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August 14, 2005

Tax Energy Incentives Act of 2005

The Energy Tax Incentives Act of 2005 contains a $14.5 billion package of tax breaks that include both renewable energy provisions and incentives for the oil, gas, coal, and nuclear industries. Here's a summary of the more widely applicable tax changes in the Act:
Energy efficiency and conservation measures.

The Act includes a number of tax incentives for consumers to buy energy efficient assets and for manufacturers and builders to provide them. Here's a summary:

New tax credits for the purchase of hybrid, fuel cell, advanced lean burn and other alternative power vehicles. The size of the credit varies depending generally on the weight class of the vehicle and the rated fuel economy. The credit applies to vehicles placed in service after 2005, with termination dates varying with the type of alternative power vehicle. Additionally, the Code Sec. 179A (deduction for certain clean fuel vehicles and refueling property sunsets after 2005 (instead of after 2006, as under pre-Act law).

New 30% tax credit for the purchase of qualifying residential solar water heating, photovoltaic equipment, and fuel cell property. The maximum credit is $2,000 (for solar equipment) and $500 for each kilowatt of capacity (for fuel cells). The credit applies for property placed in service after 2005 and before 2008.

New 30% business tax credit for the purchase of fuel cell power plants and a 10% credit for the purchase of stationary microturbine power plants, effective for periods after Dec. 31, 2005 and before Jan. 1, 2008, for property placed in service in tax years ending after Dec. 31, 2005.
New 10% personal tax credit for energy efficient improvements to existing homes. The lifetime maximum credit per taxpayer is $500 and applies for property placed in service after Dec. 31, 2005 and before Jan. 1, 2008.

New business tax credit for contractors for the construction of new energy efficient homes. The credit is either $2,000 or $1,000 per home, depending on the type of home and the energy reduction standard it meets. The credit applies to homes whose construction is substantially completed after Dec. 31, 2005, and which are purchased after Dec. 31, 2005 and before Jan. 1, 2008.

New deduction for energy efficient commercial buildings meeting a 50% energy reduction standard. The deduction (generally $1.80 per square foot, but 60¢ per square foot in some cases) is effective for property placed in service after Dec. 31, 2005 and before Jan. 1, 2008.
New manufacturers' tax credit for energy efficient dishwashers, clothes washers, and refrigerators manufactured in 2006 and 2007.

Tax breaks for energy production.

The Act includes the following incentives for energy production:

15-year writeoff for natural gas distribution lines (instead of the pre-Energy Tax Act law's 20 year writeoff), generally effective for lines the original use of which commences with the taxpayer after Apr. 11, 2005 and before Jan. 1, 2011. There's also a 15-year writeoff (instead of the pre-Energy Tax Act law's 20-year writeoff) for certain assets used in the transmission of electricity for sale and related land improvements, generally effective for property placed in service after Apr. 11, 2005.

Seven-year recovery period for natural gas gathering lines, generally effective for lines the original use of which commences with the taxpayer after Apr. 11, 2005.
Two-year writeoff of geological and geophysical expenses paid or incurred in tax years beginning after the Act's enactment date.

Expensing of 50% of the cost of certain capacity-increasing refinery investments, generally effective for property placed in service after the Act's enactment date and before 2012. The original use of the property must begin with the taxpayer.

For purposes of the small refiner exception to the oil depletion deduction, the pre-Energy Tax Act 50,000-barrel-per-day limit for independent producers is increased to 75,000 barrels a day, and is based on average daily production (instead of actual daily production). These changes are effective for tax years ending after the Act's enactment date.

A new production tax credit for qualifying advanced nuclear power facilities (certain facilities that produce electricity), effective for production in tax years beginning after the Act's enactment date.

Elective five-year carryback of net operating losses (NOLs) for certain electric companies of up to 20% of the cost of electric transmission capital and pollution control expenses. This applies to NOLs arising in 2003, 2004, and 2005; the election may be made during any tax year ending after Dec. 31, 2005, and before Jan. 1, 2009.

Two-year extension (through Dec. 31, 2007) of the placed-in-service date for wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation power, landfill gas, and trash combustion facilities that produce electricity for which the renewable electricity production credit under Code Sec. 45 may be taken. The Act does not extend the placed-in-service date for solar facilities (Dec. 31, 2005) or refined coal facilities (Dec. 31, 2008). The Act also adds two new qualifying energy resources: hydropower and Indian coal, and equalizes the credit period over which the credit may be taken at ten years for facilities placed in service after the date of enactment of the Act.

New tax credits, effective for periods after the enactment date, for investments in clean coal facilities producing electricity (20% for industrial gasification or integrated gasification combined cycle, 15% for other advanced coal-based projects that produce electricity).

84-month amortization for the cost of power-plant air pollution controls, generally effective for air pollution control facilities placed in service after Apr. 11, 2005.

Inclusion of the Code Sec. 29 tax credit for fuel produced from non-conventional sources in the “general business credit,” resulting in 1-year carryback, 20-year carryforward for unused credits, for tax years ending after Dec. 31, 2005. Also, the tax credit is extended to coke and coke gas from qualified facilities placed in service before Jan. 1, '93, or after June 30, '98, and before Jan. 1, 2010. The credit applies to production during a four-year period beginning on the later of Jan. 1, 2006, or the date the facility is placed in service.

Expansion of the small ethanol producer credit to producers with annual production capacity of 60 million gallons (up from 30 million gallons under pre-Energy Tax Act law), effective for tax years ending after the enactment date. The Act also adds a small agri-biodiesel producer credit to the biodiesel fuels credit, effective for tax years ending after the Act's enactment date, with a sunset after 2008.

Extension of the tax incentives for biodiesel (e.g., income and excise tax credits) through Dec. 31, 2008, and effective for fuel sold or used after Dec. 31, 2005, that allow producers of “renewable diesel” to claim similar income and excise tax credits at the $1.00 rate applicable to agri-biodiesel.

Other tax changes.

The Act includes a number of other tax changes, including:

... A provision allowing qualified research consortia to claim a research and experimentation tax credit for one year for energy-related research, effective for amounts paid or incurred after the date of enactment in tax years ending after that date.

... Extension of the Leaking Underground Storage Tank Trust (LUST) tax through Sept. 30, 2011, and application of the tax to dyed fuel.

... Modification of the recapture rules for amortizable Code Sec. 197 intangibles. If multiple Code Sec. 197 intangibles are sold or disposed of in a single transaction or series of transactions, the seller must calculate recapture as if all of the Code Sec. 197 intangibles were a single asset. This applies for dispositions of property after the Act's enactment date.

Please keep in mind that I've described only the highlights of the most important changes in the new law.