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Federal Tax Credits on Qualifying High-Efficiency HVAC Equipment

ACCA (Air Conditioning Contractors of America) have a new website feature helps contractors and Consumers Find Energy Efficiency Incentives – this wonderful page is worth a look here is the link:  http://www.acca.org/consumer/dsire

Updated 2/29/12:   There is a bill circulating the Senate that, if passed, will create tax credits for consumers that reduce their energy usage by at least 20%. The bill establishes a $2,000 base credit for the first 20% decrease with a $500 stepend for each 5% reduction thereafter. The credit will be capped at $5,000 or 30% of the qualified expenditures, whichever is the lesser amount.
Experts have estimated that this bill will create about 19,000 jobs through contracting, supply, and manufacturing while saving 1.7 billion kilowatthours and 18 trillion Btu of fuel by 2016. This is enough energy to power 375,000 homes!
No one is sure if Congress will pass the bill as it does not identify where the funding will come from, but the fact that energy saving bills are still being considered in Congress is a good sign. This shows that the national mindset toward energy efficiency is changing, becoming more important to the everyday consumer. End of 2/29/12 update.

FP&L (Florida Power & Light) Residential A/C Rebate Schedule link: Rebate Schedule.

Federal Tax Credit is BACK for 2011! Efficiency Requirements Same as 2009/2010

(except boilers and oil furnaces)

 BUT the Dollar Figures are Different

 The “Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010” includes a one year extension – with revisions – to the federal tax credits on qualifying high-efficiency HVAC equipment.

  • The efficiency requirements are the same as for the 2009/2010 program (except boilers and oil furnaces, where the minimum AFUE is now 95%).
  • The dollar benefit to the homeowner (the tax credit dollars) reverts to the FIXED DOLLAR AMOUNTS that we had in the previous 2007 program. There is no longer a 30% calculation.
  • The maximum amount an eligible homeowner may receive in tax credits for “residential energy property” purchased in 2011 will be reduced from $1,500 to $500. However, the total amount of credits a homeowner claimed for purchases between 2006 and 2010 is to be deducted from the $500 cap. If a homeowner has already claimed credits of $500 or more through this allowance, they will be unable to claim new credits for improvements made during 2011.

The new law will extend a number expired and expiring tax cuts and other incentives for individuals, families, small businesses, and investors.

Included in the new law are the Section 25c tax credits, the official name for the energy tax credits available to eligible taxpayers who make qualified energy efficient retrofits to their homes. The tax credits are extended through 2011, but at a significantly reduced value and with changes made to some of the qualifying equipment standards.

Starting on January 1, 2011 and through December 31, 2011, an eligible homeowner can claim 10% of the costs, capped at $500, for the installation of qualified energy efficient improvements, subject to certain limits.

Under the new law, for HVAC and hot water equipment, the maximum a homeowner could claim is $300 for a qualified central air conditioner and heat pump, and $150 for a qualified furnace or hot water boiler, and $50 for any advanced main air circulating fan. The tax credit for qualified hot water heaters is limited to $300.

Beyond the change to the tax credit values, the new law will increase the qualifying standards for natural gas hot water boilers, propane hot water boilers, oil furnaces, and oil hot water boilers to 95% AFUE. The qualifying standards for natural gas furnaces and propane furnace remain at 95% AFUE.

The qualifying standard for central air conditioners and heat pumps, which were modified by the Stimulus bill in 2009, are not changed. Therefore, a central air conditioner must meet or exceed 16 SEER and 13 EER; and an air source heat pump must meet or exceed 15 SEER and 12.5 EER and 8.5 HSPF, in order to qualify for the tax credit.

Finally, the new law reinstates the lifetime credit caps, which disqualify any homeowner who has claimed more than $500 in 25c tax credits since January 1, 2005, from any further credits.

While the extension of the tax credits at a lower value is not ideal, it keeps the tax credits alive and leaves open the opportunity to change them in the next Congress and restore them to the $1,500 level. If the tax credits had not been included in the extender package, they would likely have disappeared forever.

Aside from the energy efficiency tax credits, the new tax law includes in an extension of the Bush tax cuts and other expiring incentives, avoiding a massive tax hike on individual tax rates, the estate tax, capital gains and dividends, and other important tax provisions for the small businesses of the HVACR industry.

The following provisions of the new tax law are of most interest to small businesses.

Amended Tax Rates for Individuals and Some Small Businesses
The Bush tax cuts lowered the tax bracket rates from 28%, 31%, 36%, and 39.6% to 25%, 28%, 33%, and 35% respectively until December 31, 2010. The new law extends these tax bracket rates for another two years, through 2012.

This is significant for small businesses that operate as “pass through” entities (sole proprietors, partners or S Corporation shareholders) and, as a result, pay taxes on their business income on the individual rate schedule.

Tax on Capital Gains and Dividends
The new law extends the capital gains and dividend rates for another two years. The capital gains and dividend rates for taxpayers below the 25 percent bracket will remain zero percent through 2012. For those in the 25 percent bracket and above, the capital gains and dividend rates remains 15 percent through 2012.

Alternative Minimum Patch
The Alternative Minimum Tax (AMT) was created more than forty years ago to ensure that high income individuals cannot escape all tax liability through exemptions, deductions, or shelters. The AMT has never been indexed for inflation so each year Congress must enact a “patch” to avoid capturing millions of middle class American with an unexpected tax hike. Without the patch, a taxpayer receives an exemption of $33,750 (individuals) and $45,000 (married filing jointly). The patch in the new tax package increases the exemption amounts for 2010 to $47,450 (individuals) and $72,450 (married filing jointly) and for 2011 to $48,450 (individuals) and $74,450 (married filing jointly).

The patch enacted for 2010 allows for nonrefundable personal tax credits, like the 25c tax credit, to be claimed against the AMT.

Deduction of State and Local General Sales Taxes.
The bill extends for 2010 (retroactively) through 2011 the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for State and local income taxes.

Restoration of the Estate Tax at a Reduced Level
A new estate tax is put in place for 2011 and 2012. In 2013, the estate tax will return to the 2002 levels.

The Bush tax cuts fully repealed the estate and generation-skipping transfer taxes in 2010, and lowered the gift tax rate to 35 percent and increased the gift tax exemption to $1 million. The new law sets the exemption at $5 million per person and $10 million per couple and a top tax rate of 35 percent for the estate, gift, and generation skipping transfer taxes for two years, through 2012. The exemption amount is indexed beginning in 2012. The new tax law is effective January 1, 2010, but allows an election to choose no estate tax and modified carryover basis for estates arising on or after January 1, 2010 and before January 1, 2011. The new tax law sets a $5 million generation-skipping transfer tax exemption and zero percent rate for the 2010 year.

Under current law, couples have to do complicated estate planning to claim their entire exemption (currently $7 million for a couple). The new law allows the executor of a deceased spouse’s estate to transfer any unused exemption to the surviving spouse without such planning. The new law is effective for estates of decedents dying after December 31, 2010.

Prior to the Bush tax cuts, the estate and gift taxes were unified, creating a single graduated rate schedule for both. That single lifetime exemption could be used for gifts and/or bequests. The Bush tax cuts decoupled these systems. The new tax law reunifies the estate and gift taxes. The proposal is effective for gifts made after December 31, 2010.

Extension of bonus depreciation.
Under current law, businesses are allowed to recover the cost of capital expenditures over time according to a depreciation schedule. Congress allowed businesses, beginning January 1, 2008 through December 31, 2009, to take an additional depreciation deduction allowance equal to 50 percent of the cost of the depreciable property placed in service in those years. Under the Small Business Jobs Act of 2010, this temporary increase in the depreciation deduction allowance was extended through December 31, 2010. The new tax law extends and temporarily increases this bonus depreciation provision for investments in new business equipment. For investments placed in service after September 8, 2010 and through December 31, 2011, the bill provides for 100 percent bonus depreciation. For investments placed in service after December 31, 2011 and through December 31, 2012, the bill provides for 50 percent bonus depreciation. The provision also allows taxpayers to elect to accelerate some AMT credits in lieu of bonus depreciation for taxable years 2011 and 2012.

Temporary Extension and Modification of section 179 Expensing Allowances
Section 179 of the tax code gives small business taxpayers the option to deduct from their taxes, or “expense,” the cost of purchases, up to specified limits, in the year items are acquired, rather than recovering the costs of the items over time through depreciation. Current law also establishes a “phaseout threshold,” and if businesses place more than that specified amount of property into service in a year, then the amount that they are permitted to expense is reduced dollar for dollar, but not below zero.
 
The new law allows businesses to expense 100% of the cost of qualified property placed in service after Sept. 8, 2010, and before Jan. 1, 2012. It provides for a 50% first-year additional depreciation deduction for qualified property placed in service in 2012. The measure sets threshold limits for 2012 at $125,000 per year, with a phase-out for capital expenditures exceeding $500,000. It also allows businesses to elect to accelerate the AMT or research credit in lieu of additional first-year depreciation, through 2012. In addition, the measure extends the treatment of off-the-shelf computer software as qualifying property.

Temporary reduction in employee-paid payroll taxes
Under current law, employees pay a 6.2 percent Social Security tax on all wages earned up to $106,800 (in 2011) and self-employed individuals pay a 12.4 percent Social Security self-employment taxes of on all their self-employment income up to the same threshold. The new law provides a payroll/self-employment tax holiday during 2011 of two percentage points. This means employees will pay only 4.2 percent on wages and self-employment individuals will pay only 10.4 percent on self-employment income up to the threshold.

Exclusion of small business capital gains
The new tax law extends the 100 percent exclusion of the gain from the sale of qualifying small business stock that is acquired before January 1, 2012 and held for more than five years
 
Tax benefits for certain retail improvements
The new tax law extends for two years (through 2011) the special 15-year cost recovery period for certain leasehold improvements, restaurant buildings and improvements, and retail improvements.


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