Marc Newman is a CPA and partner at Anchin, Block & Anchin of New York, where he co-chairs the Construction Services Group. His e-mail address is marc.newman@anchin.com.

Energy Conservation Can Also Trim Tax Bills

Owners, developers, and contractors should explore the variety of financial benefits available from state and federal initiatives encouraging greater energy efficiency in new buildings and products.

by Marc Newman

The Energy Tax Incentives Act of 2005, which created more than $14 billion in tax breaks for businesses and consumers nationally, offers significant benefits to home builders, homeowners, and commercial building owners who make their properties more energy efficient. Tax breaks are also available for energy-efficient appliances and environmentally friendly vehicles.

Though a federal initiative, the credits are particularly important in the Northeast because of the region's above-average utility rates and difficulty in building new power plants to meet growing energy needs.

Real estate developers can take advantage of tax incentives by improving the energy efficiency of their own facilities and by building energy-efficient residential properties for others in order to gain valuable tax credits. And contractors can provide added value to their clients by helping them evaluate property improvements that qualify for tax breaks.

A major benefit of the new federal act allows commercial building owners to claim an immediate deduction for the cost of qualifying depreciable property placed in service this year or in 2007. To qualify, the depreciable property must be installed as part of interior lighting, heating, cooling, ventilation, or hot water systems, or as part of the building envelope, such as insulation, roofing, windows, and doors.

The qualifying item also must be certified as part of a plan designed to reduce annual energy and power costs by at least 50 percent in comparison to a standard reference building. The maximum deduction available can be calculated by multiplying the building's square footage by $1.80, while a partial deduction is available for certain improvements that fall short of the 50 percent target.

Virtually all commercial buildings are eligible for this credit, including offices, retail space, warehouses, and rental housing structures of four stories or more. In addition, publicly owned buildings are eligible, because, the credit can "pass through" to the individual primarily responsible for the building's design.

At the state level, meanwhile, New York has enacted business and individual credits to encourage the use of solar energy systems.

The New York business credit for qualified fuel cell electric-generating equipment is up to $1,500 per unit. For clean-fuel refueling property, the credit can be up to 50 percent of the cost of the qualified item.

In addition, as of September 2005, there is no sales tax or compensating use tax tax on the sales and installation of solar energy systems.

Beyond fixed property, numerous credits are also available for energy-efficient vehicles. Starting in 2006, the federal act replaces the clean fuel vehicle deduction with a more valuable credit for new vehicles leased or purchased for either personal or business use. The credit is available for hybrid, advanced lean-burn technology, fuel-cell powered, and other alternative fuel vehicles.

The amount of the credit depends on several factors, including the type of vehicle and its cost, weight, and projected fuel economy. For example, the credit for hybrid vehicles ranges from $650 to $3,400 for the most fuel-efficient models. And the credit for vehicles that use alternative fuels - such as hydrogen, natural gas, or 85 percent-methanol mixes - ranges from a maximum of $4,000 for cars and light trucks to a maximum of $32,000 for larger trucks, vans, and buses.

Taxpayers also may claim a credit for 30 percent of the cost of installing alternative fuel storage and dispensing units or electric vehicle recharging equipment. The credit runs up to $30,000 for commercial installations.

These credits expire between December 31, 2009, and December 31, 2014, depending on the type of fuel or vehicle.

The federal act offers many more potential tax benefits related to energy-efficient products, practices, and construction methods. Construction firms that familiarize themselves with these incentives can generate valuable benefits for themselves and provide added value to their clients.

While the rules to qualify for and calculate the various credits and deductions are complex, taking advantage of them and using expert tax advice is a smart business decision in an era in which rapidly evolving energy issues are likely to remain at the forefront of regional policy discussions.