Energy tax credits — get them while you can, they’re often better than simple tax deductions

This month I am responding to a large number of requests for information about energy tax credits.

This is an area that has been in and out of the tax code for many years and like any tax law on the books currently there is always a chance that Congress will amend it — or even let it lapse — as a way to reduce expenses.

The point here is that now may be your best time to take advantage of these tax breaks.

Just a quick refresher. We are talking tax credits not deductions. This is an area of confusion.

You have always been able to receive tax deductions for businesses for energy repairs, replacements, or improvements subject to the tax code rules and type of expense.

A credit though is a dollar-for-dollar deal. In other words, a $100 credit is equal to a $100 tax reduction. In comparison, a deduction is really a percentage calculation. A $100 deduction may actually translate to only a $30 tax reduction, which usually makes a tax credit much better than a tax deduction.

The biggest change that applies to 2009 and 2010 taxes is the Personal Energy Property Tax Credit. This credit was around for 2006 and 2007 but as I explained previously was not available for the 2008 tax year.

This credit is equal to 30 percent of qualified expenses, capped at $1,500 combined for tax years 2009 and 2010.

Fortunately, a great feature in 2010 is that there are no income or adjusted gross income limits, which many times in the past have limited how many tax payers could truly benefit. Also, even if you claimed a tax credit for window replacements in 2007 you still can collect the full $1,500 credit in 2009 and 2010.

One catch is that the improvements must be installed in the taxpayer’s personal residence located in the United States and must be “new” windows, for instance, not used ones.

Also, the property must meet various technical guidelines to quality for energy credits. However, taxpayers can rely on the manufacturing certification statement to assure it meets the necessary standards. Be sure to obtain that statement and save it for your tax files in case your credit claim is ever questioned.

Another good piece of news for 2010 is that there are many types of improvements that qualify for this credit. They include windows, skylights, storm windows, biomass stoves, oil furnaces, water heaters, insulation, metal and asphalt roofs, gas and propane furnaces and even doors.

Your tax advisor can work with you to review the entire list of available energy improvements and there is a nice summary of tax credits at www.energystar.gov.

Also, still on the books is the Residential Energy Efficient Tax Credit which is focused much more on various types of improvements, particularly solar energy systems, fuel cells, wind energy systems, and geothermal heat pumps. Again, the credit is 30 percent of costs, including labor for on site preparation and assembly.

I would be remiss if I didn’t give a shout out to the Snohomish County PUD, which has a wonderful array of energy rebates. There is one for businesses that I think is very rewarding, In fact, I just experienced it in my own office.

The PUD will pay up to 70 percent of the project cost for qualifying energy-efficient retrofit projects. The rebate is limited to $15,000 and you must get pre-approval before starting the project. I have already seen a reduction of my energy use since my landlord made the change in my offices last summer. For more informatioin, visit www.snopud.com/lightingrebates for more details on the projects and the guidelines of the program.

Overall, this country has a renewed focus on developing new energy sources and methods as a way to be less reliant on other countries. The Congress and President have backed that up by providing both businesses and individuals with tax credits which can directly help counter the investment cost.

I think it is very important that most of these types of improvements will translate into more dollars into taxpayers’ pockets for years to come in the form of reduced energy operating costs, in addition to the initial tax credits. The key is to always remember that just because there is a deduction — or in this case a credit — on the books today doesn’t mean it will be there tomorrow.

It is tax season, so please feel free to email me with any questions and I will try to incorporate them into my next couple of columns.

David Rumsey is the owner of Pettis Rumsey Inc., a Marysville accounting firm that works with small business owners to increase financial performance, tax planning and preparation. He can be reached at 360-659-8502 or by sending e-mail to david@pettisrumseycpa.com.