Eco-Logic - H.R. 1424: Sustainable systems provide highest return
With the downturn in the U.S. economy and the resultant effect on world markets, homeowners and small business owners are challenged to find low-risk options to protect their wealth or to provide reasonable long-term return on their investments. One option lies in their own home or business facilities: investing in renewable technologies outperforms any other venture, with little or no risk. Taxpayers and the environment benefit greatly from the provisions contained in the Emergency Economic Stabilization Act of 2008 (H.R. 1424).
The purpose of this edition of Eco-Logic is to describe the financial incentives contained in H.R. 1424 and to identify the technologies which provide the highest return on investment (ROI), enabling you to make an informed decision on renewable technologies.
H.R. 1424 extends and expands the Investment Tax Credits (ITCs) for building energy efficiency improvements and renewable energy production, while removing some limitations affected by the Alternative Minimum Tax (AMT) provisions in the current tax code. Information from the recent survey of TFG members by the Timber Frame Business Council indicates that most members are small business owners with home-based businesses. The tax credits are even more substantial when you are able to take ITCs for both residence and business. Timber frame companies working as general contractors and building energy efficient homes may qualify for an additional $2,000 deduction.
It is best to consult a tax advisor. However, don’t assume all tax advisors are conversant with these issues. Use the Internet for real-time updates of H.R. 1424, as well as local and state incentives that are not addressed in this article. The definitive website for incentives for renewable energy improvements is www.dsireusa.org.
The tax credits are based on the installed system cost after rebates. To qualify for this year’s credits, owners can complete the Renewable Energy Credits subsection on their 2008 tax return forms. Taxpayers whose current year credits are reduced by the AMT can claim the credit on their taxes for the following year.
The bill allows AMT filers and public utilities to claim the solar investment tax credits. Individuals, companies, and utilities that put solar energy property in service in the U.S. will receive a credit against their income tax liability (including AMT) in the amount specified in the bill.
No proof of purchase will be required; however, in case of an audit, keep a detailed invoice of your purchase on file. The contractor should stipulate in writing that the equipment is qualified (Solar Rating and Certification Corporation or comparable entity endorsed by the state in which the system is installed for solar, and Energy Star performance for ground source heat pumps).
The following descriptions represent my current understanding of the H.R. 1424 tax credits.
Solar hot water and solar photovoltaic (PV)
Maximum ITC—30 percent with no limit. These credits are available for residential consumers and commercial business owners. The previous solar PV 30 percent credit was extended to 2016. The previous tax code limited consumer ITCs to a $2,000 cap for solar PV and an additional $2,000 cap for solar hot water. Solar water heating property must be certified by SRCC or by comparable entity endorsed by the state in which the system is installed. At least half the energy used to heat the dwelling’s water must be from solar (solar factor > 0.5). Under current tax law, business ITCs are not limited to the $2,000 cap. H.R.1424 now treats consumers the same as businesses by removing the cap for systems placed into service after December 31, 2008. Excess credit may be carried forward to the succeeding tax year.
Small wind turbines and fuel cells
Maximum ITC—Fuel cells: $500 per 0.5 kW, Small wind: $500 per 0.5 kW, up to $4,000 maximum. The existing tax code provided no rebates for small wind turbines and fuel cells. Fuel cells must provide a minimum of 0.5kW production and fuel cells must have an electricity- only generation efficiency greater than 30 percent. H.R.1424 adds these tax credits for systems placed into service after December 31, 2008. Again, excess credit may be carried forward to the next tax year.
Geothermal tax credits
Maximum ITC—Residential: 30 percent for residential systems with $2,000 maximum for a single residence and $6,667 for double occupancy. Commercial: 10 percent with no limit. The existing tax code provides a $350 credit for qualified geothermal heat pumps. Geothermal systems must be installed after December 31, 2007 and exceed the Energy Star requirements. H.R. 1424 offers a onetime tax credit of 30 percent of the total investment (maximum of $2,000 for a single residence and $6,667 for double occupancy) for all residential ground loop or ground water geothermal heat pump installations. A credit of 10 percent of the total investment is also available (no maximum) for a commercial system installation. The tax credit is available through December 31, 2016.
Select water heaters, furnaces, boilers, heat pumps, air conditioners, building insulation, windows, doors, roofs, circulating fans used in a qualifying furnace, and stoves that use qualified biomass fuel
Maximum ITC—$500, varies by technology, 10 percent of cost of building envelope improvements. These credits had expired in December 2007, but H.R.1424 extended them through 2013.
Energy-efficient buildings and building contractor deduction for homes
H.R. 1424 extends the energy-efficient buildings deduction for five years, through December 31, 2013, and it extends through 2009 the $2,000 per home tax credit that applies to building contractors. For very large commercial buildings, taxpayers may deduct the cost of energy-efficient property. The amount deductible is up to $1.80 per sq. ft. of building floor area for property installed in commercial buildings as part of: (1) interior lighting systems, (2) heating, cooling, ventilation, and hot water systems, or (3) the building envelope.
Which technology returns the highest ROI?
With the caveat that one must consider local and state incentives, the answer depends greatly on where you are located and who provides your energy. For many consumers, substantial enticements are provided by the power company or local or state governments. Several states, including New York, California, and Oregon, have created landmark compensation programs for solar heat and power generation. Certain technologies, such as insulating, air sealing, and geothermal heat pumps, have traditionally provided the highest return on investment regardless of installation location and without stimulus packages. One may argue that aggressive tax credits driven by a strong solar lobby have changed this conventional wisdom to favor solar for many taxpayers, based on their locale.
Model residence and analysis assumptions
A family of four residing in a 2,500-sq.-ft., threebedroom, two-bath house, in Colorado (excellent solar exposure), average construction by a production builder, heated by a natural-gas 95-percent efficient furnace, air conditioning with outside direct exchange coil, gas tank-type water heater, double pane glass windows, has an average utility bill at $200 for electric and $125 for gas for a total energy bill of $325/month. In creating the chart [below], I did not include incentives provided by the utility, local governments, or state governments. The wind model assumes a class two wind resource. An excellent tool to understand your available wind resource is the Wind Energy Resource Atlas of the United States at http://rredc.nrel.gov/wind/pubs/atlas/atlas_index.html.
The table lists in priority order the effective ROI with and without federal tax credits, and summarizes the payback in years. The recommended technologies in the first column are sorted from highest to lowest ROI with air sealing/insulation providing the highest ROI and shortest payback with the lowest capital investment. At the bottom on the list, building integrated thin film photovoltaic cells provides the lowest ROI with the highest capital expenditure. Each owner should perform a similar analysis, incorporating their regional incentives, in order to create an accurate prioritized list, as the results may vary.
I was very conservative in projecting savings based on my personal experience designing and installing these systems for customers. Most manufacturers–contractors over-promote the savings for a variety of reasons; however, what I have listed in the table below is a worst-case scenario. This means you will realize at least the savings listed if your situation is similar to the model residence.
To normalize the monthly savings for various technologies, I used $10,000 as a baseline investment, fully aware that some of the proposed systems would exceed that cost. Using this example, I kept the same percentage while reducing the dollar amount in par with a $10,000 investment. This is a reasonable approach for comparison.
With local incentives, the results may change dramatically. As I mentioned above, the 1kW solar PV system installed with Xcel Energy in Colorado would qualify for over $5,000 in rebates, creating an ROI and payback comparable to geothermal heat pumps. In Oregon, for example, 90 percent of a solar PV system may be funded through local incentives, creating an ROI over 35 percent with a three-year payback. Hawaii has created incentives for solar hot water creating an installed base of 100,000 solar thermal systems—accounting for 44 percent of the total solar hot water systems in the United States! In both of these examples, as well as within Xcel Energy’s market in Colorado, the energy savings alone would fund the payments if the capital investment were financed: If added to the mortgage, the combined payment for increased principal, interest, taxes, insurance (PITI) and utility payments would be less than the current PITI combined with utility payments to the power company.
Taxpaying property owners essentially pay themselves, creating a sound investing strategy. Additional benefits include higher resale property values, much improved indoor air quality, unsurpassed comfort, and peace of mind created by newer equipment with extended warranties. Most qualifying systems must carry a minimum 5 year warranty, and some heat pumps are warranted for 10 years. In the final analysis, the investment tax credits contained in the Emergency Economic Stabilization Act of 2008 are good for homeowners, businesses, and the environment. By providing a long-term commitment to alternative energy technology, the production costs for equipment will gradually decline, making implementation even more affordable. After December 31, 2008, the highest credits are available. The secret is to find a qualified installer now to insure that your improvements are implemented in a timeframe which maximizes your savings through tax credits and energy cost avoidance.
A closing thought
Just when we thought all was addressed…H.R. 1424 permits employers to give a $20 per month reimbursement that’s tax free for bicycle commuters. I must [also] point out that there [has] been a very minor revision [since the original publication of this article] – solar hot water still retains a $2,000 limit for consumers (unlimited for businesses), and deduction on heat pumps is $2,000 for married couples and $6,667 for married filing separately … the original interpretation had this as deduction for a duplex (versus filing status). —Al Wallace, 303/877-5776, email@example.com.
By Al Wallace
Source: Scantlings (Newsletter of the Timber Framers Guild)
Publication Date: November–December 2008