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Annette Nellen
The Greening of the Work of Tax Advisers

The growing use of the tax law to carry out energy policy suggests that tax advisers must also be "green" or energy experts.

May 14, 2009
by Annette Nellen, CPA/Esq.

Since the Energy Tax Incentives Act of 2005, the number and variety of tax provisions to encourage energy and resource conservation has grown tremendously. Along with this growth in volume is a growth in complexity caused by special terminology, limitations and a range of frequently changing effective dates. For these incentives to be effective, taxpayers need to know about them. They will rely on manufacturers, vendors, utility companies, engineers, as well as tax advisers. This makes tax compliance and planning even more challenging.

This article includes an assessment of the current situation, resources for the practitioner, and policy considerations of shaping energy usage and green behavior via the tax law.

The Current Landscape

In April 2009, the Joint Committee on Taxation issued a report, Tax Expenditures for Energy Production and Conservation (JCX-25-09). The report lists over 30 special deductions, exclusions and credits for renewable energy, alternative fuels, energy efficient property, conservation and carbon dioxide sequestration. In addition, there are still several provisions to benefit the production of fossil fuels.

Many of the energy tax incentives involve terminology and eligibility requirements that are beyond the accounting, tax and finance knowledge of tax practitioners. For example, IRC §25C which allows a credit for nonbusiness energy property, provides that for exterior windows, doors and skylights to qualify they must be "equal to or below a U factor of 0.30 and SHGC of 0.30." This Code section also provides that "energy-efficient building property" includes "an electric heat pump water-heater, which yields an energy factor of at least 2.0 in the standard Department of Energy test procedures."

IRC §179D provides a deduction for energy efficient commercial building property. One of the qualifications is that such property be installed on or in a building "within the scope of Standard 90.1–2001." This refers to "Standard 90.1–2001 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America (as in effect on April 2, 2003)."

Not all of the incentives include terminology or qualifications outside of the knowledge base of tax practitioners. Several include qualifications that should be fairly straightforward to verify using information provided by manufacturers of the qualifying property. For example, the IRC §30D credit for new qualified plug-in electric drive motor vehicles includes weight and emission standards that should be made available by the manufacturer.

Even where eligibility for incentives can be verified by manufacturers or qualified individuals (such as is required for the §179D deduction), practitioners face challenges in specifically informing clients of possible tax benefits and answering questions clients may have as to whether a particular energy saving or alternative fuel expenditure qualifies for any tax benefit. Adding to the challenge is the varying effective dates and termination dates. For example, there are presently two versions of the §30D credit for plug-in electric vehicles with one set of qualifications applying for 2009 and a slightly different set for vehicles acquired after 2009.

Another complication is that certain expenditures may qualify for more than one incentive although generally taxpayers may only claim one. For example, in IR 2009-45, the IRS warns that some electric vehicles purchased in 2009, such as "low-speed, four-wheeled vehicles manufactured primarily for use on public streets" may qualify for both the §30 credit and the §30D credit. However, only one of these credits may be claimed per vehicle.

In addition to green incentives in the federal tax law, state and local governments also offer a variety of incentives through both the tax law and direct grants. Utility companies may also offer incentives. The American Recovery and Reinvestment Act of 2009 (ARRA) (PL 111-5; February 2009) also provides for direct grants for certain energy expenditures, in place of energy credits (Act §1603).

Practitioners aiming to assist clients in getting the most out of their green spending will need to be familiar with the federal, state and local tax and other incentives. However, such assistance should not ignore the reality that despite the great number of energy tax incentives, not all energy and green savings stem from the tax law or direct grants. Individuals and businesses will likely find measures not incentivized via the tax law that will reduce energy expenditures and carbon footprints. For example, there is no federal tax incentive for taxpayers to reduce travel by having employees telecommute or hold meetings via phone or web conferencing tools. Yet, such measures will reduce costs and carbon emissions. Energy efficiency studies and cost/benefit analyses are good approaches for identifying how best to be green and save money and should consider all possible actions rather than only those with tax benefits.

Resources

In addition to the IRC and guidance from Treasury and the IRS, there are a variety of resources available to help practitioners become green experts. These include:

Policy Considerations

Client questions on energy tax provisions will likely point out challenges of using the tax law to implement national energy policies. For example, business clients might ask why there is no tax incentive to perform an energy efficiency study and act upon it. Client energy plans might include approaches to reducing energy usage and carbon footprints that involve few or no federal energy tax incentives and question why.

The title for an April 2009 Senate Finance Committee hearing: Technology Neutrality in Energy Tax: Issues and Options, illustrates one challenge of energy tax incentives. Such tax provisions generally need to be narrowly tailored for compliance and enforcement purposes, but may then lead to inefficient use and development of the best technological approaches. The Joint Committee on Taxation report issued for the hearing notes:

"The extensive variety of tax expenditures for energy production and conservation have been criticized for lacking well defined objectives, and for lacking coordination among provisions having similar objectives. Some argue that the simultaneous existence of tax preferences for the fossil fuel industry and for renewable energy production represents an incoherent government policy. Others have noted that the incentives for renewable energy and conservation are not themselves designed in a coordinated way to produce the most efficient or equitable subsidies for renewable energy and conservation."

The debate over how best to implement national energy policies will continue to focus on the tax law because it provides a vehicle to both incentivize and discourage certain activities. Questions on how best to design energy tax provisions will continue as policymakers deal with climate change concerns and expiring tax provisions.

Green Tax Practice

The number of energy tax provisions and client awareness of them in general will force more practitioners to become energy experts. Many tax practitioners should also find they have contributions to make to ongoing policy discussions due to the experience gained from helping clients understand the provisions, witnessing the degree to which they affect behavior, and awareness of the compliance costs and the types of provisions that could more effectively lead to green actions.

Certainly, the time has come for a tax practitioner's knowledge base to include U factor, biomass, fuel cell, Energy Star and much more.

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Annette Nellen, CPA/Esq., is a tax professor and Director of the MST Program at San José State University. She is also a fellow with the New America Foundation. Nellen is an active member of the tax sections of the AICPA and ABA. She has several reports on federal and state tax reform and a blog.