a reproduction of the IRS draft of page 1 of the 2010 Form 5695 as of July 8, Residential Energy Efficient Property Credit (IRC Sec. 25D) Just like the Non-business Homeowners Energy Credits allowed under IRC Sec. 25C, IRC Sec. 25D provides for the Residential Energy Efficient Property Credit, first introduced into law with the signing of the Energy Policy Act of The Residential Energy Efficient Property Credit under IRC Sec. 25D is similar. Like the IRC Sec. 25C Credit provided to individual taxpayers, it is based on the cost of energy efficient improvements taxpayers make to their United States residence. However, unlike the Non-business Homeowners Energy Credits, with one exception, the expenditures need not be made to a principal residence, thus allowing taxpayers to take the credit on multiple residences located in the United States. There are other similarities in the history of the Code Sections. Like IRC Sec. 25C, IRC Sec. 25D was originally effective for property placed in service after December 31, 2005, for taxable years ending after December 31, It too was set to sunset (end) after the 2007 tax year. However, unlike the Non-business Homeowners Energy Credit, during 1986, with the passage of the Tax Relief and Health Care Act of 2006, P.L , the credit was extended through December 31, So this credit, unlike the IRC Sec. 25C, did not take the 2008 tax year off and has been available consistently since January 1, Once again, the Emergency Economic Stabilization Act of 2008 came to the rescue and reinstated the credit for tax years through December 31, For 2008 and 2009, nonrefundable credits, including the credit for the Residential Energy Efficient Property Credit under IRC Sec. 25D, can offset both regular tax (net of any allowable foreign tax credit) and alternative minimum tax (AMT) (IRC Sec. 26(a)(2)). Although nonrefundable, the taxpayer has the ability to carry forward any unused credits to future tax years. 13

24 If a credit for residential energy efficient property is allowed, the basis of the property is reduced by the amount of the credit. Also, similar to the Non-business Homeowners Energy Credit, some of the other rules and definitions have been modified as the law has evolved from its original introduction into the law by the Energy Policy Act of 2005 right up through the American Recovery and Reinvestment Act of 2009, P.L The current rules follow. In general, the Residential Energy Efficient Property Credit under IRC Sec. 25D provides a nonrefundable credit for 30% of certain expenditures that increase the energy efficiency of the taxpayer s U.S. residence. Qualifying expenditures include: Qualified solar electric property expenditures; Qualified solar water heating property expenditures; Qualified fuel cell property expenditures; Qualified small wind energy property expenditures; Qualified geothermal heat pump property expenditures. The last two, qualified small wind energy property expenditures and qualified geothermal heat pump property expenditures, were added to the law under the 2008 Energy Act, one part of the Emergency Economic Stabilization Act of After the 2008 Act, the credit limitations were as follows: The credit allowed for any tax year shall not exceed $2,000 with respect to any qualified solar electric property expenditures (no limitations after 2008); $2,000 with respect to any qualified solar water heating property expenditures (no limitations after 2008); $500 with respect to each half kilowatt of capacity of qualified fuel cell property (as defined in IRC Sec. 48(c)(1)) for which qualified fuel cell property expenditures are made. However, no credit will be allowed unless the property is certified for performance by the nonprofit Solar Rating Certification Corporation or comparable entity endorsed by the state in which the property is installed; $500 for each half kilowatt of capacity of qualified small wind energy property not to exceed $4,000 (no limitations after 2008) for which qualified small wind energy property expenditures are made; and $2,000 for any qualified geothermal heat pump property expenditures (no limitations after 2008). It is probably worth repeating that the 2008 Energy Act, a part of the Emergency Economic Stabilization Act of 2009, eliminated the $2,000 limitation on the credit allowed for a tax year for qualified solar electric property expenditures. Therefore, whereas in 2008 the maximum amount of expenditure to which the credit applied was $6,667 ($2,000 30%), there is no longer a maximum amount of expenditure to which the credit may be applied for tax years 2009 through

25 Example: During 2008, the taxpayer spends $10,000 on qualified solar electric property. The credit allowed for those expenditures is limited to $2,000 or 30% of $6,667. If the taxpayer makes those same expenditures in 2009, no limit applies, and the credit allowed is $3,000 (30% $10,000). Similarly, the American Recovery and Reinvestment Act of 2009 eliminated the credit caps for qualified solar water heating, geothermal heat pump, and small wind energy property. It did, however, retain the credit cap that had been established for qualified fuel cell property. The pre-2009 Recovery Act law limited the maximum amount of expenditures to $6,667 for both qualified solar water heating property expenditures and qualified geothermal heat pump property expenditures. The pre-2009 Recovery Act law limited expenditures to $1,667 for each 0.5 kilowatt of capacity, not to exceed $13,333, to purchase wind turbines that are qualified small wind energy property expenditures. All of these limitations on the expenditures and credits have been lifted. Example: During 2008, the taxpayer spends $10,000 on qualified solar water heating property. The credit allowed for those expenditures is limited to $2,000 or 30% of $6,667. If the taxpayer makes those same expenditures in 2009, no limit applies, and the credit allowed is $3,000 (30% $10,000). Example: During 2008, the taxpayer spends $10,000 on qualified geothermal heat pump property. The credit allowed for those expenditures is limited to $2,000 or 30% of $6,667. If the taxpayer makes those same expenditures in 2009, no limit applies, and the credit allowed is $3,000 (30% $10,000). Example: During 2008, the taxpayer spends $100,000 on qualified small wind energy property that provided 5 kilowatts of capacity. The credit allowed for those expenditures is limited to $4,000 or 30% of $13,333 ($1,667 for each half kilowatt limited to 4 kilowatts). If the taxpayer makes those same expenditures in 2009, no limit applies, and the credit allowed is $30,000 (30% $100,000). This nonrefundable credit is allowed for both regular and alternative minimum tax (AMT) through Although nonrefundable, the taxpayer has the ability to carry forward any unused credits to future tax years. IRC Sec. 25D(d)(1) defines a qualified solar water heating property expenditure as an expenditure for property to heat water for use in a dwelling unit located in the United States and used as a residence by the taxpayer if at least half of the energy used by such property for such purpose is derived from the sun. There is no credit for solar water heating property used to heat a swimming pool. 15

26 IRC Sec. 25D(d)(2) says that a qualified solar electric property expenditure is an expenditure for property that uses solar energy to generate electricity for use in a dwelling unit located in the United States that is used as a residence by the taxpayer. It is interesting to note that in both the instant case and many of the other qualified property types, there is no requirement that the residence be the taxpayer s principal residence and the taxpayer is allowed to take the credit on multiple residences. On the other hand, IRC Sec. 25D(d)(3) defines a qualified fuel cell property expenditure as an expenditure for qualified fuel cell property (as defined in IRC Sec. 48(c)(1)) installed on or in connection with a dwelling unit located in the United States and used as a principal residence (within the meaning of IRC Sec. 121) by the taxpayer. This is the only expenditure under the Residential Energy Efficient Property Credit that has the principal residence requirement. In the case of any dwelling unit with respect to which qualified fuel cell property expenditures are made and which is jointly occupied and used during any calendar year as a residence by two or more individuals, the following rules shall apply: The maximum amount of such expenditures that may be taken into account by all of the individuals with respect to the dwelling unit during such calendar year shall be $1,667 for each half kilowatt of capacity of qualified fuel cell property (as defined in IRC Sec. 48(c)(1)). The expenditures allocated to any individual for the taxable year in which the calendar year ends shall be an amount equal to the lesser of the amount of expenditures made by that individual with respect to the dwelling during the calendar year or the maximum legislated amount of those expenditures as discussed previously in ratio to that one individual s qualified expenditures in relation to the total expenditures made by all of the individuals with respect to the dwelling during that calendar year. IRC Sec. 25D(d)(4) defines qualified small wind energy property expenditure as an expenditure or property which uses a wind turbine to generate electricity for use in connection with a dwelling unit located in the United States and used as a residence by the taxpayer. IRC Sec. 25D(d)(5) defines a qualified geothermal heat pump property expenditure to be an expenditure for qualified geothermal heat pump property installed on or in connection with a dwelling unit located in the United States and used as a residence by the taxpayer. Qualified geothermal heat pump property means any equipment that uses the ground or ground water as a thermal energy source to heat such a dwelling unit or as a thermal energy sink to cool such dwelling unit, and meets the requirements of the Energy Star program which are in effect at the time that the expenditure for such equipment is made. Expenditures for labor costs properly allocable to the onsite preparation, assembly, or original installation of the property described above and for piping or wiring to interconnect such property to the dwelling unit shall be taken into account for purposes of the calculation of the credit. No expenditure relating to a solar panel or other property installed as a roof (or part of a roof) shall fail to be treated as qualifying property for the calculation of the credit solely because it constitutes a structural component of the structure on which it is installed. So, if a taxpayer with an old roof decides to replace that old roof with a new roof made entirely of solar panels it would be eligible for the credit. Of course, the basis of the roof would be reduced by the amount of the credit. 16

27 Any expenditures that are properly allocable to a swimming pool, hot tub, or any other energy storage medium that has a function other than the function of such storage shall not be taken into account for purposes of computing the Residential Energy Efficient Property Credit. If an individual is a tenant-stockholder (as defined in IRC Sec. 216) in a cooperative housing corporation (also as defined in IRC Sec. 216), that individual shall be treated as having made his or her tenant-stockholder's proportionate share (as defined in IRC Sec. 216(b)(3)) of any expenditures of that corporation. In the case of an individual who is a member of a condominium management association with respect to a condominium that the individual owns, that individual shall be treated as having made his or her proportionate share of any expenditures of the condominium management association. The term condominium management association means an organization that meets the requirements of paragraph (1) of IRC Sec. 528(c) (other than subparagraph (E) thereof) with respect to a condominium project of which substantially all of the units are used as residences. In certain cases, where less than 80% of the use of an item is for non-business purposes, only that portion of the expenditures for such item which is properly allocable to use for non-business purposes shall be taken into account. In general, any expenditure with respect to an item shall be treated as made when the original installation of the item is completed. However, when expenditures are made in connection with the building construction or reconstruction of a structure, those expenditures shall be treated as made when the original use of the constructed or reconstructed structure by the taxpayer begins. If a Residential Energy Efficient Property Credit is allowed for any expenditure with respect to any property, the increase in the basis of that property shall be reduced by the amount of the credit so allowed. With IRS Notice , the IRS has issued interim guidance on certification procedures that taxpayers may claim for costs of energy efficiency home improvements related to the credit for residential energy efficient property under IRC Sec. 25D for taxable years beginning after December 31, The notice provides procedures that manufacturers may follow to certify that property satisfies certain conditions of IRC Sec. 25D, as well as guidance regarding the conditions under which taxpayers seeking to claim the IRC Sec. 25D credit may rely on a manufacturer's certification. The IRS and the Treasury Department state in the notice that they expect that the regulations will incorporate the rules set forth in Notice The manufacturer of property may certify to a taxpayer that the property meets certain requirements that must be satisfied to claim the credit under IRC Sec. 25D by providing the taxpayer with a certification statement. The manufacturer may provide the certification statement by including a written copy of the statement with the packaging of the property, in printable form on the manufacturer's website, or in any other manner that will permit the taxpayer to retain the certification statement for tax recordkeeping purposes. Unless the IRS publishes a withdrawal of a manufacturer s right to certify property, a taxpayer may rely on a manufacturer's certification in determining whether property is eligible for the credit under IRC Sec. 25D. A taxpayer is not required to attach the certification statement to 17

28 the return on which the credit is claimed. However, a taxpayer claiming a credit for residential energy efficient property should retain the certification statement as part of the taxpayer's records for purposes of IRC Reg. Sec (a). A manufacturer's certification statement must contain the following: The name and address of the manufacturer. Identification of the property as a solar electric property, solar water heating property, fuel cell property, small wind energy property, or geothermal heat pump property. The make, model number, and any other appropriate identifiers of the property. A statement that the property is made by the manufacturer. In the case of solar water heating property, a statement describing the circumstances in which at least half the energy used by the property to heat water for use in a dwelling unit is derived from the sun. In the case of solar water heating property, a statement that the property is certified for performance by the non-profit Solar Rating Certification Corporation or a comparable entity endorsed by the government of the state in which such property is installed. In the case of fuel cell property, a statement that the property is a fuel cell power plant that has a nameplate capacity of at least 0.5 kilowatt of electricity using an electrochemical process. In the case of a fuel cell property, a statement that the property is a fuel cell power plant that has an electricity-only generation efficiency greater than 30%. In the case of fuel cell property, a statement specifying the capacity of the property in half kilowatts. In the case of small wind energy property, a statement specifying the capacity of the wind turbine in half kilowatts. In the case of geothermal heat pump property, a statement that the property meets the requirements of the Energy Star program that are in effect at the time that the expenditure for such equipment is actually made. A manufacturer's certification statement must contain a declaration, signed by a person currently authorized to bind the manufacturer in such matters, in the following form: Under penalties of perjury, I declare that I have examined this certification statement, and to the best of my knowledge and belief, the facts presented are true, correct, and complete. A taxpayer may obtain the Residential Energy Efficient Property Credit under IRS Sec. 25D by properly completing Form 5695 (Residential Energy Credits) and attaching it to the taxpayer s Form The calculation of the Residential Energy Efficient Property Credit is done on page 2 of the form under Part II, Residential Energy Efficient Property Credit. Page 1 of the Form 5695 is used to calculate the Non-business Homeowners Energy Credit, which is discussed in detail in the previous section of this lesson. Also on page 2 is where the taxpayer sums the two credits for reporting on a single line, Line 52 of the 2010 Form The Appendix to this lesson contains a reproduction of the IRS draft of page 2 of the 2010 Form 5695 as of July 8,

29 Business Incentives New Energy Efficient Home Credit (IRC Sec. 45L) IRC Sec. 45L was added to the Internal Revenue Code by the Energy Policy Act of 2005, P.L , effective for qualified new energy efficient homes acquired after December 31, 2005, in taxable years ending after December 31, 2005 and through December 31, During 2006, with the passage of the Tax Relief and Health Care Act of 2006, P.L , the credit was extended through December 31, The Emergency Economic Stabilization Act of 2008, P.L , further extended the credit to new energy efficient homes acquired before January 1, As of October 2010, Congress has not enacted legislation to extend this credit. The New Energy Efficient Home Credit allows eligible contractors to claim a $1,000 or $2,000 credit for each qualified new energy efficient home purchased for use as a personal residence after December 31, 2005, and before January 1, Although the credit addresses new energy efficient homes, construction as defined in the regulation includes substantial reconstruction and rehabilitation. Therefore, a home doesn t necessarily have to be new to qualify for the credit. These credits apply only to homes sold by contractors for use as personal residences. IRC Sec. 45L does not define the actual phrase used in the Code Section of for use as a residence. Notice, it does not say principal residence. Therefore, it is likely that the IRS will use a definition similar to the definition that applies for purposes of the vacation home disallowance rules under IRC Sec. 280A. A qualified new energy efficient home is a dwelling unit that is located in the United States, substantially completed after August 8, 2005, and satisfies the prescribed energy saving requirements. A home meets the energy saving requirements if it: Is certified in writing to have a level of annual heating and cooling energy consumption that is at least 50% below the annual level of heating and cooling energy consumption of a comparable dwelling unit that is constructed in accordance with the standards of chapter 4 of the 2003 International Energy Conservation Code in effect on August 8, 2005, and with heating and cooling equipment efficiencies corresponding to the minimum allowed under the regulations established by the Department of Energy s National Appliance Conservation Act of 1987 and in effect at the time of completion of construction; and the building envelope component improvements must account for at least 10% (20% of the 50%) of the energy consumption savings (generally the building envelope includes everything that separates the interior of a building from its outdoor environment, including the windows, walls, foundation, basement slab, ceiling, roof, and insulation); Is a manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards and that meets the requirements above; or Is a manufactured home that conforms to Federal Manufactured Home Construction and Safety Standards and either meets the requirements above, substituting 30% for 50%, or meets the requirements established by the administrator of the Environmental Protection Agency under the Energy Star Labeled Homes program. 19

30 An eligible contractor is either the person or entity that constructed the qualifying home. In the case of a manufactured home, the eligible contractor is the producer of the manufactured home. Again, it is worth noting that construction can include substantial reconstruction and rehabilitation. The amount of the credit is $2,000 for a home or manufactured home that meets the 50% less consumption test. The credit is $1,000 for a manufactured home that meets the 30% less consumption test or meets the requirements established by the administrator of the Environmental Protection Agency under the Energy Star Labeled Homes program. The contractor s tax basis in the home on which a New Energy Efficient Home Credit is taken is reduced by the amount of the credit. Expenditures taken into account in determining the IRC Sec. 47 rehabilitation credit or the IRC Sec. 48(a) energy credit cannot be taken into account in determining the IRC Sec. 45L new energy efficient home credit. Under IRC Sec. 45L, the contractor is required to obtain a certification in writing made in accordance with guidance prescribed by the Secretary, after consultation with the Secretary of Energy. Such guidance shall specify procedures and methods for calculating energy and cost savings. Furthermore, the certification in writing shall be made in a manner which specifies in readily verifiable fashion the energy efficient building envelope components and energy efficient heating or cooling equipment installed and their respective rated energy efficiency performance. The guidance provided is IRS Notices and These notices address the process contractors should use to obtain the required written certification that a property qualifies as an energy efficient home under the rules of IRC Sec. 45L. IRS Notice applies to manufactured homes and IRS Notice applies to all other homes. Both notices provide that the contractor claiming the credit need not attach the certificate to the income tax return. Instead, the contractor is required to retain the certificate to document that the credit is valid. An eligible certifier is a person who is not related to the eligible contractor and has been accredited or otherwise authorized by the Residential Energy Services Network (RESNET) or an equivalent rating network to use energy performance measurement methods approved by RESNET or the equivalent rating network. An employee or other representative of a utility or local building regulatory authority qualifies as an eligible certifier if the employee or representative has been accredited or otherwise authorized by RESNET or an equivalent rating network to use the approved energy performance measurement methods. Notice provides that a certification will be treated as satisfying the requirements of IRC Sec. 45L(c)(1) if all construction has been performed in a manner consistent with the design specifications provided to the eligible certifier and the certification contains the name, address, and telephone number of the eligible certifier, the address of the dwelling unit, and a statement by the eligible certifier that: The home has a projected level of annual heating and cooling energy consumption that is at least 50% below the annual level of heating and cooling energy consumption of a reference dwelling unit in the same climate zone; 20

31 The building envelope component improvements alone account for a level of annual heating and cooling energy consumption that is at least 10% below the annual level of heating and cooling energy consumption of a reference home in the same climate zone; and Heating and cooling energy and cost savings have been calculated as provided in Residential Energy Services Network (RESNET) Publication No (November 17, 2005) or (June 1, 2006) or in accordance with an equivalent calculation procedure. The contractor must also retain a statement by the eligible certifier that field inspections of the home performed by the eligible certifier during and after the completion of construction have confirmed that all features of the home affecting the heating and cooling energy consumption comply with the design specifications provided to the eligible certifier. For builders who build at least 85 homes a year or build subdivisions with the same floor plan using the same subcontractors, the eligible certifier may use the sampling protocol found in the current Energy Star for Homes Sampling Protocol Guidelines instead of inspecting every home. The sampling protocols can be found at IRS Notice also requires the certifier to provide to the contractor for retention a list identifying: The home s energy efficient building envelope components and their respective energy performance rating, and The energy efficient heating and cooling equipment installed in the home and the energy efficiency performance of such equipment as rated under applicable Department of Energy Appliance Standards test procedures. The certificate must identify any listed software program used to calculate energy consumption and must contain a declaration, applicable to the certification and any accompanying documents, signed by a person currently authorized to bind the eligible certifier in these matters, in the following form: Under penalties of perjury, I declare that I have examined this certification, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete. IRS Notice has certification requirements for manufactured homes that are similar to those in Notice for all homes other than manufactured homes. The IRS created and will maintain a public list of software programs that may be used to calculate energy consumption for purposes of providing a certification. Go to website for this list of approved software. A taxpayer may obtain the New Energy Efficient Home Credit under IRC Sec. 45L by properly completing Form 8908 (Energy Efficient Home Credit). Partnerships and S corporations report the amount of the credit as a flow-through item on Schedules K and K-1. All other taxpayers report the calculated amount of the credit from Form 8908 on Line 1p of Form 3800 (General Business Credit). The 2009 draft Form 8908 (Energy Efficient Home Credit) is reproduced in this lesson s Appendix. 21

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37 SELF-STUDY QUIZ Determine the best answer for each question below. Then check your answers against the correct answers in the following section. 3. What is the aggregate amount of Non-business Homeowners Energy Credits allowed to an individual taxpayer for tax years beginning in 2009 and 2010? a. $500. b. $1,500 less amounts taken in years prior to c. $1, You are preparing a 2010 Form 1040 tax return. You review the prior year s 2009 Form 1040 and notice that the taxpayers took a $600 Non-business Homeowners Energy Credit. The taxpayers supply you with information that supports the fact that they had new energy efficient windows installed in their principal residence during 2010, and they further provide you with the proper manufacturer s certification. The cost of the windows is $7,500. What is the amount of the potentially allowable Non-business Homeowners Energy Credit on their 2010 individual income tax return? a. $0. b. $200. c. $900. d. $1, The Non-business Homeowners Energy Credits allowed under IRC Sec. 25C may be based on the cost of an energy efficient building envelope component. Which of the following is considered a qualified building envelope component? a. Qualified natural gas furnace. b. Energy-saving refrigerator. c. Skylight. 6. Jay, your client, tells you that during 2010, he replaced his old central air conditioning system with a new system. The person who installed the new system told Jay it is more energy efficient than his old one and he can save money on his taxes. What should you do? a. Tell the taxpayer that a new central air conditioner does not qualify for the credit. b. Complete Page 2 of Form 5695 and calculate the Residential Energy Efficient Property Credit. c. Tell the client to obtain the proper certification so that you will be able to calculate the Non-business Homeowners Energy Credit on his tax return. 27

38 7. A taxpayer may obtain the Residential Energy Efficient Property Credit by filing which tax form? a. Form b. Form 5695, Parts I and III. c. Form 5695, Parts II and III. d. Form The New Energy Efficient Home Credit is: a. A $1,500 aggregate credit allowed for energy improvements to a taxpayer s U.S. principal residence. b. A 30% credit, with some limitations allowed to a taxpayer for energy efficient improvements to a taxpayer s U.S. residence. c. A $1,000 or $2,000 credit is allowed to the builder for each qualified new energy efficient home purchased. d. Solar electric property. 28

39 SELF-STUDY ANSWERS This section provides the correct answers to the self-study quiz. If you answered a question incorrectly, reread the appropriate material. (References are in parentheses.) 3. What is the aggregate amount of Non-business Homeowners Energy Credits allowed to an individual taxpayer for tax years beginning in 2009 and 2010? (Page 9) a. $500. [This answer is incorrect. $500 was the aggregate amount of the credit that was allowed through the year 2007.] b. $1,500 less amounts taken in years prior to [This answer is incorrect. When the credit was reinstated and later modified, the new credit limit does not have to be reduced by the $500 aggregate amount of the credit that was allowed through the year 2007.] c. $1,500. [This answer is correct. The American Recovery and Reinvestment Act increased the lifetime credit limitation from $500 to $1,500 and allows the full $1,500 for taxpayers who exhausted their $500 lifetime limitation during 2006 and 2007.] 4. You are preparing a 2010 Form 1040 tax return. You review the prior year s 2009 Form 1040 and notice that the taxpayers took a $600 Non-business Homeowners Energy Credit. The taxpayers supply you with information that supports the fact that they had new energy efficient windows installed in their principal residence during 2010, and they further provide you with the proper manufacturer s certification. The cost of the windows is $7,500. What is the amount of the potentially allowable Non-business Homeowners Energy Credit on their 2010 individual income tax return? (Page 9) a. $0. [This answer is incorrect. The taxpayer made a qualified expenditure for energy efficient building property and is eligible for a Non-business Homeowners Energy Credit on his or her individual income tax return under IRC Sec. 25C.] b. $200. [This answer is incorrect. The $200 limitation for windows was for years prior to The Non-business Homeowners Energy Credit for tax years 2009 and 2010 no longer has separate limitations for separate kinds of property.] c. $900. [This answer is correct. The overall aggregate limitation on the Nonbusiness Homeowners Energy Credit for tax years 2009 and 2010 is $1,500. The taxpayer had already taken a $600 Non-business Homeowners Energy Credit on his or her 2009 Form 1040 and was therefore limited to a maximum credit on his or her individual income tax return of $900. $900 is the lesser of the taxpayer s remaining aggregate Non-business Homeowners Energy Credit of $900, the taxpayer s allowable aggregate credit of $1,500, or $2,250 which is 15% of the cost of the windows (7,500 15%).] d. $1,500. [This answer is incorrect. The overall aggregate limitation on the Non-business Homeowners Energy Credit for tax years 2009 and 2010 is $1,500. However, the taxpayers in this case are not entitled to the full amount because they took a Nonbusiness Homeowners Energy Credit on their 2009 Form 1040.] 29

40 5. The Non-business Homeowners Energy Credits allowed under IRC Sec. 25C may be based on the cost of an energy efficient building envelope component. Which of the following is considered a qualified building envelope component? (Page 10) a. Qualified natural gas furnace. [This answer is incorrect. Although potentially eligible for the Non-business Homeowners Energy Credit, a qualified natural gas furnace would qualify as qualified energy property and not a qualified building envelope component.] b. Energy-saving refrigerator. [This answer is incorrect. There is no tax credit available for purchasing an energy saving refrigerator. It is not considered either qualified energy property or a qualified building envelope component, and is not eligible for the Nonbusiness Homeowners Energy Credit.] c. Skylight. [This answer is correct. Under IRC Sec. 25C, a skylight qualifies as a qualified building envelope component provided it is specifically and primarily designed to reduce heat loss or gain of a dwelling unit when installed in or on such dwelling unit and meets the prescriptive criteria for such material or system established by the 2009 International Energy Conservation Committee.] 6. Jay, your client, tells you that during 2010, he replaced his old central air conditioning system with a new system. The person who installed the new system told Jay it is more energy efficient than his old one and he can save money on his taxes. What should you do? (Page 11) a. Tell the taxpayer that a new central air conditioner does not qualify for the credit. [This answer is incorrect. A central air conditioner may qualify for the Non-business Homeowners Energy Credit on Jay s 2010 tax return with the required documentation.] b. Complete Page 2 of Form 5695 and calculate the Residential Energy Efficient Property Credit. [This answer is incorrect. Per IRC Sec. 25D, a new central air conditioner is not considered a qualifying expenditure under the more favorable Residential Energy Efficient Property Credit which is reported on Page 2 of Form 5695.] c. Tell the client to obtain the proper certification so that you will be able to calculate the Non-business Homeowners Energy Credit on his tax return. [This answer is correct. A central air conditioner may qualify for the Non-business Homeowners Energy Credit with a proper manufacturer s certification. If the taxpayer is able to obtain a proper manufacturer s certification, you should properly calculate the Non-business Homeowners Energy Credit on Page 1 of Form 5695.] 30

41 7. A taxpayer may obtain the Residential Energy Efficient Property Credit by filing which tax form? (Page 18) a. Form [This answer is incorrect. This form is for the Energy Efficient Home Credit available to builders of qualified energy efficient homes.] b. Form 5695, Parts I and III. [This answer is incorrect. Parts I and III of Form 5695 are used to calculate and obtain the Non-business Homeowners Energy Credit.] c. Form 5695, Parts II and III. [This answer is correct. Parts II and III of Form 5695 are used to calculate the Residential Energy Efficient Property Credit for expenditures for Qualified Solar Electric Property expenditures, Qualified Solar Water Heating Property expenditures, Qualified Fuel Cell Property expenditures, Qualified Small Wind Energy Property expenditures, or Qualified Geothermal Heat Pump Property expenditures.] d. Form [This answer is incorrect. This Form is used to calculate and report depreciation and amortization.] 8. The New Energy Efficient Home Credit is: (Page 19) a. A $1,500 aggregate credit allowed for energy improvements to a taxpayer s U.S. principal residence. [This answer is incorrect. This is a description of the current Nonbusiness Homeowners Energy Credit.] b. A 30% credit, with some limitations allowed to a taxpayer for energy efficient improvements to a taxpayer s U.S. residence. [This answer is incorrect. This is a description of the current Residential Energy Efficient Property Credit.] c. A $1,000 or $2,000 credit is allowed to the builder for each qualified new energy efficient home purchased. [This answer is correct. Unlike the other two credits allowed for energy efficiencies that are for the owner of a residence or principal residence, this credit is for eligible contractors for residences sold (IRC Sec. 45L).] d. Solar electric property. [This answer is incorrect. Solar electric property doesn t meet the requirements of a qualified building envelope component under IRC Sec. 25C, but it is eligible for the more beneficial Residential Energy Efficient Property Credit under IRC Sec. 25D.] 31

42 32

43 EXAMINATION FOR CPE CREDIT Lesson 2 Determine the best answer for each question below. Then log onto our Online Grading Center at OnlineGrading.Thomson.com to record your answers. 2. In December of 2008, a taxpayer had new energy efficient windows with the proper manufacturer s certification installed in his home. The cost of the windows and their installation was $7,500. Under IRC Sec. 25C, what is the amount of the potentially allowable Non-business Homeowners Energy Credit on the taxpayer s 2008 individual income tax return? a. $0. b. $200. c. $1,500. d. $2, You are preparing a 2010 Form 1040 tax return. During 2007, the taxpayer took a $300 Non-business Homeowners Energy Credit. He supplies you with information that supports the fact that he had new energy efficient windows installed in his home during 2010, and he further provides you with the proper manufacturer s certification. The cost of the windows was $10,000. What is the amount of the potentially allowable Non-business Homeowners Energy Credit on his 2010 individual income tax return? a. $700. b. $1,200. c. $1,500. d. $2, Which improvement is not eligible for the Non-business Homeowners Energy Credit? a. Exterior windows. b. Exterior doors. c. Natural gas hot water boiler. d. Solar panels. 33

44 5. A taxpayer makes $100,000 of qualified solar electric property expenditures on a U.S. residence on December 15, Additionally, he spends $10,000 on its proper installation. The taxpayer s regular tax liability for 2010 is $50,000, which is $5,000 more than his alternative minimum tax liability. By how much will he be able to reduce his tax liability in 2010 using the Residential Energy Efficient Property Credit under IRC Sec. 25D? a. $2,000. b. $5,000. c. $30,000. d. $33, Joe and Martha purchased qualified geothermal heat pump property that cost $25,000 and whose installation cost $5,000 for their U.S. residence on December 15, Joe and Martha s regular tax liability for that year was $50,000, which was $5,000 more than their alternative minimum tax liability. If they make the same expenditures in 2010, by how much will they be able to reduce their tax liability in 2010? a. $2,000. b. $9,000. c. $15,000. d. $16, If a manufactured home meets the requirements established by the administrator of the Environmental Protection Agency under the Energy Star Labeled Homes program, who is eligible for the New Energy Efficient Home Credit and for what amount? a. The producer is eligible for a $1,000 credit. b. The purchaser is eligible for a $1,000 credit. c. The producer is eligible for a $2,000 credit. d. The purchaser is eligible for a $2,000 credit. 34

45 Lesson 3: Green Incentives for Travel Travel Incentives for the Individual Learning Objectives Completion of this lesson will enable you to: Differentiate between the credits available to individual and business taxpayers for improving the energy efficiency associated with travel, determine their application and identify their requirements. New Qualified Plug-in Electric Drive Motor Vehicles Credit (IRC Sec. 30D) The New Qualified Plug-in Electric Drive Motor Vehicles Credit under IRC Sec. 30D was first added to the Internal Revenue Code with the signing of the Emergency Economic Stabilization Act, P.L However, it only applies (as written in the Act) to vehicles purchased during The American Recovery and Reinvestment Act of 2009 totally changed the Code Section and the calculation of the New Qualified Plug-in Electric Drive Motor Vehicles Credit under IRC Sec. 30D. It is less likely that the practitioner will come across a taxpayer who purchased a New Qualified Plug-in Electric Drive Motor Vehicle in 2009, as few were on the market. General Motors expects to begin selling the Chevrolet Volt, a qualified vehicle, late in However, just in case someone who purchased a qualified vehicle during 2009 requires your services, you must know how the credit is calculated and the rules surrounding it. Applies to 2009 Only During 2009 there shall be allowed as a credit against a taxpayer s income tax for the taxable year an amount equal to the applicable amount with respect to each new qualified plug-in electric drive motor vehicle placed in service by the taxpayer during the taxable year. The applicable amount is the sum of $2,500 plus $417 for each kilowatt hour of traction battery capacity in excess of 4 kilowatt hours. The traction battery capacity of a Toyota Prius is 1.4 kilowatts, so it is evident that this credit was strictly designed for electric vehicles and not hybrid vehicles. Furthermore, the credit for 2009 is limited, based on the gross vehicle weight rating of the vehicle, as follows: $7,500, in the case of any new qualified plug-in electric drive motor vehicle with a gross vehicle weight rating of not more than 10,000 pounds; $10,000, in the case of any new qualified plug-in electric drive motor vehicle with a gross vehicle weight rating of more than 10,000 pounds but not more than 14,000 pounds; $12,500, in the case of any new qualified plug-in electric drive motor vehicle with a gross vehicle weight rating of more than 14,000 pounds but not more than 26,000 pounds; and $15,000, in the case of any new qualified plug-in electric drive motor vehicle with a gross vehicle weight rating of more than 26,000 pounds. 35

46 For 2009, a new qualified plug-in electric drive motor vehicle means a motor vehicle: That draws propulsion using a traction battery with at least 4 kilowatt hours of capacity; That uses an off board source of energy to recharge the battery; Which, in the case of a passenger vehicle or light truck that has a gross vehicle weight rating of not more than 8,500 pounds, has received a certificate of conformity under the Clean Air Act and meets or exceeds the equivalent qualifying California low emission vehicle standard under section 243(e)(2) of the Clean Air Act for that make and model year; and In the case of a vehicle having a gross vehicle weight rating of 6,000 pounds or less, the Bin 5 Tier II emission standard established in regulations prescribed by the Administrator of the Environmental Protection Agency under section 202(i) of the Clean Air Act for that make and model year vehicle; and In the case of a vehicle having a gross vehicle weight rating of more than 6,000 pounds but not more than 8,500 pounds, the Bin 8 Tier II emission standard which is so established; The original use of which commences with the taxpayer in the United States; That is acquired for use or lease by the taxpayer and not for resale; and That is made by a manufacturer. This was meant to be a temporary credit. The full credit was only meant for the first 250,000 new qualified plug-in electric drive motor vehicles. Once 250,000 new qualified plug-in electric drive motor vehicles are sold for use in the United States, the credit begins to phase out. A taxpayer may only take 50% of the otherwise allowable credit for the first two calendar quarters following the sale of 250,000 qualified plug-in electric drive motor vehicles. A taxpayer may only take 25% for the third and fourth calendar quarters following the sale of 250,000 qualified plug-in electric drive motor vehicles per manufacturer. After that, no credit may be taken. For non-business use, this credit is nonrefundable and may not be carried forward as it can for business purposes. Originally, the section was meant to expire for any property purchased after December 31, Applies to 2010 and Beyond The American Recovery and Reinvestment Act of 2009, P.L , Section 1141(a), amended IRC Sec. 30D and is effective for vehicles acquired after December 31, First, for 2009 the credit was allowed for vehicles that had a gross vehicle weight of greater than 14,000 pounds. In fact, vehicles with a gross vehicle weight of greater than 14,000 pounds were allowed to take a larger credit than vehicles with a gross vehicle weight of less than 14,000 pounds (see the discussion above). For any new qualified plug-in electric drive motor vehicle purchased after December 31, 2009, the maximum gross vehicle weight is 14,000 pounds, and vehicles that weigh more get no credit whatsoever. 36

47 Second, the limitations that ran from $7,500 to $15,000 based on the gross vehicle weight of a new qualified plug-in electric drive motor vehicle were totally scrapped. For a new qualified plug-in electric drive motor vehicle purchased after December 31, 2009, there is now a single limitation for any vehicle. The maximum credit is simply $5,000 for any vehicle, no matter its weight. The calculation of the credit has changed also. The base amount of $2,500 remains unchanged. However, the calculation of the applicable amount of the new qualified plug-in electric drive motor vehicle credit is now based on $417 for each kilowatt hour in excess of 5 kilowatt hours instead of 4 kilowatt hours as required during The per-vehicle dollar limitation for 2010 and beyond for any new qualified plug-in electric drive motor vehicle is $2,500 plus $417 for each kilowatt hour of capacity in excess of 5 kilowatt hours. The amount of the credit may not exceed $5,000. Example 1: During 2009, a taxpayer purchases a new qualified plug-in electric drive motor vehicle whose gross vehicle weight is less than 10,000 pounds. The vehicle s lithium ion battery is rated at 16 kw hours. The taxpayer is eligible for a new qualified plug-in electric drive motor vehicle credit of $7,504 calculated as follows: Base Amount $2,500 Add: for each kilowatt hour in excess of 4 kilowatt hours $417 New Vehicle Battery 16 kw per hour (16 4) $417 $5,004 $7,504 Compare to Maximum $7,500 Lesser of Calculation or Maximum $7,500 Example 2: The same facts as example one, except the purchase occurs during The taxpayer would be entitled to a $5,000 new qualified plug-in electric drive motor vehicle credit calculated as follows: Base Amount $2,500 Add: for each kilowatt hour in excess of 5 kilowatt hours $417 New Vehicle Battery 16 kw per hour (16 5) $417 $4,587 $7,087 Compare to Maximum $5,000 Lesser of Calculation or Maximum $5,000 Unchanged from the original statute is the fact that the personal nonrefundable new qualified plug-in electric drive motor vehicle credit for a non-business vehicle does not carry forward. It is either use it or lose it in the year of purchase. 37

48 The definition of a new qualified plug-in electric drive motor vehicle has been updated from the original statute by the amendments introduced by the American Recovery and Reinvestment Act of For 2010 and beyond, a new qualified plug-in electric drive motor vehicle means a motor vehicle: The original use of which commences with the taxpayer, That is acquired for use or lease by the taxpayer and not for resale, That is made by a manufacturer, That is treated as a motor vehicle for purposes of title II of the Clean Air Act, That has a gross vehicle weight rating of less than 14,000 pounds, and That is propelled to a significant extent by an electric motor which draws electricity from a battery that has a capacity of not less than 4 kilowatt hours, and is capable of being recharged from an external source of electricity. The biggest difference from the original definition is that there is now a 14,000 pound gross vehicle weight limitation on the availability of the credit. Whereas, for vehicles purchased during 2009 there was not only no limitation, but heavier vehicles were allowed larger credits. Interestingly, the 4 kilowatt hour battery capacity hasn t changed even though the credit calculation now starts at 5 kilowatt hours and not the original 4 kilowatt hours. This means that a new qualified plug-in electric drive motor vehicle with a kilowatt hour rating of between 4 and 5 would still receive a credit equaling the base amount of $2,500. It is also interesting that the language of the code prior to its amendment by the American Recovery and Reinvestment Act of 2009 included the term traction battery in the description of a qualifying vehicle s propulsion requirements. The Code Section after its amendment by ARRA just uses the term battery. Both of the IRC Sec. 30Ds, both pre- and post-arra, require that the battery be recharged from an external source of electricity. The requirements that the original use of the vehicle must begin with the taxpayer, the vehicle is acquired for use or lease by the taxpayer and not for resale, and the vehicle is made by a manufacturer are the same as in the pre-2009 Recovery Act version of the Code Section. The requirement concerning Title II of the Clean Air Act did not apply under the pre-2009 American Recovery and Reinvestment Act version of the Code Section. This has the effect of barring low-speed motor vehicles from being eligible for the credit. However, vehicles that cannot qualify as motor vehicles for purposes of IRC Sec. 30D because they are low-speed may qualify for a new credit provided for by the 2009 American Recovery and Reinvestment Act with IRC Sec. 30. Also, vehicles that can't qualify as motor vehicles for purposes of IRC Sec. 30D because they have only two or three wheels may qualify for a credit under IRC Sec. 30. This will be discussed further in the next section of this lesson. Some of the emission standards requirements for passenger automobiles and light trucks with a gross vehicle weight rating of no more than 8,500 pounds were not imposed in the Code Section post-arra. 38

49 Under pre-2009 American Recovery and Reinvestment Act law, no credit for new qualified plug-in electric drive motor vehicles was available for vehicles purchased after December 31, As modified by the 2009 American Recovery and Reinvestment Act, the credit will be subject, as under pre-2009 Recovery Act law, to a phase-out, but won't be subject to any termination date. Unlike the phase-out rules for the pre-2009 American Recovery and Reinvestment Act credit, which count all U.S. sales of new qualified plug-in electric drive motor vehicles against a single limit, the phase-out rules, below, are applied with per-manufacturer limits. Also, under the pre Recovery Act credit, the number of vehicles that triggers the phase-out is 250,000, instead of 200,000 (see below), and the vehicles taken into account are those sold after December 31, 2008, instead of after December 31, The phase-out period will be the period beginning with the second calendar quarter following the calendar quarter that includes the first date on which the number of new qualified plug-in electric drive motor vehicles manufactured by the manufacturer of the new qualified plug-in electric drive motor vehicle and sold for use in the U.S. after December 31, 2009, is at least 200,000. The applicable percentage of the new qualified plug-in electric drive motor vehicles credit allowed during the phase-out period remains the same and is as follows: 50% for the first two calendar quarters of the phase-out period (IRC Sec. 30D(e)(3)(A)), 25% for the third and fourth calendar quarters of the phase-out period (IRC Sec. 30D(e)(3)(B)), and 0% for each later calendar quarter (IRC Sec. 30D(e)(3)(C)). Also, the IRS is required to issue regulations that provide for recapturing the benefit of any credit allowable for new qualified plug-in electric drive motor vehicles with respect to any property that stops being property eligible for the credit (IRC Sec. 30D(f)(5). This is a bit less than the specific direction the IRS was given to issue regulations addressing recapture in the case of a lease period of less than the economic life of a vehicle. However, even for a new qualified plug-in electric drive motor vehicle leased after December 31, 2009, this issue will matter. Until regulations are issued, the IRS has provided interim guidance with IRS Notice on how a vehicle manufacturer or a domestic distributor of foreign vehicles can certify that its motor vehicles meet the requirement to claim the IRC Sec. 30D credit and the amount of credit allowable for vehicles bought and placed in service in The IRS cautioned that the guidance only pertains to the version of IRC Sec. 30D before the recent amendments made by the American Recovery and Reinvestment Act of 2009 that are effective for vehicles purchased after A taxpayer may obtain the New Qualified Plug-in Electric Drive Motor Vehicles Credit under IRC Sec. 30D by properly completing Form 8936 (Qualified Plug-in Electric Drive Motor Vehicle Credit) and attaching it to the taxpayer s Form The calculation of the New Qualified Plug-in Electric Drive Motor Vehicles Credit for a personal use vehicle is done by completing Parts I and III, based on the draft form as of August 2, A draft of Form 8936 is provided in this lesson s Appendix. 39

50 Certain Plug-in Electric Vehicles Credit (IRC Sec. 30) The 2009 American Recovery and Reinvestment Act provides a credit, subject to limitations, equal to 10% of the cost of any qualified plug-in electric vehicle (defined below) placed in service by the taxpayer during the tax year. In amending IRC Sec. 30 to provide the credit for qualified plug-in electric vehicles, the 2009 American Recovery and Reinvestment Act struck from the text of the Code Section all of the provisions of the pre-2007 credit that were available for qualified electric vehicles. This credit is designed to provide a credit for certain low-speed vehicles and two- or three-wheeled vehicles acquired before January 1, The discussion that follows is with regard to IRC Sec. 30 after the American Recovery and Reinvestment Act of 2009 changes and applies to qualified plug-in electric vehicles acquired before January 1, 2012, and after February 17, The amount of the credit allowed cannot exceed $2,500 with respect to any one vehicle, nor is the credit available for any vehicle acquired after December 31, Just like the personal nonrefundable credit for new qualified plug-in electric drive motor vehicles, the personal nonrefundable credit for qualified plug-in electric vehicles is allowed for both regular and alternative minimum tax for However, personal non-business nonrefundable credits do not carry forward if they cannot be used in the present year. The code defines a qualified plug-in electric vehicle as a specified vehicle The original use of which commences with the taxpayer, That is acquired for use or lease by the taxpayer and not for resale, That is made by a manufacturer, That is manufactured primarily for use on public streets, roads, and highways, That has a gross vehicle weight rating of less than 14,000 pounds, and That is propelled to a significant extent by an electric motor which draws electricity from a battery that has a capacity of not less than 4 kilowatt hours (2.5 kilowatt hours in the case of a vehicle with two or three wheels), and is capable of being recharged from an external source of electricity. A specified vehicle means any vehicle that is a low-speed vehicle within the meaning of section of title 49 of the Code of Federal Regulations (CFR) (as in effect on February 17, 2009), or has two or three wheels. Section of title 49 of the CFR defines a low-speed motor vehicle as a four-wheeled vehicle with a gross vehicle weight rating (GVWR) of no more than 3,000 pounds with a capability of attaining speeds of no less than 20 mph and no more than 25 mph. Therefore, any four-wheeled qualified plug-in electric vehicle would need to meet those requirements, but they do not apply to two-wheeled or three-wheeled vehicles. The term capacity means, with respect to any battery, the quantity of electricity that the battery is capable of storing, expressed in kilowatt hours, as measured from a 100% state of charge to a 0% state of charge. The basis of any property for which a qualified plug-in electric vehicle credit is allowable shall be reduced by the amount of the credit so allowed, and no double benefit is allowed for this credit and the new qualified plug-in electric drive motor vehicle. The amount of any credit allowable for a new qualified plug-in electric drive motor vehicle shall be reduced by the amount of credit allowable as a qualified plug-in electric vehicle for such vehicle. 40

51 This credit, like the IRC Sec. 30D credit, is not allowed for property used outside of the United States. Also similarly, the IRS has been charged with writing regulations that will provide for recapturing the benefit of any credit allowable with respect to any property that ceases to be property eligible for the credit. A taxpayer may obtain the Qualified Plug-in Electric Vehicle Credit under IRC Sec. 30 by properly completing Form 8834 (Qualified Plug-in Electric and Electric Vehicle Credit) and attaching it to the taxpayer s Form The calculation of the Qualified Plug-in Electric Vehicle Credit for a personal use vehicle is done by completing Part I, Section A, Vehicle Information and Section C, Credit for Personal Use Part of Vehicle on page 1 of the form. Part II of the Form 8834 on page 2 only applies to qualified electric vehicle passive activity credits from prior years. Therefore, for any Qualified Plug-in Electric Vehicle placed in service after February 17, 2009, the taxpayer need only fill out page 1 of Form The 2010 draft form is provided in this lesson s Appendix. Alternative Motor Vehicle Credit (IRC Sec. 30B) The Alternative Motor Vehicle Credit, IRC Sec. 30B, was added to the Internal Revenue Code with the signing of the Energy Policy Act of 2005, P.L , and was effective for property placed in service after December 31, 2005, in taxable years ending after December 31, During 2008, the Emergency Economic Stabilization Act of 2008 (EESA), P.L , added subsection (d)(3)(d), effectively excluding plug-in vehicles for taxable years beginning after December 31, After all, plug-in vehicles did just get their own IRC Sec. 30D and got their very own credit. That subsection of the IRC was changed again during 2009 and now reads after December 31, 2009 as amended by the American Recovery and Reinvestment Act of 2009 (ARRA), P.L Two of the biggest changes to the alternative motor vehicle credit made by the American Recovery and Reinvestment Act of 2009 was its expansion to include a plug-in conversion credit for property placed in service after February 17, 2009, and before January 1, 2012, and making it a personal credit that can be used against the alternative minimum tax (AMT) in tax years beginning after December 31, 2008, through December 31, Aside from technical corrections due to changes in other Code Sections, some other changes of note made by the American Recovery and Reinvestment Act of 2009 include a change to the term motor vehicle and a change in the way the allowance of the personal credit is calculated. Prior to passage of the 2009 American Recovery and Reinvestment Act, the personal portion of the alternative motor vehicle credit, reduced by other nonrefundable personal credits and the foreign tax credit, could offset the excess of the regular tax liability over the tentative minimum tax for a tax year. With the passage of the American Recovery and Reinvestment Act of 2009, for tax years beginning after 2008 and before 2011, the alternative motor vehicle credit is a personal credit allowed against the alternative minimum tax. The amount of the alternative motor vehicle credit that a taxpayer may claim for the tax year is the sum of the following five items: 1. New qualified fuel cell motor vehicle credit, 2. New advanced lean burn technology motor vehicle credit, 41

52 3. New qualified hybrid motor vehicle credit, 4. New qualified alternative fuel motor vehicle credit, and 5. Plug-in conversion credit. A motor vehicle doesn't have to be used in a trade or business or for the production of income in order to qualify for the alternative motor vehicle credit or for any of its component credits. Thus, a personal use motor vehicle can qualify for the alternative motor vehicle credit. However, except for the plug-in conversion credit, the vehicle must be new. The credit amount is computed under a different formula for each type of alternative fuel vehicle, generally based on the vehicle's relative fuel efficiency. Let s look at each of the five components separately. 1. New Qualified Fuel Cell Motor Vehicle Credit A qualified fuel cell motor vehicle is propelled by power derived from one or more cells that convert chemical energy directly into electricity by combining oxygen with hydrogen fuel that is stored on board the vehicle and may or may not require reformation prior to use. These vehicles must also meet certain federal emission standards. The fuel cell motor vehicle credit consists of two parts, a base credit amount depending upon the gross vehicle weight rating (GVWR) of the qualifying vehicle and an additional credit amount based on fuel efficiency improvements compared to 2002 models. The credit applies to qualified vehicles purchased before The credit can range from $4,000 to $40,000 based on the weight of the vehicle. The credit amount can also be increased if specified benchmarks of fuel economy are met by the vehicle. The new qualified fuel cell motor vehicle credit determined with respect to a new qualified fuel cell motor vehicle placed in service by the taxpayer during the taxable year is as follows: $8,000 ($4,000 in the case of a vehicle placed in service after December 31, 2009), if such vehicle has a gross vehicle weight rating of not more than 8,500 pounds; $10,000, if such vehicle has a gross vehicle weight rating of more than 8,500 pounds but not more than 14,000 pounds; $20,000, if such vehicle has a gross vehicle weight rating of more than 14,000 pounds but not more than 26,000 pounds; and $40,000, if such vehicle has a gross vehicle weight rating of more than 26,000 pounds. The amount determined above for a qualified fuel cell motor vehicle that is a passenger car or light truck is further increased to reflect fuel efficiency. The amount of this increased credit is based on the 2002 model year city fuel economy. These are listed in two tables, one for passenger automobiles and one for light trucks contained within IRC Sec. 30B at subparagraph (b)(2)(b). The increase to the credit is calculated as follows: $1,000, if such vehicle achieves at least 150% but less than 175% of the 2002 model year city fuel economy; $1,500, if such vehicle achieves at least 175% but less than 200% of the 2002 model year city fuel economy; 42

53 $2,000, if such vehicle achieves at least 200% but less than 225% of the 2002 model year city fuel economy; $2,500, if such vehicle achieves at least 225% but less than 250% of the 2002 model year city fuel economy; $3,000, if such vehicle achieves at least 250% but less than 275% of the 2002 model year city fuel economy; $3,500, if such vehicle achieves at least 275% but less than 300% of the 2002 model year city fuel economy; and $4,000, if such vehicle achieves at least 300% of the 2002 model year city fuel economy. The 2002 model year city fuel economy with respect to a vehicle shall be determined in accordance with the following tables: In the case of a passenger automobile: If vehicle inertia weight class is: The 2002 model year city fuel economy is: 1,500 or 1,750 lbs mpg 2,000 lbs mpg 2,250 lbs mpg 2,500 lbs mpg 2,750 lbs mpg 3,000 lbs mpg 3,500 lbs mpg 4,000 lbs mpg 4,500 lbs mpg 5,000 lbs mpg 5,500 lbs mpg 6,000 lbs mpg 6,500 lbs mpg 7,000 to 8,500 lbs mpg In the case of a light truck: If vehicle inertia weight class is: The 2002 model year city fuel economy is: 1,500 or 1,750 lbs mpg 2,000 lbs mpg 2,250 lbs mpg 2,500 lbs mpg 2,750 lbs mpg 3,000 lbs mpg 3,500 lbs mpg 4,000 lbs mpg 4,500 lbs mpg 5,000 lbs mpg 5,500 lbs mpg 6,000 lbs mpg 6,500 lbs mpg 7,000 to 8,500 lbs mpg 43

54 Taxpayers may rely on the certification by a domestic manufacturer (or, in the case of a foreign manufacturer, its domestic distributor) that a make, model, and model year of a vehicle qualifies as fuel cell motor vehicle, and the amount of the credit allowable for that vehicle. The IRS has issued interim guidance with IRS Notice It has yet to be updated for changes made by the American Recovery and Reinvestment Act of These vehicles do exist. In IR , the IRS acknowledged the certification by American Honda Motor Company, Inc., that one of its vehicles meets the requirements of the Alternative Motor Vehicle Credit as a qualified fuel cell vehicle. Purchasers of the 2005 and 2006 Honda FCX, which is only capable of operating on hydrogen, may rely on their certification concerning the vehicle's qualification for the Qualified Fuel Cell Motor Vehicle Credit. The credit amount for the 2005 and 2006 Honda FCX was $12,000. For purposes of the credit, a new qualified fuel cell motor vehicle means a motor vehicle: That is propelled by power derived from one or more cells which convert chemical energy directly into electricity by combining oxygen with hydrogen fuel which is stored on board the vehicle in any form and may or may not require reformation prior to use; That, in the case of a passenger automobile or light truck, has received on or after the date of the enactment of this section a certificate that such vehicle meets or exceeds the Bin 5 Tier II emission level established in regulations prescribed by the Administrator of the Environmental Protection Agency under section 202(i) of the Clean Air Act for that make and model year vehicle; The original use of which commences with the taxpayer; That is acquired for use or lease by the taxpayer and not for resale; and That is made by a manufacturer. 2. New Qualified Advanced Lean Burn Technology Motor Vehicle Credit Qualified advanced lean burn motor vehicles are passenger automobiles and light trucks (GVWR of 8,500 pounds or less) with an internal combustion engine that uses lean burn technology, which involves direct injection of a fuel mix using more air than is necessary for complete combustion of the fuel, such as certain diesel engines. The credit amounts are the same as for qualified hybrid motor vehicles with a GVWR of 8,500 pounds or less (see information later in this lesson). These vehicles must also meet certain federal emission standards. This credit applies to qualified vehicles purchased before 2011 and is also subject to the same phase-out rule as for qualified hybrid motor vehicles. According to IR , the following vehicles qualify for this credit: 2009 Volkswagen Jetta 2.0L TDI Sedan manual or automatic $1, Volkswagen Jetta 2.0L TDI SportWagen manual or automatic $1,300 Mercedes GL 320 BLUE TEC $1,800 Mercedes R 320 Blue TEC $1,550 Mercedes ML 320 Blue TEC $900 44

55 The credit amount is based on fuel economy and the credit amount increases as a vehicle's fuel efficiency increases. It is based on 2002 model year city fuel economy, the same as the new qualified fuel cell motor vehicle credit. Therefore, for a vehicle that achieves a fuel economy (expressed as a percentage of the 2002 model year city fuel economy) of: At least 125% but less than 150%, the credit is $400. At least 150% but less than 175%, the credit is $800. At least 175% but less than 200%, the credit is $1,200. At least 200% but less than 225%, the credit is $1,600. At least 225% but less than 250%, the credit is $2,000. At least 250%, the credit is $2,400. In addition to the fuel economy credit, the credit for an advanced lean burn technology motor vehicle is increased by a conservation credit amount, based on the vehicle s lifetime fuel savings. Lifetime fuel savings means, in the case of any advanced lean burn technology motor vehicle, an amount equal to the excess (if any) of 120,000 divided by the 2002 MYCFE for the vehicle inertia weight class, over 120,000 divided by the city fuel economy for the vehicle. Where the vehicle's lifetime fuel savings (expressed in gallons of gasoline) is: At least 1,200 but less than 1,800, the credit amount is $250. At least 1,800 but less than 2,400, the credit amount is $500. At least 2,400 but less than 3,000, the credit amount is $750. At least 3,000, the credit amount is $1,000. Example: If an advanced lean burn technology motor vehicle achieves a fuel economy percentage of 165% and a lifetime fuel savings of 2,000 gallons, the total advanced lean burn technology motor vehicle credit would be $1,300 ($800 plus $500). For purposes of this credit, a new advanced lean burn technology motor vehicle means a passenger automobile or a light truck: With an internal combustion engine that is designed to operate primarily using more air than is necessary for complete combustion of the fuel; That incorporates direct injection; That achieves at least 125% of the 2002 model year city fuel economy; That, for 2004 and later model vehicles, has received a certificate that such vehicle meets or exceeds in the case of a vehicle having a gross vehicle weight rating of 6,000 pounds or less, the Bin 5 Tier II emission standard established in regulations prescribed by the Administrator of the Environmental Protection Agency under section 202(i) of the Clean Air Act for that make and model year vehicle, and in the case of a vehicle having a gross vehicle weight rating of more than 6,000 pounds but not more than 8,500 pounds, the Bin 8 Tier II emission standard which is so established; The original use of which commences with the taxpayer; That is acquired for use or lease by the taxpayer and not for resale; and That is made by a manufacturer. 45

56 The new advanced lean burn technology motor vehicle credit available for vehicles from a specific manufacturer will begin phasing out over a period of four calendar quarters once the manufacturer sells a cumulative total of 60,000 qualifying vehicles for use in the United States. The phase-out period begins with the second calendar quarter following the quarter in which the 60,000 milestone is reached. During the first two quarters of the four-quarter phase-out period, the credit is reduced to 50% of the otherwise allowable amount. During the last two quarters of the phase-out period, the credit is reduced to only 25% of the otherwise allowable amount. Consequently, starting with the sixth quarter after the 60,000 milestone is reached, phase-out is complete and no further credits will be allowed for vehicles from that manufacturer. This credit sunsets and will not be available for any property purchased after December 31, New Qualified Hybrid Motor Vehicle Credit Qualified hybrid motor vehicles combine an internal combustion engine with another propulsion system that uses an onboard rechargeable energy source such as electric batteries. These vehicles must also meet certain federal emission standards. The hybrid motor vehicle credit applies in differing amounts to the following types of vehicles: Passenger Automobiles and Light Trucks (gross vehicle weight rating (GVWR) of 8,500 pounds or less). Vehicles Other Than Passenger Automobiles and Light Trucks (GVWR of more than 8,500 pounds). For passenger automobiles and light trucks with a gross vehicle weight rating (GVWR) of 8,500 pounds or less, the credit is the sum of two amounts. One amount is based on the vehicle s fuel economy and is calculated exactly the same way that it is calculated for qualified advanced lean burn motor vehicles. The credit amount is based on fuel economy and the credit amount increases as a vehicle's fuel efficiency increases. It is based on 2002 model year city fuel economy, the same as the new qualified fuel cell motor vehicle credit. Therefore, for a vehicle that achieves a fuel economy (expressed as a percentage of the 2002 model year city fuel economy) of: At least 125% but less than 150%, the credit is $400. At least 150% but less than 175%, the credit is $800. At least 175% but less than 200%, the credit is $1,200. At least 200% but less than 225%, the credit is $1,600. At least 225% but less than 250%, the credit is $2,000. At least 250%, the credit is $2,400. The first part of the credit is increased by the second part of the credit, a conservation credit that is also the identical calculation of a qualified advanced lean burn motor vehicle. It is based on the vehicle s lifetime fuel savings. Lifetime fuel savings means, in the case of any advanced lean burn technology motor vehicle, an amount equal to the excess (if any) of 46

57 120,000 divided by the 2002 MYCFE for the vehicle inertia weight class, over 120,000 divided by the city fuel economy for the vehicle. Where the vehicle's lifetime fuel savings (expressed in gallons of gasoline) is: At least 1,200 but less than 1,800, the credit amount is $250. At least 1,800 but less than 2,400, the credit amount is $500. At least 2,400 but less than 3,000, the credit amount is $750. At least 3,000, the credit amount is $1,000. In other words, the total credit for a passenger car or light truck that qualifies as a hybrid motor vehicle is determined under the same tables that would apply if the vehicle qualified as an advance lean burn technology vehicle. For a qualified hybrid motor vehicle that isn't a passenger automobile or light truck, the credit is an amount equal to the applicable percentage of the certified qualified incremental hybrid cost of the vehicle. The applicable percentage is: 20% if the vehicle achieves an increase in city fuel economy relative to a comparable vehicle of at least 30% but less than 40%, 30% if the vehicle achieves an increase of at least 40% but less than 50%, and 40% if the vehicle achieves an increase of at least 50%. The qualified incremental hybrid cost for purposes of the amount of the credit for any vehicle is equal to the amount of the excess of the manufacturer's suggested retail price for the vehicle over the price for a comparable vehicle, to the extent that amount does not exceed: $7,500, if such vehicle has a gross vehicle weight rating of not more than 14,000 pounds; $15,000, if such vehicle has a gross vehicle weight rating of more than 14,000 pounds but not more than 26,000 pounds; and $30,000, if such vehicle has a gross vehicle weight rating of more than 26,000 pounds. Example: A qualified heavy duty hybrid motor vehicle has a gross vehicle weight rating (GVWR) of 21,500 pounds and has an incremental cost of $18,500, not taking into account the above described GVWR limitations. The vehicle produces an increase in fuel economy of 35% over a comparable vehicle. Because the vehicle has a GVWR of at least 14,000 pounds but not more than 26,000 pounds, its incremental cost can't exceed $15,000. And because the vehicle produces a 35% increase in fuel economy (at least 30% but less than 40%), the applicable percentage is 20%. Thus, the vehicle qualifies for a credit of $3,000 (20% of $15,000). For purposes of this credit, a new qualified hybrid motor vehicle means a motor vehicle: That draws propulsion energy from onboard sources of stored energy that are both an internal combustion or heat engine using consumable fuel and a rechargeable energy storage system; 47

58 That, in the case of a passenger automobile or light truck, has received a certificate of conformity under the Clean Air Act and meets or exceeds the equivalent qualifying California low emission vehicle standard under section 243(e)(2) of the Clean Air Act for that make and model year; in the case of a vehicle having a gross vehicle weight rating of 6,000 pounds or less, the Bin 5 Tier II emission standard established in regulations prescribed by the Administrator of the Environmental Protection Agency under section 202(i) of the Clean Air Act for that make and model year vehicle; and in the case of a vehicle having a gross vehicle weight rating of more than 6,000 pounds but not more than 8,500 pounds, the Bin 8 Tier II emission standard which is so established; That has a maximum available power of at least 4% in the case of a passenger automobile or light truck, 10% in the case of a vehicle which has a gross vehicle weight rating of more than 8,500 pounds and not more than 14,000 pounds, and 15% in the case of a vehicle in excess of 14,000 pounds; That, in the case of vehicles other than passenger automobiles and light trucks, has an internal combustion or heat engine which has received a certificate of conformity under the Clean Air Act as meeting the emission standards set in the regulations prescribed by the Administrator of the Environmental Protection Agency for 2004 through 2007 model year diesel heavy duty engines or Otto cycle heavy duty engines, as applicable; The original use of which commences with the taxpayer; That is acquired for use or lease by the taxpayer and not for resale; and That is made by a manufacturer. The term qualified hybrid motor vehicle does not include any vehicle that is not a passenger automobile or light truck if the vehicle has a gross vehicle weight rating (GVWR) of less than 8,500 pounds. The term consumable fuel means any solid, liquid, or gaseous matter that releases energy when consumed by an auxiliary power unit. In the case of passenger automobiles and light trucks, the term maximum available power means the maximum power available from the rechargeable energy storage system during a standard 10-second pulse power or equivalent test, divided by such maximum power and the SAE (Society of Automotive Engineers) net power of the heat engine. In the case of other vehicles, the term maximum available power means the maximum power available from the rechargeable energy storage system, during a standard 10-second pulse power or equivalent test, divided by the vehicle's total traction power. For this purpose, total traction power means the sum of the peak power from the rechargeable energy storage system and the heat engine peak power of the vehicle, except that if the storage system is the sole means by which the vehicle can be driven, the total traction power is the peak power of the storage system. Also, it should be noted again, that any vehicle with respect to which a credit is allowable under IRC Sec. 30D, the credit for new qualified plug-in electric drive motor vehicles, shall not be allowed a credit under IRC Sec. 30B. The hybrid motor vehicle credit available for vehicles from a specific manufacturer will begin phasing out over a period of four calendar quarters once the manufacturer sells a cumulative total of 60,000 qualifying vehicles for use in the United States. The phase-out period begins with the second calendar quarter following the quarter in which the 60,000 milestone is reached. During the first two quarters of the four-quarter phase-out period, the credit is 48

59 reduced to 50% of the otherwise allowable amount. During the last two quarters of the phaseout period, the credit is reduced to only 25% of the otherwise allowable amount. Consequently, starting with the sixth quarter after the 60,000 milestone is reached, phase-out is complete and no further credits will be allowed for vehicles from that manufacturer. This credit will not apply to property purchased after December 31, New Qualified Alternative Fuel Motor Vehicle Credit Another component of the alternative motor vehicle credit is the qualified alternative fuel motor vehicle credit. The qualified alternative fuel motor vehicle credit applies to vehicles that operate entirely on alternative fuel. A reduced credit applies to certain mixed-fuel vehicles that use both alternative fuel and petroleum based-fuel. Except for mixed-fuel vehicles, the new qualified alternative fuel motor vehicle credit is an amount equal to the applicable percentage of the incremental cost of any new qualified alternative fuel motor vehicle placed in service by the taxpayer during the taxable year. The amount of the credit is calculated as a percentage (of up to 80%) of the incremental cost of the vehicle. The applicable percentage with respect to any new qualified alternative fuel motor vehicle is 50%, plus 30%, if such vehicle: Has received a certificate of conformity under the Clean Air Act and meets or exceeds the most stringent standard available for certification under the Clean Air Act for that make and model year vehicle (other than a zero emission standard), or Has received an order certifying the vehicle as meeting the same requirements as vehicles which may be sold or leased in California and meets or exceeds the most stringent standard available for certification under the State laws of California for that make and model year vehicle (other than a zero emission standard). In the case of any new qualified alternative fuel motor vehicle that weighs more than the 14,000 pounds gross vehicle weight rating, the most stringent standard available shall be such standard available for certification on the date of the enactment of the Energy Tax Incentives Act of The incremental cost of any new qualified alternative fuel motor vehicle equals the excess of the manufacturer's suggested retail price (MSRP) for the vehicle over the MSRP for a gasoline or diesel fuel motor vehicle of the same model. However, incremental cost can't exceed: $5,000, if the vehicle has a gross vehicle weight rating (GVWR) of not more than 8,500 pounds. $10,000, if the vehicle has a GVWR of more than 8,500 pounds but not more than 14,000 pounds. $25,000, if the vehicle has a GVWR of more than 14,000 pounds but not more than 26,000 pounds. $40,000, if the vehicle has a GVWR of more than 26,000 pounds. It is important to remember that the 50% and 30% amounts are added to each other to get to the applicable percentage. Also, the fact that a taxpayer pays less than MSRP for a vehicle will have no effect on the calculation of the credit. 49

60 Example: A taxpayer buys and places in service during the tax year a vehicle that qualifies for the qualified alternative fuel vehicle credit as a new qualified alternative fuel motor vehicle. The vehicle has a gross vehicle weight rating (GVWR) of 7,500 pounds and has a manufacturer s suggested retail price (MSRP) of $42,000. The MSRP for the same model, if diesel or gasoline powered, is only $30,000. Thus, the incremental cost taken into account would be $12,000 ($42,000 $30,000), if not for the imposed limitations. However, because the vehicle's GVWR is less than 8,500 pounds, the amount of incremental cost that may be taken into account is limited to $5,000. Because the vehicle also meets the additional standards specified in IRC Sec. 30B(e)(2)(B), i.e., a certificate of conformity with respect to the Clean Air Act, the vehicle qualifies for a credit of up to 80% of the incremental cost. The credit is 80% of the allowed incremental cost of $5,000, or $4,000. For purposes of this credit, a new qualified alternative fuel motor vehicle means any motor vehicle: That is only capable of operating on an alternative fuel; The original use of which commences with the taxpayer; That is acquired by the taxpayer for use or lease, but not for resale; and That is made by a manufacturer. The term alternative fuel means compressed natural gas, liquefied natural gas, liquefied petroleum gas, hydrogen, and any liquid at least 85% of the volume of which consists of methanol. As mentioned earlier, there is a reduced credit available for mixed-fuel vehicles. In the case of a mixed-fuel vehicle placed in service by the taxpayer during the taxable year, the credit is an amount equal to: In the case of a 75/25 mixed-fuel vehicle, 70% of the credit which would have been allowed under this subsection if such vehicle was a qualified alternative fuel motor vehicle; and In the case of a 90/10 mixed-fuel vehicle, 90% of the credit which would have been allowed under this subsection if such vehicle was a qualified alternative fuel motor vehicle. The term mixed-fuel vehicle means any motor vehicle that is either a 75/25 mixed-fuel vehicle or a 90/10 mixed fuel vehicle that: Is certified by the manufacturer as being able to perform efficiently in normal operation on a combination of an alternative fuel and a petroleum-based fuel; Either has received a certificate of conformity under the Clean Air Act, or has received an order certifying the vehicle as meeting the same requirements as vehicles which may be sold or leased in California and meets or exceeds the low emission vehicle standard under section of title 40, Code of Federal Regulations, for that make and model year vehicle; The original use of which commences with the taxpayer; Is acquired by the taxpayer for use or lease, but not for resale; and Is made by a manufacturer. 50

61 A 75/25 mixed-fuel vehicle is a mixed-fuel vehicle that operates using at least 75% alternative fuel and not more than 25% petroleum-based fuel. A 90/10 mixed-fuel vehicle is a mixed-fuel vehicle that operates using at least 90% alternative fuel and not more than 10% petroleum-based fuel. Either mixed-fuel vehicle must be unable to perform efficiently in normal operation unless its fuel contains at least 75%/90% alternative fuel and not more than 25%/10% petroleum-based fuel according to the interim guidance of IRS Notice pending issuance of Regulations. This credit sunsets and is not available for any property purchased after December 31, Plug-in Conversion Credit The last of the components of the alternative motor vehicle credit is the plug-in conversion credit. For purposes of the alternative motor vehicle credit, the plug-in conversion credit determined with respect to any motor vehicle that is converted to a qualified plug-in electric drive motor vehicle is 10% of so much of the cost of converting the vehicle as long as the cost does not exceed $40,000. The maximum amount that can be claimed as a plug-in conversion credit for any vehicle is $4,000 ($40,000 10%). Example: A taxpayer converts a motor vehicle into a qualified plug-in electric drive motor vehicle. The cost of converting the vehicle is $48,000. Because the cost of converting the vehicle exceeds $40,000, the taxpayer s plug-in conversion credit is limited $4,000 ($40,000 10%). For purposes of this credit, the term qualified plug-in electric drive motor vehicle means any new qualified plug-in electric drive motor vehicle as defined in IRC Sec. 30D (see discussion above regarding qualified plug-in electric drive motor vehicles), determined without regard to whether such vehicle is made by a manufacturer or whether the original use of such vehicle commences with the taxpayer. This credit is allowed with respect to a motor vehicle notwithstanding whether a credit has been allowed with respect to such motor vehicle for an alternative motor vehicle credit other than for a plug-in conversion credit in any preceding taxable year. Therefore, a vehicle that was allowed an alternative motor vehicle credit in a prior year for the new qualified fuel cell motor vehicle credit, the new advanced lean burn technology motor vehicle credit, the new qualified hybrid motor vehicle credit, or the new qualified alternative fuel motor vehicle credit and is converted in a later tax year to a qualified plug-in electric drive motor vehicle is eligible for another alternative motor vehicle credit. The plug-in conversion credit applies to property placed in service after February 17, The credit sunsets on January 1, 2012, and doesn t apply to conversions made after December 31, Reporting the Alternative Motor Vehicle Credit A taxpayer may obtain the Alternative Motor Vehicle Credit under IRC Sec. 30B, whether for the new qualified fuel cell motor vehicle credit, the new qualified fuel cell motor vehicle credit, the new qualified hybrid motor vehicle credit, the new qualified alternative fuel motor vehicle credit, or the plug-in conversion credit, by properly completing Form 8910 (Alternative Motor Vehicle Credit) and attaching it to the taxpayer s Form The calculation of the Alternative Motor Vehicle Credit for a personal use vehicle is done by completing Part I and Part III. The draft form as of August 11, 2010, is provided in this lesson s Appendix. 51

62 Travel Incentives for Business New Qualified Plug-in Electric Drive Motor Vehicles Credit (IRC Sec. 30D) Certain Plug-in Electric Vehicles Credit (IRC Sec. 30) Alternative Motor Vehicle Credit (IRC Sec. 30B) You may have noticed all three forms Form 8936 (Qualified Plug-in Electric Drive Motor Vehicle Credit), Form 8834 (Qualified Plug-in Electric and Electric Vehicle Credit), and Form 8910 (Alternative Motor Vehicle Credit) have sections to calculate a business portion of the credit. All of these credits are available not only for individual taxpayers, but also for business entities that purchase energy efficient vehicles. The calculation of the credits, the certification requirements, and all of the rules are the same with a few exceptions. First, there is no rule allowing the business portion of any of these credits to apply against the individual alternative minimum tax (AMT). Only the personal credits count against the individual AMT. This means that business flow-through credits from a partnership and S corporations as well as the business portion of credits from a sole proprietorship would not count against the individual taxpayer s AMT. Second, unlike personal credits, which are use them or lose them, business credits carry forward. The credits are calculated on the previously mentioned forms (copies of 2010 draft forms of each appear in this lesson s Appendix) and are carried to Form 3800 (General Business Credit). Also, if the credit is from a passive activity, it would be subject to limitations and would also be reported on Form 8810 (Corporate Passive Activity Loss and Credit Limitations) or on Form 8582-CR (Passive Activity Credit Limitations) for an individual return. Note that the amount of the credit for some of the larger vehicles used in construction or road building can be very large. A qualified alternative fuel vehicle that weighs over 26,000 pounds could obtain a credit as large as $32,000 ($40,000 maximum incremental cost (50% base credit + 30% bonus for Clean Air Act conformity). Example: A taxpayer buys and places in service during the tax year a vehicle that qualifies for the qualified alternative fuel vehicle credit as a new qualified alternative fuel motor vehicle. The vehicle has a gross vehicle weight rating (GVWR) of 17,500 pounds and has a manufacturer s suggested retail price (MSRP) of $250,000. The MSRP for the same model, if diesel or gasoline powered, is only $180,000. Thus, the incremental cost taken into account would be $70,000 ($250,000 minus $180,000), if not for the imposed limitations. However, because the vehicle's GVWR is between 14,000 pounds and 26,000 pounds, the amount of incremental cost that may be taken into account is limited to $25,000. Because the vehicle also meets the additional standards specified in IRC Sec. 30B(e)(2)(B), i.e., a certificate of conformity with respect to the Clean Air Act, the vehicle qualifies for a credit of up to 80% of the incremental cost. The credit is 80% of the allowed incremental cost of $25,000, or $20,

63 Transit and Vanpool Transportation Fringe Benefits Although the section of the American Recovery and Reinvestment Act that increases transit and vanpool transportation fringe benefits is not generally viewed as one of the green incentives of ARRA, one could argue that it also encourages energy conservation. Under the tax law, an employee may exclude qualified transportation fringe benefits provided by an employer from both his gross income and wages for payroll tax purposes. The employer, of course, is able to fully deduct the transportation fringe as an ordinary and necessary business expense under IRC Sec These transportation fringes include parking, transit passes, vanpool benefits, and qualified bicycle commuting reimbursements. Prior to ARRA, up to $230 per month of parking benefits and up to $120 per month of transit and vanpool benefits (as indexed for inflation) were excludable from income. It may seem peculiar that prior law allowed almost double the fringe benefits ($230 versus $120) to be paid for the benefit of an employee who drove his own automobile to work and just parked, than it paid for its employees who were conserving more energy by participating in vanpooling or by using public transportation. ARRA has eliminated this seemingly non-energy friendly discrepancy. Driving one s own automobile to work is no longer rewarded over vanpooling or taking public transportation. The Recovery Act (ARRA) has increased the monthly exclusion for employerprovided transit and vanpool benefits to $230, the same amount as the exclusion for employerprovided parking. This is effective for months beginning on March 1, 2009, and before January 1, 2011 (IRC Sec. 132(f)(2), as amended by ARRA, Section 1151). Bicycle Commuters Fringe Benefit The Emergency Economic Stabilization Act of 2008 added any qualified bicycle commuting reimbursement as a new employer-provided fringe benefit to IRC Sec. 132(f) for tax years beginning after December 31, This new tax-free transportation fringe benefit is for employees who commute to work on bicycles. An employer may reimburse an employee for reasonable expenses incurred by the employee during the calendar year for the purchase, improvements, repair, and storage of a bicycle that is used regularly for a substantial portion of the commute between the employee s home and workplace. We are still awaiting guidance on what constitutes a substantial portion of an employee s commuting distance. Employees are not allowed to exclude from income a bicycle commuting reimbursement for any month that another transportation fringe benefit (see above) is received by the employee. Employers have until March 31 to reimburse the employee for expenses incurred in the prior calendar year. The exclusion is limited to $20 for each month of bicycle commuting during the calendar year for a maximum of $240 per year. This limitation is not indexed for inflation. 53

64 Example: Travis Lightly rides his bike five miles from his home to his office. Because he has an expensive racing bike, Travis rents a bike locker near the office for $240 per year to securely store the bike while he is working. Travis can only ride to the office nine months out of the year, because of the weather conditions where he lives. However, bike lockers are only available for rent on an annual basis. Therefore, Travis must pay for the bike locker for the three months that he cannot use it. Because Travis does not ride his bike to work during three months of the year, they are not qualified bicycle commuting months. Therefore, Travis's qualified bicycle commuting reimbursement is limited to $180 ($20 9 months) even though he is paying $240 for the rental bike locker. 54

65 Lesson 3 Appendix 55

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