Energy Tax Incentives Act of 2005
Safe, Accountable, Flexible, Efficient Transportation Equity Act of 2005

The near simultaneous passage of the Energy Policy Act of 2005 (H.R. 6) and the SAFE Transportation Equity Act of 2005 (H.R. 3) tends to highlight the interrelationship of the two major areas of energy and transportation to the American economy. A major portion of energy usage goes to support transportation in its various forms and the taxation of energy resources serves as a major source of funding to build and maintain the transportation infrastructure.
It is expected that neither piece of legislation will have much, if any, immediate impact on the price consumers pay for gasoline. However, the tax title (Energy Tax Incentives Act, Title XIII of H.R. 6), does contain numerous benefits directed at traditional energy producers, such as the oil, coal, and electric power industries. In addition, the sometimes forgotten nuclear power industry also received attention from Congress. Finally, nontraditional sources of energy, including biodiesel and solar power, were also considered.
Although these legislative efforts were aimed primarily at the energy and transportation industries, that is not to say that individuals or general business should feel left out. In particular, car purchasers, homeowners, and commercial building owners will all have something to consider when doing their tax planning. In addition, the legislation contains the typical smattering of specialized provisions benefitting such diverse groups as small custom gunsmiths, sport fishermen, and certain segments of the alcoholic beverage industry.

Overall Effect on Individuals
Individual taxpayers were the recipients of two significant changes made by the Energy Tax Incentives Act of 2005 (Energy Act). First, prospective car and light truck purchasers will have new incentives to purchase a vehicle powered by other than a traditional gasoline engine. Due to certain restrictions contained in the statute, anyone contemplating such a purchase in the near future should study their options and consider the benefits of deciding sooner rather than later.
Another major class of beneficiaries of the Energy Act are homeowners. New incentives for energy-efficient changes to one's home, including the installation of certain solar or photovoltaic equipment should prove popular. In addition, a new credit is available for the installation of equipment to be used to refuel certain nontraditional vehicles.

Effect on Purchasers of Environmentally Friendly Vehicles
New credits on purchase or lease. --The Energy Tax Incentives Act of 2005 (Energy Act) did not neglect a growing segment of the American driving public consisting of purchasers of vehicles that are powered by other than a traditional gasoline engine. Such vehicles, which include pure electrics and hybrids, as well as those that run on natural gas, liquefied petroleum or natural gas, or 85-percent methanol have been growing in popularity as gasoline prices have risen. Hybrid cars, such as the Toyota Prius and Honda Insight, as well as more recent luxury entries like the Lexus RX 400h, have been garnering the bulk of the publicity. Particularly in the case of hybrids, price does not seem to have deterred sales, at least not to date. However, the typical hybrid model "stickers" for several thousand dollars more than its normally powered sibling. Over time, consumers may find it hard to justify such a price differential even when that initial price is offset by fuel savings over the life of the vehicle. For example, if the hybrid version of a vehicle averages 40 miles per gallon versus 25 for the gasoline version and, assuming gasoline averages $2.50 per gallon, a driver would have to travel over 80,000 miles to recover a $3,000 difference in price between the two vehicles. Of course, this is before the consideration of tax incentives that can drastically alter that equation.

The Energy Act effectively terminates the current law deduction for clean fuel vehicles and replaces it with a series of credits for hybrids, lean-burn vehicles, fuel cell vehicles, and alternative fuel vehicles under the overall title of the "Alternative Motor Vehicle Credit".

Hybrids and lean-burn vehicles. --Although prior law did provide tax incentives for the purchase of a hybrid or other nontraditional vehicle, the Energy Act sweetens the deal. Beginning January 1, 2006, purchasers and lessors of hybrids and so-called lean-burn vehicles are entitled to a two-part credit rather the deduction that had been in place before the new law. The two part credit consists of (1) a fuel economy credit and (2) conservation credit. The fuel economy credit is computed on the basis of a comparison with 2002 model year fuel economy for city driving. This portion of the credit ranges from $400 for a vehicle with fuel economy that is at least 125 percent better than the base amount and up to $2,400 for one that has fuel economy of at least 250 percent of the base amount. For example, a 2002 passenger car in the 3,500 pound class had a fuel economy rating of 22.6 miles per gallon. Accordingly, a hybrid vehicle that produces fuel economy of double that amount would be entitled to a $1,600 fuel economy credit under the new law. The conservation credit relates to the lifetime fuel savings of a vehicle and ranges from $250 for a savings of at least 1,200 gallons of gasoline to $1,000 for a savings of at least 3,000 gallons. A similar credit is available for commercial vehicles as well.

However, what Congress gives with one hand it often takes away with the other. The new credit for hybrid and lean-burn vehicles will be capped once a manufacturer sells 60,000 of such vehicles. Beginning with the second quarter after the 60,000th sale is recorded, purchasers would only be entitled to a reduced credit phasing down to no credit after the fifth quarter. Although the basic reason for such a cap may be the cost to the federal treasury, there has been some speculation that it was also included to give domestic auto manufacturers a needed break against some of their Japanese rivals that have been out front with this technology and are already selling enough such cars annually to easily exceed the cap limitations next year. The credit is set to expire generally December 31, 2010.

Alternative fuel vehicles. --Somewhat less sexy from a technological point of view than hybrids, alternative fuel vehicles are still an important segment of the current automotive market. Alternative fuels include natural gas, liquefied petroleum or natural gas, or 85-percent methanol. The Department of Energy lists over 20 models of 2005 cars and light trucks that are available as alternative fuel vehicles that are not hybrids. These include such mainstream models as the Ford Taurus, Dodge Ram pick up, and the Chevy Silverado. For alternative fuel cars and light trucks, the Energy Act provides a credit of up to $4,000. A larger credit is available for trucks, buses, and vans. This credit also expires December 31, 2010.

Fuel cell vehicles. --Although fuel cell vehicles are extremely rare today, President Bush in his 2003 State of the Union address stated his interest in American industry developing viable hydrogen powered cars and trucks within the near future. The result is the President's Hydrogen Fuel Initiative, which, in conjunction with the FreedonCAR partnership with automakers, is intended to advance high-technology research needed to produce a practical, affordable hydrogen fuel cell that can significantly improve fuel economy over time. The drafters of the Energy Act did not forget to consider the potential future importance of fuel cell vehicles. Accordingly, a two-part credit is also provided for these vehicles with part one based on the vehicle's weight class and the second part based on fuel economy as compared to the 2002 model year figures. The base credit can run as high as $8,000 for cars, but tops at $4,000 in 2010 and later. The additional credit runs from $1,000 for vehicles having 150 percent better fuel economy than 2002 to $4,000 for those with 300 percent better fuel economy. The fuel cell credit would expire December 31, 2014.

Unfortunately, not all alternative vehicles received a boost from the Energy Act. A provision that would have extended the credit for electric vehicles was dropped in the Conference Agreement.

Residential clean-fuel refueling equipment. --If you own a vehicle that is powered by something other than gasoline, a serious practical problem may be how to refuel your vehicle. At the present time, it is not possible to simply drive down to the local service station and fill up your tank with 20 gallons of natural gas or to recharge your electric car. In answer to this point, beginning in 2006 for property placed in service in 2006, the Energy Act allows a new credit of up to $1,000 for the residential installation of alternative fuel vehicle refueling property. Such property would include storage tanks and dispensing units and charging stations for electric cars. Alternative fuels for purposes of this credit include mixtures that are at least 85-percent ethanol, natural gas, compressed natural gas, liquefied natural gas or petroleum gas or hydrogen, as well as biodiesel/diesel mixtures of at least 20-percent biodiesel A larger credit is available for commercial property. To claim this credit, qualifying property must have been put in service prior to 2010 or, in the case of hydrogen related property, 2015.

Effect on Homeowners
Energy-efficient improvements. --Although the main thrust of the Energy Tax Incentives Act of 2005 (Energy Act) is on energy producers and related industries, individuals, including homeowners, were not forgotten. Owners of existing homes will be entitled to a lifetime credit of up to $500 for energy-efficient improvements to their homes made in 2006 and 2007. The credit is 10 percent of the cost of (1) energy-efficient improvements plus the cost of (2) residential energy property expenditures. Qualifying improvements must be expected to last for at least five years and include those for insulation, windows, skylights, and doors, although only $200 can be attributed to expenditures for windows. Metal roofs coated with heat-reducing pigments are also included.

The residential energy property expenditures included in the credit are broken down into three components each with their own separate limits:

  • $50 for a main air circulating fan;
  • $150 for a natural gas, propane or oil furnace or hot water boiler; and
  • $300 for what is referred to as "energy efficient building property," which includes electric and geothermal pumps and central air conditioners.

The home for which the credit is being taken must be the taxpayer's principal residence. Although taxpayers are not required to certify their expenses for the credit, they will be required to reduce their basis in the qualifying property in the amount of the credit.
Solar or photovoltaic equipment. --Homeowners are also entitled to a 30-percent credit for the installation of solar hot water or photovoltaic (electricity generating solar) and fuel cell property. An annual credit limit of $2,000 per category is set for solar hot water and photovoltaic expenditures, and $500 for each half kilowatt of capacity of qualified fuel cell property. This credit is also available for property placed in service in 2006 and 2007. However, the credit cannot be taken for equipment used for heating swimming pools or hot tubs. Jointly occupied property, as well as condominiums and co-ops, are subject to proration rules.
Overall Effect on Business

Business generally fared well under provisions of both the Energy Tax Incentives Act of 2005 (Energy Act) and the SAFE Transportation Equity Act of 2005 (Highway Act). New incentives were added for the purchase and installation of fuel cell and microturbine power plants, as well as certain solar energy property. The research credit was also expanded to include certain expenditures on energy-related research. However, the benefits of the amortization of intangibles under IRC Sec. 197, will be recaptured in some cases.

Business owners who purchase or lease vehicles may be able to take advantage of the revised credits available for the purchase/lease of hybrid and other types of alternative fuel vehicles that are also available to individuals. Homebuilders, including those producing manufactured homes, will be the recipients of new credits for energy-efficient homes. Commercial building owners could benefit from provisions that will reward them for energy-efficient expenditures on their properties. The hard-hit home appliance industry can receive new business credits for manufacturing clothes washers, refrigerators, and dishwashers.

CCH Editorial Staff, Energy and Highway Tax Acts of 2005: Law, Explanation & Analysis, CCH, Incorporated, 2005