As a part of the National Energy Act of 1978, Congress established a system of income tax credits for people who invest in conservation and renewable energy equipment. These credits are scheduled to expire at the end of 1985, and a proposal to renew them failed to get through Congress during 1984. It’s likely that another renewal effort will be made during 1985, but not even the most optimistic observers think that extension of the credits is a sure thing. Therefore, this year may be your last chance to take advantage of the savings.
Residential renewable energy tax credits allow you to subtract 40 percent of the cost of applicable systems, up to a total cost of $10,000 (up to $4,000 of tax credit), from the federal tax you pay. (Note: This is not a deduction but a credit. By filing form 5695, owners can subtract that 40 percent directly from the tax they pay.) What is an applicable system? Well, that’s not always easy to say. But on the basis of previous experience, it seems clear that active solar collectors are included in the description, and thermosiphoning units are seldom questioned.
If you choose to build your own collectors, you can deduct only the cost of materials. (Another option is to build a collector for your neighbor and have him or her build one for you. You then report the payment to your neighbor — for materials and labor — as an energy tax credit, and report your neighbor’s payment to you as income. As long as your tax bracket is lower than 30 percent, you both save money.) The general intent of the rule is that the equipment must be new and the device must continue to work for at least five years. The credits apply only to a principal residence but may be claimed by either owners or renters.
Passive elements in new home construction present much stickier questions. Any part of a building that could be considered structural or decorative can’t be claimed. Sunspaces have caused quite a ruckus, since the IRS is generally not inclined to accept them as deductible. Those that have been accepted have all had active systems for moving heat into the home. In addition, sunspaces must generally be uninhabitable.
Wind generators, photovoltaic panels and geothermal systems (for sources greater than 50 degrees Celsius or 122 degrees Fahrenheit) can be claimed pretty much without exception, but the peripherals (batteries, inverters, etc.) fall into a shady area. Hydroelectric systems do not qualify for a residential renewable energy tax credit. (They do, however, earn a different credit if they are used as a business or to supply a business, though the relationship of this credit to investment tax credits is complicated.)
Conservation tax credits allow you to exempt 15 percent of up to $2,000 spent on insulation and other energy-saving devices, such as storm windows, caulking, setback thermostats, efficient furnace burners, etc. In general, the category doesn’t include insulating curtains or other items that could be considered decorative or structural. The manufacturer of a particular product may be able to advise you as to whether the purchase can be claimed for a credit on your income tax. Again, if you do the job yourself, you can’t claim the labor.
Many states — too many to list — offer similar credits, and it’s well worth your while to check on the specifics in your region. It’s not uncommon to be able to exempt as much as two-thirds of the purchase price of renewable energy equipment when the federal and state credits are combined. (For example, one MOTHER employee who spent $2,500 last summer on a pair of Cornell 480 solar water heaters — installed — figures to take advantage of North Carolina’s 25-percent tax credit as well as Uncle Sam’s 40-percent offer and recoup $1,725 of his outlay, making his final cost just $875.)
However, we urge you to seek the advice of a qualified tax advisor before claiming a credit on your taxes. As seems to be the case with anything having to do with the IRS, nothing is simple: The applicability of a particular piece of renewable energy equipment is case-specific. A tax preparer who’s experienced in using the credits should be aware of IRS procedures and relevant tax court cases. By taking his or her advice, you may avoid the nuisance of an audit and the pain of penalty fees.