BY MICHAEL BOHINC, CPA
Most people, including many CPAs, cringe any time a new tax law is enacted. However, there are some great opportunities for contractors and taxpayers within some of the new laws that have been passed recently.
One source of such opportunities is the Federal Energy Policy Act, which was passed in 2005.
There are some great marketing opportunities for contractors within this law. It provides for tax credits of up to $500 on energy-saving products that meet certain federal standards on energy usage. The credit is available for purchases made between January 1, 2006 and December 31, 2008.
One component of the tax credit covers qualified energy-efficiency improvements made to existing homes. Qualifying purchase items include:
advanced main air circulating fan upgrade/installation (the credit can't exceed $50)
insulation materials or systems designed to reduce heat loss or gain
exterior windows, including sky lights and doors.
The maximum credit for these items is $200 of the total $500 credit available.
The other component of the tax credit covers residential energy property purchased for personal residences. Residential energy property items include:
gas and electric water heaters
central air conditioners and heat pumps
gas and oil furnaces and boilers
- ground-source heat pumps.
The maximum credit allowed for these items is $300 of the total $500 credit.
One of the primary motivations for the Energy Policy Act was to reduce our dependence on fossil fuels and encourage energy savings. The government is using these tax credits as incentive for homeowners to invest in energy-efficient comfort systems. Therefore, in your marketing, you can promote tax savings to your clients in addition to the money they'll save on their monthly energy bills. They can improve the energy efficiency in their homes, and take at least a $300 credit on their tax return.
Remember, this is a tax credit, not a deduction. Credits are generally better because they reduce the actual tax liability, not the taxable income. This can be used as an additional incentive in selling clients on upgrading their home comfort systems.
Another point to stress to your clients is the fact that expenses of this type are normally not deductible on their personal tax returns.
There are a few things to consider regarding this tax credit. There is a maximum total credit of $500 over a taxpayer's lifetime. You can't take the credit on one residence and then move and take another $500 credit for the new residence. The credit applies only to a principal residence; vacation homes and rental properties don't qualify.
The Homebuilder's Credit
Another credit to be aware of is the Homebuilder's Credit. This one isn't as likely to have broadbased use amongst contractors as the residential energy credit, but it's still worth knowing.
The Homebuilder's Credit is available for those contractors who build new, energy-efficient homes. Again, this credit only applies to homes purchased between January 1, 2006 and December 31, 2008 for use by a person as their residence.
To qualify for the credit, the home (including manufactured homes) built by the contractor must be certified according to law. The credit amount is $2,000 for those manufactured or constructed homes certified to reduce the energy consumption by at least 50%. The credit is reduced to $1,000 for those homes that are certified to reduce energy consumption by at least 30%.
The government has also re-instituted a tax credit for purchases of "renewable energy" sources equipment. The credit is available to individual taxpayers who purchase qualifying solar equipment in 2006, 2007, and 2008. Qualifying equipment includes solar water heating equipment, fuel cell equipment, and solar equipment that generates electricity from sunlight. The maximum credit is $2,000 per tax year. This is another selling tool to use with your clients who may be interested in renewable energy sources.
While many taxpayers think any new tax law will automatically have negative implications, the Energy Policy Act bucks that trend. It offers a terrific opportunity for contractors to promote the tax incentives available to homeowners who replace or upgrade their home comfort system.
For additional information on these energy tax credits, including energy efficiency specification requirements, visit the Energy Star website at www. energystar.gov and click on "Tax Credits Under the Energy Bill" on the site's home page.
This article is intended to provide general information on the topic of the energy Policy Act, the potential tax credits available and possible opportunities for contractors under this law. this article is not intended to be comprehensive, and you should seek professional tax advice in discussing your specific situation and opportunities available.
Michael A. Bohinc is a certified public accountant based in Cleveland, OH. He is also a licensed contractor in the state of Ohio, an associate member of the Air Conditioning Contractors of Ohio, an associate member of the Plumbing-Heating-Cooling Contractors (PHCC) of Ohio, and a Consult & Coach Partner for the service roundtable. He has 19 years' experience working on business management issues in the HVAC and plumbing industries. He can be reached at 440/7082583, e-mail [email protected]
Photo: Digital Stock