Watch tax provisions in making timely decisions

November 8, 2010
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We are now in the second week of November, and we can all take a deep breath: The mid-term elections are over and the campaign ads have, thankfully, ceased.

Now, the task at hand in Washington, D.C., will be to debate the extension of the Bush tax cuts in the lame duck Congressional session and to consider the extension of certain expiring tax provisions. We have covered many of these items in the past months. Many speculate on what may happen, but we have no real insight into how to handicap the chances of success for any specific legislative tax proposals.

There will be much continued debate and discussion on the expiring provisions, as well as what tax policy should be for the future given the country's current and future economic situation. The tax code continues to grow in size each time sections are added, changed, deleted, or they expire.

A few expiring provisions that merit some mention deal with residential energy-efficiency tax credits for individual taxpayers. Taxpayers may need to consider taking some action before they expire. These particular tax credits cover such items as water heaters, boilers, heat pumps, central air conditioning, building insulation, windows, doors and roofs. The credits also cover stoves that use qualified biomass fuel.

If you are likely to make a purchase of such items in the near future, you should take a few minutes to determine whether there are any tax credits related to the purchase and whether the credits actually are available and result in a benefit in your own personal tax situation. I have recently seen a number of the retailers of qualifying items running commercial spots on television highlighting the upcoming expiration of the credits.

The credits aren't necessarily large compared to other tax credits (such as the renewable energy credits we will mention later), but the total credit that may be available may be as high as 30 percent of the qualified costs, up to a cumulative limit of $1,500. That, in itself, may help in deciding whether to incur the cost of the purchase. The amount of the credit is claimed on Form 5695; information can be found at the Department of Energy's special Energy Star website at www.energystar.gov. Specific information on the credits also is available on the IRS website at www.irs.gov

The maximum tax credit was originally set at $500 in the Energy Policy Act of 2005 for qualified purchases in 2006 and 2007. The tax credit was reinstated in 2008 for the 2009 and 2010 tax years with the tax credit available adjusted upward to the current $1,500 amount. However, the residential energy-efficiency tax credit is currently scheduled to expire Dec. 31, 2010.

The credits may be available for a number of items including qualified water heaters and furnaces and that use electric, propane, natural gas or oil. Certain circulating fans in a furnace or heater may also be covered by the credit.

The devil is in the details for understanding what is covered or not covered by the tax credits. Therefore, it is important to refer to the IRS publications, IRS Form 5695 and its instructions, and the Energy Star website. Many retailers of the products also have information that may be helpful. However, it may be prudent to review the information with your tax adviser to understand whether the purchase qualifies and whether you would receive actual benefits in your own personal income tax situation.

On some items, the cost of installation of the qualifying item also qualifies for the credit, and for others it does not. For example, the cost of certain home insulation is covered, but the installation (labor) cost is not covered. The same goes for the installation costs associated with qualifying doors, windows and roofs. Also, any excess credit not used in your current year tax return is not available as a carryover to a future tax year.

The other set of energy credits available to individuals — the residential renewable-energy credits — have different credit thresholds and expiration dates. The maximum tax credit is 30 percent of the qualifying costs for solar electric systems, wind turbines and geothermal heat pumps. Fuel cells have a maximum credit of $500 per .5 kW. There were some limits on the total credit that could be claimed for tax years before 2009. The renewable-energy credits are not set to expire until Dec. 31, 2016. In addition, any excess renewable-energy credit in one tax year can be carried forward to another tax year (at least until 2016 based on the guidance in the Form 5695 instructions).

The renewable-energy credit can trace its history to the Energy Policy Act of 2005 and has subsequently been extended and the maximum credit increased since its enactment.

The tax incentives may help in the economic decision and any payback analysis, but as with any purchase, the tax benefits should not be the sole or predominant reason for making the expenditure. Of course for many, the satisfaction of considering green initiatives may override other economic reasons for making the expenditure.

Many West Michigan-based companies currently are manufacturing or getting ready to manufacture products that may qualify for the renewable-energy credit for residential use or the Business Energy Investment Tax Credit. Both state and federal incentives are available in many cases for these manufacturers.

On the business side, business energy investment tax credits are available, in addition to any depreciation incentives that otherwise may be available to the business. Certain adjustments to qualifying costs for depreciation purposes may be required for any tax credits claimed.

There may be other state and local incentives as well as utility incentives available for individuals and businesses for expenditures on qualifying energy equipment purchases. A good resource to review what incentives, credits and grants are available can be accessed at the Database of State Incentives for Renewables and Efficiency website at www.dsireusa.org. The site has information on programs and incentives by individual state, as well as federal incentives and programs. The site is updated on a periodic basis for recent changes in legislation and policies. If you view or actually print the summaries for the federal and Michigan incentives, it may take awhile as there are nearly 125 pages of incentives, grants and credits that are available to businesses or individuals.

As the year closes, the advice for all is to keep a close eye on what happens in Washington with any tax legislation and to consider the impact of any expiring provisions, renewal of certain provisions and the enactment of any new provisions on one's own personal and business tax situations. To quote the motto of the Boy Scouts, "be prepared" for what may surface from the ashes of the tax debate in Washington. For some provisions, you may need to react in a timely fashion to take full advantage of what is available.

William F. Roth III is a tax partner with BDO USA LLP. The views expressed are those of the author and not necessarily those of BDO.

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