Through the American Recovery and Reinvestment Act of 2009 (ARRA), along with the Emergency Economic Stabilization Act of 2008 (EESA), the IRS is encouraging taxpayers to conserve energy by offering new and expanded tax benefits.

Included within these new Acts are energy saving deductions for commercial buildings and tax credits for home improvements and vehicles.

The EESA extended the Commercial Building Deduction until December 31, 2013. The deduction can be claimed by a taxpayer who owns or leases a building and installs part of the building's interior lighting systems, heating, cooling, ventilation and hot water systems or the building envelope itself. 

The amount of the deduction can be as much as $1.80 per square foot of the building floor area. In order to receive the maximum deduction, the building must achieve a 50 percent reduction in energy and power costs. Improvements that do not achieve a 50 percent reduction may qualify for a deduction of $0.60 per square foot if the building achieves at least a 16- 2/3 percent reduction in energy costs. 

Once the taxpayer qualifies and takes the deduction for the energy savings, a basis reduction in the building for the amount of the deduction is required.  For example, if a 200,000 square foot the building qualifies for the 50 percent energy savings deduction of $1.80 per square foot, then $360,000 will be deducted from taxable income in the current year and subsequently subtracted from the basis for depreciating the building. However, since most buildings are depreciated over 39 years, the current year savings significantly outweigh the reduction in tax from the foregone depreciation – not to mention the energy savings received each day!

The ARRA also reinstated and improved the Energy Tax Incentives Act of 2005 (ETIA). The 2005 Act established a tax credit equal to 10 percent of the money spent on energy efficient improvements, not to exceed a lifetime maximum of $500. The ETIA applied only to purchases made in 2006 and 2007. While other tax breaks included in ETIA were extended by ARRA, this credit expired as planned on December 31, 2007. 

However, beginning January 1, 2009, ARRA tripled the rate of the credit established by ETIA from 10 to 30 percent, to a maximum of $1,500. The new rules give taxpayers until December 31, 2010, to purchase energy efficient improvements for their primary residences and qualify for the tax credits. Taxpayers that took the $500 lifetime credit in 2006 or 2007 are still eligible for the entire $1,500 tax credit under ARRA.

The $1,500 credit is the maximum for most products placed in service in 2009 and 2010 except for renewal energy systems such as geothermal heat pumps, solar water heaters, solar panels, fuel cells and small wind energy systems. The installation of these systems are not capped at the $1,500 maximum and can be placed in service on a taxpayer's second home (as well as their primary residence) to receive the credit. One who is building a new home can qualify for the tax credit for installing the renewal energy systems but not for energy efficient doors, windows, insulation, roofs, etc.

New credits inevitably lead to more standards. The IRS will soon issue new standards for improvements placed in service after February 17, 2009, but until the new ones are released, homeowners may rely on the manufacturer's certifications that were provided under the old guidelines and the Energy Star labels for property purchased before June 1, 2009.

Don't forget about energy efficient vehicles!  For hybrid gasoline-electric, diesel, battery-electric, alternative fuel  and fuel cell vehicles, the tax credit is based on a formula determined by vehicle weight, technology, and fuel economy compared to the base year models. Each manufacturer has a 60,000 vehicle limit before the phase-out period begins. The credits for popular models by Toyota and Honda have already been phased out, but credit is still available for Ford, GM, and Nissan models, just to name a few.

Starting January 1, 2009, there is a new tax credit for plug-in hybrid electric vehicles. The credit starts at $2,500 and is capped at $7,500. Consumers will receive tax credits for these vehicles based on the same criteria of weight, technology, and fuel economy as the energy efficient vehicles. The phase-out for these vehicles begins after the first 250,000 cars are sold. 

Reduce your energy costs and pay less tax -  it's a win / win!