New U.S. Energy Law Offers Some Tax Breaks for Energy-Wise Businesses

New U.S. Energy Law Offers Some Tax Breaks for Energy-Wise Businesses

U.S. businesses should be able to save energy and money, too, if they're in a position to take advantage of provisions of the nation's new energy law. Both houses of Congress have passed the Energy Policy Act of 2005 and sent it to the White House, where President Bush is expected to sign it.

The Act has come under fire from environmentalists, who claim that most of the $14.5 billion in tax breaks will help producers and users of oil, natural gas, and coal. However, the Act does offer some tax breaks -- the overwhelming preponderance going to businesses -- over a ten-year period to help boost conservation efforts, increase domestic energy production and expand the use of alternative energy sources such as solar, wind, ethanol, biomass, and clean-coal technology.

Consumers will also benefit, notes Mark Luscombe, principal federal tax analyst at CCH Incorporated, a provider of tax and accounting information. "The bulk of the tax benefits will go to energy-related businesses and commercial users of energy, but homeowners, home purchasers, car buyers, and consumers in general stand to benefit as well, either through tax credits or through the greater availability and affordability of energy-efficient homes and appliances," Luscombe said.

Breaks for Car Buyers

Car buyers can benefit through tax credits for the purchase of a variety of energy-efficient vehicles, not all of which are currently available to the general public. The credit replaces a less generous tax deduction. In addition to familiar hybrid passenger cars and SUVs, the credit also applies to cars and trucks powered by fuel cells, advanced "lean burn" diesel and other alternative power sources.

The size of the credit varies depending on the weight class of the vehicle, its fuel economy and lifetime fuel savings. For example, a hybrid SUV weighing less than 8,500 pounds that is 200 percent as fuel-efficient as a 2002 model would qualify for a credit of $1,600. It could also qualify for an additional "conservation credit" based on projected lifetime fuel savings -- up to $1,000 for a lifetime fuel savings of 3,000 gallons or more.

The credits will be available beginning next year and run through 2010 for lean burn vehicles, advanced fuel vehicles and hybrid cars and light trucks. The credit for hybrid medium and heavy trucks ends after 2009. The credit for fuel cell vehicles extends to the end of 2014.

"Buyers should note that purchases made this year will not qualify for these new credits, so buyers should time their purchase accordingly," Luscombe noted.

Indirect Benefits for Home, Appliance Buyers

Home buyers may benefit indirectly from a business tax credit for the construction of new energy-efficient homes. Contractors and other suppliers installing energy-efficient heating and cooling appliances and other items in new homes are eligible for a new credit up to either $1,000 or $2,000 per dwelling unit, depending on the degree of energy efficiency. The $1,000 credit is for improvements of 30 percent over the energy consumption by a comparable dwelling unit; $2,000 for a 50% improvement. Manufactured homes qualify for the credit but with some additional limitations.

"The credit goes to the home builder, rather than the homeowner, but builders may pass the credit through to purchasers, who would end up with a more energy-efficient house than they otherwise could afford," Luscombe observed. Like the credits for homeowners, this credit expires after 2007.

A similar indirect benefit may be provided by a manufacturers' tax credit for energy-efficient dishwashers, clothes washers and refrigerators manufactured in 2006 and 2007.

"The goal is to encourage manufacturers to offer more efficient and cheaper appliances that will also save consumers money on their energy bills over the long haul," Luscombe said.