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Grow Your Tax Practice by Understanding Energy Tax Credits

“Renewable energy” and “clean energy” are terms that have become all but ubiquitous in corporate circles. Trends show that businesses and consumers alike are concerned with their environmental footprints, and governments at the Federal, state, and local levels are doing their part by offering incentives to taxpayers investing in sustainable energy. But energy tax credits can be confusing, which is why if you’re a tax advisor with even basic knowledge about these tax credits, you can gain the trust of new clients and quickly grow your tax practice.

How Tax Planning Software Can Help

Robust tax planning software can do a few things to help you gain and retain clients seeking energy tax credits. First, a good tax planning software can provide background information about each tax credit to help you better understand incentive options written into the tax code. It can also identify which specific tax credits your clients are eligible for. And lastly, a dynamic tax software should be able to calculate the optimal combination of credits that maximizes your client’s tax position. We’ll discuss software more a bit later, but now, let’s talk about four popular energy tax credits that may be available to your clients.

Nonbusiness Energy Property Tax Credit

Homeowners will qualify for the nonrefundable Nonbusiness Energy Property Tax Credit if they make energy efficiency improvements to their home that meet guidelines established by the Department of Energy. The credit can be earned in two ways.

(1)   By making “qualifying energy efficiency improvements” to the following areas in their homes:

  • Energy-efficient exterior windows, doors and skylights. 
  • Roofs (metal and asphalt) and roof products.
  • Insulation.

(2)   By incurring “residential energy property costs” on the following energy-efficient products:

  • Energy-efficient heating and air conditioning systems.
  • Water heaters (natural gas, propane or oil).
  • Biomass stoves.
  • Natural gas, propane, or oil furnaces and the circulating fans used within them

The first category of expenditures is eligible for a 10% credit, and the second category of expenditures is eligible for a 100% credit. The amount of credit that can be claimed for some products is limited under the law, and taxpayers cannot exceed $500 in combined credits under this program in a lifetime. This credit is currently set to expire at the end of 2020.

Residential Renewable Energy Tax Credit

Homeowners may also qualify for tax credits if they install products that rely on renewable energy like solar panels, wind turbines, and geothermal heat pumps in their primary or secondary homes. Fuel-cell technology is also eligible for this credit, but only when installed in a taxpayer’s principal residence.

In 2020, this nonrefundable credit is 26% of the cost, including installation, of these renewable energy products. The credit is reduced to 22% in 2021 and will be fully phased out at the end of 2021 unless it is extended. Unlike the Nonbusiness Energy Property Tax Credit, there is no lifetime limitation on the amount of credit a taxpayer can claim. There is an annual limit on the amount of credit that taxpayers can claim for installing fuel-cell equipment–that is capped at  $1,000 for each kilowatt of capacity generated.

Because this tax credit is nonrefundable and cannot reduce an individual’s tax liability below zero, taxpayers may have excess credits they cannot claim in the current year. Unused credits can be carried forward and applied against future tax liabilities if needed.

Both the Nonbusiness Energy Property Tax Credit and the Residential Renewable Energy Tax Credit are reported on Form 5695 of an individual taxpayer’s Form 1040.

Energy Efficient Home Credit

Individuals are not the only taxpayers eligible for energy tax credits. Businesses may be eligible for energy credits under Section 45L of the tax code. The Energy Efficient Home Credit incentivizes eligible contractors to build new, energy-efficient homes (or substantially renovate older homes to be more energy efficient) that are sold or leased to individuals to use as personal residences. If these homes reduce energy consumption by at least 50%, contractors can claim a $2,000 credit per dwelling unit in the year those units are sold or leased.

Businesses who cannot meet this 50% energy reduction standard may still qualify for partial credit under Section 45L. If they can get energy consumption reduced by at least 30%, they are eligible for a $1,000 credit per dwelling unit.

Interestingly, though this credit appears to be made solely for contractors or builders, individuals may be able to claim this credit. The tax credit is awarded to the taxpayer that has basis in the home during its construction or renovation. If an individual hires a contractor to perform substantial qualifying renovations on their home, the individual is the one who can claim the energy tax credit, not the third-party contractor.

The Energy Efficient Home Credit is a general business credit, which means that it may be limited based on the individual’s tax liability. Unused general business credits can be carried forward 20 years or carried back to the previous tax year.

Energy Efficient Commercial Building Deduction

Another tax incentive available to businesses is the Energy Efficient Commercial Building Deduction under Section 179D. This incentive rewards owners or lessees of commercial buildings with a tax deduction when they make eligible energy-efficient improvements to new or old buildings on or before December 31, 2020. Qualifying improvements (those made to the HVAC system, interior lighting, or to the building’s envelope) must reduce energy consumption by at least 50% to qualify for the full $1.80 per square foot deduction. If the business is unable to reduce energy consumption by 50%, it may be eligible for a reduced credit.

The calculation method makes this deduction particularly unique: the calculation can span more than just one tax year. The deduction is calculated based on energy improvements made to buildings placed into service during the “look back period,” which is typically three years for commercial buildings. This allows businesses to take a deduction in the current year for improvements made in prior years.

Another unique aspect of this deduction is that it is available for designers, architects, engineers, contractors, environmental consultants, and energy service providers when they design energy-efficient buildings for government agencies. Because government entities do not typically owe taxes, the tax deductions are passed onto the designers, creators, and builders.

How Energy Tax Credit Knowledge Can Help You Gain the Trust of Prospects

You can utilize this knowledge when discussing tax plans with prospects. Because many CPAs underestimate the value of energy tax credits, they are rarely discussed in meetings with prospects. Your knowledge can help you gain the trust of these individuals and business owners so that you can gain new clients and grow your tax practice. And the great news is that our tax planning software can help you. Corvee tax planning software helps you ask the right questions and collect the information you need to establish an ideal tax plan for your client, which is a great way to grow your tax practice. If you want to see a demo of how our software works, contact us today.

Contact us today to learn more about how Corvee Tax Planning software can help grow your tax practice.

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