Here's a Summary of the Energy Bill. NOW - I'm done! Everybody clap! Everybody tell Bumper to delete these posts! Ban me! I'll be quiet now....................

Kleinrock's Federal Tax Bulletin

August 15, 2005

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ENERGY BILL SIGNED BY PRESIDENT INCLUDES INDIVIDUAL AND BUSINESS TAX

On August 8, President Bush signed into law the Energy Policy Act of
2005. The Act includes several provisions of interest to individuals and small businesses: two residential energy credits, several alternative motor vehicle credits, a business tax credit for the construction of new energy efficient homes, a business solar tax credit, and a deduction for energy-efficient commercial property. In addition, a miscellaneous provision was included relating to the recapture of Code Section 197 intangible amortization.


RESIDENTIAL ENERGY CREDITS

The Act introduces two new residential energy credits: nonbusiness
energy property credit and the residential energy efficient property credit. <1> These tax credits are available with respect to the following types of energy-efficient property that meet certain eligibility requirements: (1) exterior doors; (2) heat pumps; (3) water heaters; (4) central air conditioners; (5) furnace or hot water boilers; (6) fans used in natural gas, propane, or oil furnaces; (7) insulation material or an insulation system specifically and primarily designed to reduce the heat gain or loss of a dwelling unit; (8) a metal roof that has appropriately pigmented coatings specifically and primarily designed to reduce the heat gain of a dwelling unit; (9) exterior windows (including skylights); (10) qualified photovoltaic property; (11) qualified solar water heating property; (12) qualified fuel cell property. The first nine items are part of the non-business energy property credit. The remaining three are part of the residential energy efficient property credit.

The amount of tax credits allowed is determined based on the
expenditures that a taxpayer makes on items of eligible property. An expenditure made on an item of eligible property generally is treated as made when the original installation of the property is completed. However, if expenditures are made in connection with the construction or reconstruction of a dwelling unit, they will be treated as made when the taxpayer begins his original use of the dwelling unit. Expenditures made from subsidized energy financing are not eligible for the tax credits.

If eligible property is installed on or in a dwelling unit that is used
for both personal purposes and business purposes, and the property is used less than 80 percent for personal purposes, then only that portion of the expenditures that are properly allocable to the personal use of the property are eligible for the credit.

OBSERVATION: If such property is used 80 percent or more for personal
purposes, then the full amount of the expenditures is eligible for
the credit.

If eligible property is installed on or in a dwelling unit that is
jointly occupied and used as a residence by two or more individuals, the amount of the allowable credits must be pro-rated between those individuals based on the expenditures made by each individual with respect to the eligible property.

A tenant-shareholder in a cooperative housing corporation is treated as
having paid a proportionate share of the corporation's expenditures on eligible property. In other words, the amount of allowable credits of the corporation must be pro-rated between tenant-shareholders and a tenant- shareholder may take his proportionate share of the tax credits for which the cooperative housing corporation is eligible.

A condominium owner is treated as having paid a proportionate share of
the condominium association's expenditures on eligible property. In other words, the amount of allowable credits of the association must be pro- rated between the owners and a condominium owner may take his proportionate share of the tax credits for which the condominium association is eligible.

When one of these tax credits is allowable for an expenditure on
eligible property, the taxpayer's basis in that property must be reduced by the amount of the credit allowed. <2> Thus, the increase in the basis of the property from the expenditure will usually be offset by the reduction in the basis of the property from the tax credit.


NON-BUSINESS ENERGY PROPERTY CREDIT

Under the non-business energy property credit provision, individual
taxpayers are allowed a tax credit equal to the sum of:

(1) 10 percent of the amount paid or incurred during the tax year for
qualified energy efficiency improvements; and

(2) the amount paid or incurred during the tax year for residential
energy property.

The maximum tax credit allowed for all tax years with respect to the
same dwelling unit is $500. In other words, $500 is the maximum lifetime credit per dwelling unit.

There are also additional limitations on specific types of property:

(1) The maximum credit that may be taken for exterior windows is $200.

(2) The maximum credit that may be taken for any item of energy-
efficient building property is $300.

(3) The maximum credit that may be taken for any qualified natural gas,
propane, or oil furnace or hot water boiler is $150.

(4) The maximum credit that may be taken for any advanced main air
circulating fan is $50.

If an expenditure on qualified energy efficiency improvements or
qualified energy property is made with respect to two or more dwelling units, the limitations on the tax credit are computed separately for each dwelling unit based on the amount of the expenditure made for each dwelling unit.


RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDIT

Under the residential energy efficient property credit provision,
individual taxpayers are allowed a tax credit equal to the sum of:

(1) 30 percent of expenditures made during the tax year for qualified
photovoltaic property;

(2) 30 percent of expenditures made during the tax year for qualified
solar water heating property; and

(3) 30 percent of expenditures made during the tax year for qualified
fuel cell property.

The amount of the tax credit allowed for any tax year under Code Section 25D
is limited based on the type of property involved. The following annual limitations apply to the three different types of property:

(1) for qualified voltaic property, the annual limitation is $2,000;

(2) for qualified solar water heating property, the annual limitation
is $2,000; and

(3) for qualified fuel cell property, the annual limitation is $500
with respect to each half kilowatt of capacity of such property.

PRACTICE TIP: If the amount of the allowable credit exceeds the
limitations on the credit for the tax year, then the excess credits
may be carried forward to the succeeding tax year and, subject to the
limitations that apply to that year, the credit may be used in that
year.

Qualified photovoltaic property is property that uses solar energy to
generate electricity for use in a dwelling unit used as a residence by the taxpayer and located in the United States.

Qualified solar water heating property is property that uses solar
energy to heat water for use in a dwelling unit used as a residence by the taxpayer and located in the United States. For this property to qualify for the credit, at least half of the energy used by the property to heat water must be derived from the sun. In addition, such property must be 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.

Qualified fuel cell property is a an integrated system that is
comprised of a fuel cell stack assembly and associated balance of plant components by which fuel is converted into electricity using electrochemical means (a so-called "fuel cell power plant") and that is installed on or in a dwelling unit used as a principal residence by the taxpayer and located in the United States. The fuel cell power plant must have a nameplate capacity of at least 0.5 kilowatt of electricity and must have an electricity-only generation efficiency greater than 30 percent.

The following are some specific types of expenditures that may qualify
for this credit:

(1) solar panels or other property installed as a roof or a portion of
a roof (even if that property constitutes a structural component of the dwelling unit on which it is installed);

(2) the labor costs that are properly allocable to the onsite
preparation, assembly, or original installation of the property; and

(3) the piping or wiring to interconnect the property to the dwelling
unit.

However, expenditures properly allocable to a swimming pool, hot tub,
or any other energy storage medium that has a function other than a storage function are not eligible for the credit.


CREDIT FOR NEW ENERGY EFFICIENT HOMES

The Act provides a new credit to eligible contractors for the
construction of a qualified new energy-efficient home. To qualify as an energy-efficient home, the home must be: (1) a dwelling located in the United States, (2) substantially completed after a certain date, and (3) certified in accordance with guidance prescribed by the Secretary of Treasury to have a projected level of annual heating and cooling energy consumption that meets the standards for either a 30-percent or 50-percent reduction in energy usage. The credit relating to homes meeting the 30- percent efficiency standard applies only to manufactured homes. With respect to manufactured homes that meet the 30-percent standard, one-third of such 30 percent savings must come from the building envelope. With respect to homes that meet the 50-percent standard, one-fifth of such 50 percent savings must come from the building envelope.

The credit equals $1,000 in the case of a new manufactured home that
meets the 30 percent standard and $2,000 in the case of a new home that meets the 50 percent standard. The eligible contractor is the person who constructed the home, or in the case of a manufactured home, the producer of such home. The Committee intends that the building envelope component means insulation materials or system specifically and primarily designed to reduce heat loss or gain, exterior windows (including skylights), doors, and any duct sealing and infiltration reduction measures.

Manufactured homes that conform to federal manufactured home
construction and safety standards are eligible for the credit provided all the criteria for the credit are met. Manufactured homes certified by a method prescribed by the Administrator of the Environmental Protection Agency under the Energy Star Labeled Homes program are eligible for the $1,000 credit provided criteria (1) and (2), above, are met. The credit is part of the general business credit. No credits attributable to energy efficient homes can be carried back to any taxable year ending on or before the effective date of the credit.

The credit applies to homes whose construction is substantially
completed after December 31, 2005, and which are purchased after 2005 and before 2008.


DEDUCTION FOR ENERGY EFFICIENT COMMERCIAL PROPERTY

The Act provides a deduction equal to energy-efficient commercial
building property expenditures made by the taxpayer. Energy-efficient commercial building property expenditures is defined as property (1) which is installed on or in any building located in the United States that is within the scope of Standard 90.1-2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America, (2) which is installed as part of (i) the interior lighting systems, (ii) the heating, cooling, ventilation, and hot water systems, or (iii) the building envelope, and (3) which is certified as being installed as part of a plan designed to reduce the total annual energy and power costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water systems of the building by 50 percent or more in comparison to a reference building which meets the minimum requirements of Standard 90.1-2001 (as in effect on April 2, 2003). The deduction is limited to an amount equal to $1.80 per square foot of the property for which such expenditures are made. The deduction is allowed in the year in which the property is placed in service.

If a deduction is allowed, the basis of the property is reduced by the
amount of the deduction. Additionally, if a deduction is allowed for business energy property under section 1523 of the Senate amendment, or an individual credit for nonbusiness energy property or principal residence is allowed under section 1524 of the Senate amendment, then with respect to property for which a deduction under this provision may be claimed, the annual energy and power costs of the reference building is to be determined assuming the reference building contains the property for which the deduction or credit has been allowed, and any cost of such property taken into account under those other provisions of the bill cannot be taken into account under this provision.

In the case of a building that does not meet the overall building
requirement of a 50-percent energy savings, a partial deduction is allowed with respect to each separate building system that comprises energy efficient property and which is certified by a qualified professional as meeting or exceeding the applicable system-specific savings targets established by the Secretary of the Treasury. The applicable system- specific savings targets to be established are those that would result in a total annual energy savings with respect to the whole building of 50 percent, if each of the separate systems met the system specific target. The separate building systems are (1) the interior lighting system, (2) the heating, cooling, ventilation and hot water systems, and (3) the building envelope. The maximum allowable deduction is $0.60 per square foot for each separate system.

The provision is effective for property placed in service after 2005
and before 2008.


BUSINESS SOLAR TAX CREDIT

Currently, a non-refundable, 10-percent business energy credit is
allowed for the cost of new property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a structure, or to provide solar process heat, or (2) used to produce, distribute, or use energy derived from a geothermal deposit, but only, in the case of electricity generated by geothermal power, up to the electric transmission stage.

The business energy tax credits are components of the general business
credit. <3> The business energy tax credits, when combined with all other components of the general business credit, generally may not exceed for any taxable year the excess of the taxpayer's net income tax over the greater of (1) 25 percent of so much of the net regular tax liability as exceeds $25,000 or (2) the tentative minimum tax. An unused general business credit generally may be carried back one year and carried forward 20 years.

The Act increases the 10-percent credit to 30 percent in the case of
solar energy property. Additionally, the provision provides that equipment that uses fiber-optic distributed sunlight to illuminate the inside of a structure is solar energy property eligible for the 30-percent credit. The provision provides that property used to generate energy for the purposes of heating a swimming pool is not eligible solar energy property.

Generally, the 30 percent credit provision applies to periods after
2005 and before 2008.


ALTERNATIVE MOTOR VEHICLE CREDITS

Qualified Fuel Cell Motor Vehicle Credit

The Act provides a new credit for a new qualified fuel cell motor
vehicle placed in service by the taxpayer during the year. The credit is: $8,000 ($4,000 in the case of a vehicle placed in service after 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 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 weight rating of more than 26,000 pounds. These amounts are subject to additional increases depending on whether the vehicle achieves a certain percentage of the 2002 model year city fuel economy and the Code includes a chart detailing what those 2002 numbers are for various weight classes.

This credit applies to vehicles placed in service in 2006 through 2014.


Advanced Lean Burn Technology Motor Vehicle Credit

The Act provides a new credit for a new advanced lean burn technology
motor vehicle placed in service by the taxpayer during the year. The credit is anywhere from $400 to $2,400 depending on the vehicles fuel economy expressed as a percentage of the 2002 model year city fuel economy. These amounts may be increased by up to $1,000 in the case of a vehicle that achieves a certain lifetime fuel savings.

This credit applies to vehicles placed in service in 2006 through 2010.


Qualified Hybrid Motor Vehicle Credit

The Act provides a new credit for a qualified hybrid motor vehicle
placed in service by the taxpayer during the tax year. The amount of the credit is the same as the advanced lean burn technology motor vehicle credit.

OBSERVATION: There is a limitation on the number of new qualified
hybrid and advanced lean-burn technology vehicles eligible for the
credit.

This credit applies to vehicles placed in service 2006 through 2009.


Qualified Alternative Fuel Motor Vehicle Credit

The Act provides a new credit for a qualified alternative fuel motor
vehicle placed in service by the taxpayer during the tax year. The credit is an amount equal to the applicable percentage of the incremental cost of any new qualified alternative fuel motor vehicle. The incremental cost of any new qualified alternative fuel motor vehicle is equal to the amount of the excess of the manufacturer's suggested retail price for such vehicle over such price for a gasoline or diesel fuel motor vehicle of the same model, to the extent the amount does not exceed $5,000, if such vehicle has a gross vehicle weight rating of not more than 8,500 pounds; $10,000, if such vehicle has a gross weight rating of more than 8,500 pounds but not more than 14,000 pounds; $25,000, 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 weight rating of more than 26,000 pounds.

This credit applies to vehicles placed in service in 2006 through 2010.


RECAPTURE OF CODE SECTION 197 AMORTIZATION

Currently, taxpayers are entitled to recover the cost of amortizable
Code Section 197 intangibles using the straight-line method of amortization over a uniform life of fifteen years. With certain exceptions, amortizable Section 197 intangibles generally are purchased intangibles held by a taxpayer in the conduct of a business. Gain on the sale of depreciable property must be recaptured as ordinary income to the extent of depreciation deductions previously claimed, and the recapture amount is computed separately for each item of property. Code Section 197 intangibles, because they are treated as depreciable property, are subject to these recapture rules.

The Act provides that, if multiple Code Section 197
intangibles are sold (or otherwise disposed of) in a single transaction or series of transactions, the seller must calculate recapture as if all of the Code Section 197 intangibles were a single asset. Thus, any gain on the sale (or other disposition) of the intangibles is recaptured as ordinary income to the extent of ordinary depreciation deductions previously claimed on any of the Code Section 197 intangibles.

This provision is effective for dispositions of property after August
8, 2005.



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Notes:

1/ Code Sections 25C, 25D.

2/ Code Sections 25D(f), 25C(f).

3/ Code Section 38(b)(1).