Federal

Tuesday, June 30, 2009

IRS Releases Guidelines for Taxpayers Electing to Take the Investment Tax Credit Instead of the Production Tax Credit

Taxpayers who satisfy the definition of a qualified facility for purposes of the production tax credit may irrevocably elect to take the investment tax credit (energy credit). 

 

Taxpayers must claim the energy credit on IRS Form 3468 and file the form with the taxpayer's income tax return for the year in which the property is placed into service.  A separate election for each qualified facility must be made.  In addition to the submission of Form 3468, the taxpayer must attach a statement that contains a technical description of the facility, including generating capacity and a technical description of the energy property placed into service during the taxable year as an integral part of the facility.  This election only applies to qualified facilities that were placed into service after December 31, 2008.  

 

If the taxpayer has received a Section 1603 grant (grant in lieu of the energy tax credit or production tax credit), then the taxpayer is not eligible to take either the energy tax credit or the production tax credit.  

 

Additional requirements for making this election are contained in IRS Notice 2009-52.  

 

 

Tuesday, March 17, 2009

Claiming the Residential Energy Property Credit

The American Recovery and Reinvestment Act of 2009 substantially increased the tax credit for making your home more energy efficient. The credit is available for 2009 and 2010. This note, authored by Victor Thuronyi and Walter Wang,  explains how to qualify for the credit and why it is important to take advantage of this credit if you are eligible.

 

 

Section 1: Introduction
Why should people focus on this and make these improvements as soon as possible?

By reinstating and increasing the amount of the tax credit available to homeowners, the government is providing us an increased incentive to focus now on making energy efficient improvements. There are several reasons to act soon:

 

• The credit is available only for 2009 and 2010.
• The amount of the credit has been increased to 30% (previously it was 10%), for up to $5,000 of energy improvements.
• By spending money on improvements, you will help stimulate the economy. The collective spending by potentially millions of people will help create jobs and help bring about economic recovery.
• This is prudent spending – investment, rather than current consumption. The amounts you spend will reduce your utility bills in future years and increase the value of your home.
• By reducing your energy use, you will be reducing America’s reliance on foreign energy sources and contribute to the effort to stopglobal warming.

 

What types of improvements are covered?

Insulation, windows, doors, metal roofs, heat pumps, central air conditioners, water heaters, hot water boilers, and fans used in furnaces. See Section 3 below for details on improvements that qualify.

 

Section 2. Claiming the credit on your tax return

I don’t itemize. Can I claim the credit?

Yes, this is a tax credit, not a deduction, so you can take the credit even if you don’t itemize deductions.

What tax forms do I need to use?

To claim the credit, you need to file your individual income tax return using Form 1040. You cannot use Form 1040EZ or 1040A. You figure the amount of your credit using Form 5695. However, because the credit was unavailable for the 2008 taxable year, the 2008 version of Form 5695 cannot be used. You can find Form 5695 for 2006 on the IRS website, but some of the information on that form is outdated because the 2009 law changed some of the rules. The IRS will revise Form 5695 on its website for the 2009 taxable year at some point during the year.

Most of my tax is paid by withholding so I don’t pay much tax. Can I claim the credit?

The credit is limited to your tax liability, but this is the amount before taking into account tax withheld. For example, let’s say your tax liability is $1,000, and $1,100 has been collected through withholding, so that you would get a refund of $100 (if you did not claim the credit). In this case, your tax liability is $1,000, so you can take a credit of up to that amount (you would need to spend $3,000 on qualifying energy improvements). In this case, your refund would be $1,100. If you spent more than $3,000, your credit would still be limited to $1,000.

What if I don’t have enough tax liability take advantage of the credit? Can I carry it over to the next year?

You can’t carry it over, but what you could do is install the energy property in two different years. For example, if your tax liability is $1,000 each year, you could install, say, $3,000 worth of property in 2009 (for a credit of $900) and $2,000 worth of property in 2010, claiming a credit of $600 for 2010.

Is there a limit on the amount of credit I can take?

The total credit that you can claim for 2009 and 2010 is limited to $1,500. This corresponds to $5,000 of expenditures, since the credit rate is 30%.

Can I claim the credit if I am liable for Alternative Minimum Tax?

Yes. For 2009, the credit can be used to offset AMT. Congress might extend this rule to include 2010, but if you want to be sure to get the credit, install your energy efficient property in 2009. The earlier the better as this will benefit the economy and the environment.

Can I get the money now or do I have to wait until next April 15?

If you expect a refund, you can file your income tax return immediately after the end of the 2009 and 2010 taxable year or, if you want to benefit from the money earlier, you can ask your employer to reduce your withholding.

 

Section 3. What types of improvements qualify for the credit?

Improvements for which only the cost of the energy efficient property is eligible for the credit include insulation, exterior windows, skylights, and doors. The improvements must meet certain specified certification requirements. For exterior windows and skylights that were paid for before June 1, 2009 and placed into service after February 17, 2009, the certification requirement is met if the product has the Energy Star label on it and is installed in the region identified.  However, the Energy Star label may not be relied on in any other circumstance.   

Improvements for which the cost of the property and the installation costs are eligible for the credit include electric heat pump, electric heat pump water heater, closed loop geothermal heat pump, open loop geothermal heat pump, direct expansion geothermal heat pump, central air conditioner, natural gas, propane, or oil water heater, natural gas, propane, or oil furnace or hot water boiler, and a fan that is used in a natural gas, propane, or oil furnace. The property listed above must also meet certain requirements set forth by the IRS.

 

 

Section 4. General Questions
I’m a renter. Can I claim the credit?

No, the credit is available only for property installed in a home you own.

Can I claim the credit for improvements to my vacation home?

No, you can only claim the credit for your principal residence.

I live in a condo. Can I get the credit for costs paid by the condo association?

Yes, ask your homeowners association to report your share of the cost. Same if you live in a co-op.

 

What about installation costs?

For insulation, windows, doors, and metal roofs, the credit is based only on the cost of the materials. For all the other property, expenditures qualifying for the credit include installation costs.

 

Does my utility company offer any rebates on the purchase of energy efficient property?

Some utilities do offer rebates for the purchase of energy efficient property. For example, San Diego Gas & Electric (SDG&E) offers rebates on attic or wall insulation, central furnaces, pool pumps and motors, and water heaters among other types of energy efficient property. You should check with your local utility provider for more details. It should be noted that property that qualifies for a utility rebate may not always be the same as property that qualifies for the Federal residential energy property credit.

Sunday, March 01, 2009

Details of the Stimulus Bill Provisions Allowing a Grant in Lieu of the Production Tax Credit or Investment Tax Credit

The Stimulus Bill contains many provisions that are designed to increase investment in alternative energy related projects. One of the more important items in the Stimulus Bill gives taxpayers the ability to obtain a grant in lieu of the production tax credit or investment tax credit. The grant is available to certain energy property which is "placed in service" during 2009 and 2010. The grant is also available to property that is placed in service after 2010, but only if construction begins during 2009 or 2010 and is placed in service by the applicable credit termination date. Applications for grants must be submitted before October 1, 2011. Grants will be paid the later of 60 days from the date of the application for the grant, or the date the property was placed in service.

 

The amount of the grant tracks the amount you would otherwise receive under the investment tax credit. For example, if you placed qualified solar property into service, the amount of the grant would be 30% of the basis in the property (same as the credit). For other property such as geothermal property, the amount of the grant would be 10%. If you dispose of the property early, certain amounts of the grant would be recaptured and must be recognized as income.

For property, the construction of which began in 2009 or 2010 that was not placed into service during those years, the property must be placed into service by the following dates:

 

January 1, 2013 - Wind Facilities

January 1, 2014 - Certain Other Facilities Eligible for the Production Tax Credit

January 1, 2017 - Property Eligible for the Investment Tax Credit

 

Once the application procedures are released, we can help advise and pursue the grant application on your behalf.

Sunday, March 01, 2009

Department of Energy Announces Changes to Expedite Loan Guarantees for Alternative Energy Investment

Energy Secretary Steven Chu announced on February 19, 2009 that the Department of Energy ("DOE") will reorganize the process by which the department disperses direct loans, loan guarantees, and other funding vehicles for investments in the alternative energy economy.  The list of reforms include among others: (1) rolling appraisals of applications; (2) streamlining and simplifying loan application forms and other paperwork; (3) accelerating loan underwriting; and (4) reduction of upfront fees in certain cases. 

 

The DOE anticipates that by late April or early May, loan guarantees under the Department's previous loan guarantee program will begun to be offered.  Loan guarantees provided for under the Stimulus Act will be offered beginning this summer.  Additionally, the DOE expects to disperse 70% of the investment from the Stimulus Act by the end of 2010. 

Friday, January 23, 2009

USPTO Publishes a Patent For Financing Residential Renewable Energy Equipment Using a PPA

The USPTO published a patent application on January 22, 2009 which claims that a form of residential PPA is a patentable business method. Under the PPA arrangement set forth in the patent application, the PPA investor has a right to take a real property security interest or an actual security interest in primary residence of a residential consumer. The PPA arrangement set forth in the patent application assumes either a loan or lease arrangement. The application claims that the security interest in the primary residence will enable the residential consumer to take a tax deduction for any interest portion of the payments to the PPA investors.

 

When and if a patent is issued, the issuance does not necessarily mean that the business method is legitimate and the tax benefits associated with such method are correct (see below). The effect of the issuance of a patent related to residential PPA's may have a chilling effect on the alternative energy industry as this may cause an increase in the cost of setting up a residential PPA.

 

Background

The general purpose of a patent is to encourage invention and reward the inventors with an exclusive right to exclude others from using their invention. In recent years, the subject matter upon which patents may be issued has expanded to include business methods. One consequence has been that numerous attorneys, businesses, and accountants have applied for and received a patent for various tax planning methods. In 2006, the Congressional Joint Committee on Taxation highlighted some of the concerns regarding the issuance of patents for tax planning methods. One of the overriding concerns expressed was that the granting of a patent for a tax planning method would be tantamount to granting the patent holder an ownership right over the relevant provision of the Internal Revenue Code and Treasury Regulations. Other concerns included the thought that patents would be allowed for aggressive tax avoidance strategies as well as routine planning strategies. An additional issue raised by the Joint Committee on Taxation and echoed by former IRS Commissioner, Mark Everson, is that a patent does not mean that such planning method is legitimate or that such method would succeed under audit.

 

Each of the House and Senate have, in prior years, introduced legislation that would ban the ability to patent a tax-planning method. However, to date, such legislation has yet to become law.