Environmental Tax Credits

HISTORY

In 2005, President George Bush signed the United States Energy Policy Act. This legislation gives financial incentives to residential contractors and commercial building owners that build energy efficient homes and buildings. By using energy efficient building materials such as structural insulated panels (SIPs), builders and contractors can qualify for a $2000 tax credit on residential homes or up to a $1.80 per square foot tax deduction on commercial buildings.

PROVISIONS

Homebuilders are eligible for a $2,000 tax credit for a new energy efficient home that achieves fifty percent energy savings for heating and cooling over the 2003 International Energy Conservation Code (IECC) plus 2004 supplements. At least one fifth of the energy savings must come from building envelope improvement, achieved through higher levels of insulation and air sealing. A SIP building envelope delivers high R-value insulation while reducing air leakage, making SIPs an ideal option for meeting this requirement.

A tax deduction of up to $1.80 per square foot is available to owners (or designers, in the case of government-owned buildings) of new or existing commercial buildings. To qualify owners must demonstration that the building was constructed or reconstructed to save at least 50% of the heating, cooling, water heating, and interior lighting energy cost that meet ASHRAE Standard 90.1-2001. Partial deductions of up to $.60 per square foot can be taken for comparable reductions from any one of three building systems�the building envelope, lighting, or heating and cooling system�that meets goals consistent with achieving the fifty percent savings for the entire building.

TAX CREDIT VS TAX DEDUCTION

Tax credits, as compared to tax deductions, directly reduce the amount of income tax owed. Tax deductions reduce the amount of income subject to tax.

HOW TO QUALIFY AND APPLY HOME TAX CREDIT

To receive the $2000 tax credit for homes, the builder must follow the guidelines set out in IRS Notice 2006-27. To do so, the home must undergo an inspection from an energy rater certified through the Residential Energy Services Network (RESNET). To find a RESNET energy rater in your area visit the RESNET website.

The Internal Revenue Service has created IRS Form 8908 to guide contractors through applying for the tax credit.

Additional environmental tax credits and deductions vary by region throughout the United States. Visit http://www.dsireusa.org/ for additional regional information about tax incentives in your area. 

HOW TO QUALIFY AND APPLY FOR COMMERCIAL TAX DEDUCTION

Owners and Leaseholders of commercial buildings must follow the procedures listed in IRS Notice 2006-52. Additional information about this IRS notice can be found in an article on the IRS' website.

This notification provides guidance for full and partial deductions on new commercial construction and renovation. Since the financial incentive is a tax deduction, the Internal Revenue Service will continue to use standard forms to apply it to your taxes each year. Please consult a tax professional to learn how you can maximize your deduction.

PARTIAL DEDUCTIONS

In the case of a building that does not meet the whole building requirement of a 50 percent energy savings, a partial deduction is allowed for each separate building system that is certified by a qualified professional as meeting or exceeding the applicable system savings targets of the $1.80 per square foot commercial tax credits. The applicable system savings targets are those that would result in a total annual energy savings of fifty percent for the whole building, if each of the separate systems met the system target; note that the maximum allowable deduction is $0.60 per square foot. The separate building systems are:

1. Interior lighting system
2. Heating, cooling, ventilation, and hot water systems
3. Building envelope

For more information on partial deductions, consult IRS Notice 2006-52.