Energy Expenditures - Taking the Credit You Deserve

Tax and Financial News

May 2005

Energy Expenditures - Taking the Credit You Deserve

This month's business article centered on the small business person's concern about the price and availability of fuel. Recent prices of oil and natural gas, along with less than optimum refinery capacity, are making it difficult for the United States to maintain high economic growth.

Most of the solutions revolve around switching to newer energy sources. This can place such a heavy burden on small business. Converting from one form of power to another has proven to be an expensive prospect; however, our congressional representatives have provided a way to offset some of that expense. That's what we are about this month - to show you how Uncle Sam wants to help you save money on new technologies.

Energy Credit

The Energy Credit is a credit allowed for 10 percent of the cost of 1) equipment that uses solar energy to generate electricity, heat or cool a building, provide hot water, or 2) equipment that is used to produce, distribute or use geothermal energy. To qualify, equipment must be depreciable (used in your business) and, after claiming the credit you must keep the equipment at least three years.

Renewable Electricity and Refined Coal Production Credit

The Renewable Electricity and Refined Coal Production Credit is a credit allowed for investment in qualified equipment that produces electricity from any of the following:

Open-loop biomass used in an open-loop biomass facility.
Geothermal energy used in a geothermal facility.
Solar energy used in a solar facility.
Small irrigation power used in small irrigation power facility.
Municipal solid waste used in a landfill gas facility.
Municipal solid waste used in a trash combustion facility.
Poultry waste facility.
Certain other facilities.
Wind energy.
Refined coal.

The credit goes to the owner of the facility and is based on a rather complicated computation. For further information, please refer to Form 8835. If you think this may be a route for you, you should begin the process immediately after finishing the article. At present, the credit is available only for facilities placed in service before January 1, 2006. The credit is available for either five years or 10 years after the in-service date, depending on the type of plant.

Qualified Electric Vehicle Credit

If you are in the market for a new vehicle, perhaps this would be a good time to investigate electric vehicles. A 10% credit based on vehicle cost is allowed for the purchase of a qualified electric vehicle for 2005 (For 2006 the amount will be 25% of what would have normally been allowed.). The credit cannot exceed $4,000 for any one vehicle. The following excerpt from the instructions to IRS Form 8834 defines a qualified electric vehicle:

"A qualified electric vehicle is any motor vehicle that is:

Manufactured primarily for use on public streets, roads, and
highways, and has at least four wheels;
Powered primarily by an electric motor drawing current from
rechargeable batteries, fuel cells, or other portable sources of
electrical current;
Originally used by you; and
Acquired for your own use and not for resale.

Exceptions. The qualified electric vehicle credit does not apply
to vehicles that are:

Used primarily outside the United States,
Used by a governmental unit or agency or any foreign person or entity, or
Used by a tax-exempt organization (other than a section 521 farmers' cooperative) unless the property is used mainly in an unrelated trade or business taxed under section 511."

The main drawback to electric vehicles is there are virtually none that will serve for higher speed and distance required of most family vehicles. There are a few electric vehicles that qualify, but their use is only for short distances like in your neighborhood.
This would almost certainly require owning two vehicles for use - one for longer distance and higher speed and another vehicle for short, slow speed travel in the neighborhood. With a top speed of 25 miles per hour, you will save money on gas, maintenance and speeding tickets.

Clean Fuel Vehicle Deduction

Finally, there is a deduction available to all taxpayers regardless of the business purpose, or lack thereof, for the expenditure. The Clean Fuel Vehicle Deduction allows the purchaser of a vehicle certified by the IRS as qualifying for the expense, a deduction of up to $2,000 for 2005 and $500 for 2006. Generally speaking, the new hybrids (part electrically - part gasoline) on the market qualify for the deduction, but make sure you know the IRS has already certified the model you want to purchase.

Conclusion

With the continued scare over gasoline prices and, indeed availability of petroleum products, perhaps now is the time to consider buying more "green friendly" vehicles. Your decision will necessarily be guided by cost factors and personal preferences. Personnel preferences are not within our control, but if you need some help, give us a call and let us run the numbers to test the claim that the new vehicle will actually save money. We will do the number crunching and you will get all the credit.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.