Energy Policy Act for the Legislatively Challenged

May 15, 2006
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WASHINGTON - If EPAct sounds familiar to you, it should. An earlier form covered new motors and motor replacements in commercial-industrial applications. However, the Energy Policy Act of 2005 (EPAct) offers a lot more than its predecessor, EPAct of 1992 - there is more in it for residential HVAC contractors and their customers.

"The [2005] energy efficiency tax credits will allow consumers to reduce their 2006 tax bills on a dollar-for-dollar basis up to the amount allowed under the law," explained the Department of Energy (DOE).

According to the American Council for an Energy Efficient Economy (ACE3), the EPAct of 1992 "established minimum efficiency levels for electric motors manufactured or imported after October 1997." EPAct of 2005 broadens the scope to residential mechanical equipment and building components, as well as hybrid vehicles.

The act, signed by President Bush in 2005, offers consumers and businesses federal tax credits, which began in January 2006, for purchasing energy-efficient appliances and products, as well as fuel-efficient hybrid-electric vehicles. They are only applicable to products or equipment purchased as of Jan. 1, 2006, pointed out Chris Kielich, spokesperson for the DOE. Most of these tax credits remain in effect through Dec. 31, 2007, she said. Improvements must be installed in or on the taxpayer's principal residence in the United States.

In this article, we will address HVAC contractors' basic questions regarding EPAct 2005.

WHAT'S A TAX CREDIT?

It has been a while since federal tax credits have played a role in the HVAC contractor's business. In a nutshell, a tax credit is different from an equivalent tax deduction. According to the DOE, "a tax credit reduces tax dollar-for-dollar, while a deduction only removes a percentage of the tax that is owed." In short, a tax credit reduces your total taxable income.

Beginning in tax year 2006, consumers will be able to itemize purchases on their federal income tax form, which will lower the total amount of tax they owe the government. EPAct 2005 deals in tax credits, not deductions.

Which energy-efficiency improvements are eligible for tax credits?
Consumers who purchase and install specific products, such as energy-efficient windows, insulation, doors, roofs, water heaters, and heating and cooling equipment in the home, can receive a tax credit of up to $500 beginning in January 2006.

Do the credits apply to 13 SEER air conditioners?
Be aware that the new 13 SEER, minimum-efficiency heating-cooling equipment will not qualify for the credit. The goal of the program is to encourage consumers to act beyond the minimum, said Stephen Yurek, general counsel for the Air-Conditioning and Refrigeration Institute (ARI). "The minimum just sets the floor."

TABLE 1. Anticipated tax and energy savings for energy-efficient HVAC and water heating improvements. NOTE: The IRS will determine final tax credit amounts. (Source: http://energystar.gov)
The minimum efficiency for a unitary air conditioning split system, for example, is 15 SEER (12.5 EER), for a tax credit of $300 (see Table 1). Whether or not this is suitable for a contractor's customers depends on many factors, not the least of which is their climate.

"No matter the tax credits, you'll still save energy with a higher efficiency system," pointed out Yurek. "However, the expense of the equipment and the climate will affect the payback period. The payback periods [for central air conditioners] will be much shorter down South." On the flipside, consumers in colder climates will have a shorter payback when purchasing a heating system that qualifies for a tax credit ($150 credit for an AFUE-95 furnace).

Are there solar tax credits?
Yes, there are solar tax credits in EPAct 2005, but water heating for pools and hot tubs won't count. It provides a credit equal to 30 percent of qualifying expenditures for the purchase of qualified photovoltaic (PV) property, and for solar water heating property, "used exclusively for purposes other than heating swimming pools and hot tubs," stated DOE. The credit shall not exceed $2,000.

Are there credits for new homes?
The business credit for energy-efficient new homes provides tax credits to eligible contractors for the construction of qualified new, energy-efficient homes. The credit applies to manufactured homes meeting Energy Star® criteria and other homes that save 50 percent of the energy compared to the EPAct standard. While the credit applies to the building contractor, that company may decide to pass along some of the savings to its clients.

Are there more business tax credits?
Yes indeed, and they go well beyond the old EPAct's motor requirements. EPAct 2005 extends business tax credits for buying hybrid vehicles, building energy-efficient buildings, and improving the energy efficiency of commercial buildings. In some cases, it includes fuel cells and stationary power plants.

  • Credit for business installation of qualified fuel cells, stationary microturbine power plants, and solar equipment: This provides a 30 percent tax credit for the purchase price for installing qualified fuel cell power plants for businesses, a 10 percent credit for qualifying stationary microturbine power plants, and a 30 percent credit for qualifying solar energy equipment.

  • Energy-efficient commercial building deduction. This provision allows a tax deduction for energy-efficient commercial buildings that reduce annual energy and power consumption by 50 percent compared to the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE) 2001 Standard 90.1. The deduction would equal the cost of energy-efficient property installed during construction, with a maximum deduction of $1.80 per square foot of the building, according to DOE. Additionally, a partial deduction of 60 cents per square foot would be provided for building subsystems.

    Are there credits for ductwork?
    No, though many experts in the HVAC industry agree that without a good delivery system, "the box" (as the equipment is often referred to) can lose a lot of efficiency in the field. "There's a lot of discussion within the industry on what type of incentives, standards, or programs can be used to deal with the systems the equipment is attached to - duct, insulation, building envelope," said Yurek.

    "At this point in time, we're looking into how such an incentive system could be developed," he said. "Everybody agrees that's where we need to go."

    Sidebar: More Information

    Chris Kielich, spokesperson for the DOE, suggested that HVAC contractors get familiar with the following information resources, so they can pass them along to their customers and/or customers' accountants.

  • IRS guidance for consumers: www.irs.gov/pub/irs-drop/n-06-26.pdf

  • www.energy.gov/taxbreaks.htm

    Publication date: 05/15/2006

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