EPAct2005: Tax Credit Opportunities for Solar and Energy Efficiency

The Energy Policy Act of 2005 (EPAct 2005) is the first effort of the United States government to address U.S. energy policy since the Energy Policy Act of 1992. Among many other things, the 1724 page law provides new tax incentives for a number of solar and energy efficiency measures. Among them are:

The complete conference bill for the Energy Policy Act may be downloaded here (2.5 MB PDF file). The solar and energy efficiency provisions are found in Title XIII, Subtitle C, beginning on page 1332 page 1390 of the act.

PLEASE NOTE : The effective dates given in this Web site are based on current law and in general everything placed in service through 12/31/08 qualifies for the federal tax incentives. There is legislation being considered in U.S. congress that may extend these dates.

An Important Distinction

There is an important difference between a tax deduction and a tax credit. A tax deduction is subtracted from income before total tax liability is computed. On the other hand, a tax credit is subtracted directly from the total tax liability. This means that a deduction and a credit have very different values, with a credit being 3 or more times more advantageous to the taxpayer than a deduction. For example, a tax credit of $1,000 for someone in the 28% tax bracket is equivalent to a tax deduction of $3,571

Combined Incentives

In many cases, multiple tax incentives may be claimed. In the case of a new home for example, the builder may claim credit the high efficiency home and the homeowner may claim tax credits for solar hot water and photovoltaic and fuel cell systems. Other financial incentives, such as utility or SunBuilt rebates, further reduce the cost of building or owning a solar and energy efficient home.

Solar Photovoltaic and Hot Water Systems

This provision offers tax credits to individuals for residential solar energy systems.

  • For solar hot water systems, the allowable tax credit is 30% of the qualified solar system expenditures up to a maximum tax credit limitation of $2,000.
  • For solar photovoltaic (PV) systems, the allowable tax credit is 30% of the qualified PV system expenditures up to a maximum tax credit limitation of $2,000.

To be eligible for the solar hot water system tax credit, the system must be certified by the Solar Rating and Certification Corporation (SRCC) or the Florida Solar Energy Center (in the case of systems sold in Florida) and half of the energy used by the system must be derived from the sun.
There is no qualification provided for PV systems (except in Florida, where systems must be rated and certified by the Florida Solar Energy Center). Individuals may claim tax credits for either or both types of solar systems.

The incentives apply to equipment placed in service during 2006 through December 31, 2008. The IRS form to claim the credit is available at http://www.irs.gov/pub/irs-pdf/f5695.pdf [331K]. Note that this is for non-business use of your home.

In addition, the provisions of the bill substantially increases the business investment tax credit from 10% to 30%. This tax credit is available to businesses that purchase solar thermal and PV systems during calendar years 2006 – 2008. In Florida, such systems would be subject to the requirement that solar systems manufactured or sold in the state be certified by the Florida Solar Energy Center. This business investment tax credit for solar equipment does not have a maximum credit limit.

IRS rules for qualification of this tax credit may be found in IRS Notice 2006-26.

Additional information on solar systems that my qualify for these tax credits may be found at the following Web sites:

Solar hot water systems
Photovoltaic (PV) systems

Commercial Buildings

This provision offers business taxpayers a deduction of $1.80 per square foot for commercial buildings that achieve a 50% reduction in annual energy cost to the user, compared to a base building defined by the industry standard ASHRAE/IESNA 90.1-2001. Energy costs refer only to heating, cooling, lighting and water heating, since only these uses are within the scope of the ASHRAE standard and within the control of the building designer.

Each of the three energy-using systems of the building — the envelope, the heating, cooling and water heating system, and lighting system — is eligible for one third of the incentive if it meets its share of the whole-building savings goal. Explicit interim compliance procedures are provided for lighting.

Eligible buildings include commercial buildings such as: offices, retail buildings, warehouses, etc., rental housing of four stories or more, and publicly-owned buildings. For publicly-owned buildings, there is an interesting provision allowing the credit to pass through to the "person primarily responsible for designing the building."

New construction in an existing building is also eligible for the tax deduction, with one third of the deduction amount for new construction that affects the new energy-using system (such as lighting or heating, cooling and water heating).

Compliance is determined by third party inspectors who review the plans and the actual in-place construction. Energy savings are determined by software that must be certified by the Department of Energy as meeting criteria of consistency and accuracy, following the successful experience of California’s performance-based energy code enforcement.

The incentives apply to buildings or systems placed in service during 2006-2008, although extenders increasing the eligibility through 2009 or 2010 are a distinct possibility. (see colloquia)

IRS rules for qualification of this tax credit may be found in IRS Notice 2006-52.

New Homes

This provision offers homebuilders a tax credit of $2,000 for homes that reduce energy use for heating and cooling only (not hot water) by 50% compared to the national model code — the 2004 IECC Supplement (assuming an SEER-13 air conditioner). Producers of manufactured homes can also choose to qualify for a tax credit of $1,000 for homes that save 30%. This $1,000 credit for reaching 30% savings is not available for site built homes, which must reach the 50% savings tier to qualify for the $2,000 credit. The form to claim the credit is available at http://www.irs.gov/pub/irs-pdf/f8908.pdf [212K].

Eligible homes must demonstrate savings using software that has been approved by IRS (see below) and builders must demonstrate compliance by the use of third-party inspectors certified according to IRS rules. Similar standards exist in Florida and elsewhere under the auspices of Florida’s Building Energy Rating System and under the national standards of the national Residential Energy Services Network (RESNET). Additionally, the Florida Solar Energy Center has released a free 15-day trial version of IRS accredited software that makes the calculations that are expected to be used for tax credit qualification. To download this free 15-day trial software click here.

The incentives apply to homes placed in service during 2006 through December 31, 2008.

IRS rules on qualification for new site-built home credit may be found in IRS Notice 2006-27.

IRS rules on qualification for manufactured home credit may be found in IRS Notice 2006-28.

Existing Homes

These provisions offer cost-based incentives of 10% of the amount expended by the taxpayer for "Qualified Energy Efficiency Improvements" and up to $300 for "Qualified Energy Property" up to a maximum credit limit of $500.

"Qualified Energy Efficiency Improvements" are specifically defined as:

  • Any insulation material or system specifically designed to reduce heat loss or gain
  • Exterior windows (including skylights)
  • Exterior doors
  • Any metal roof having pigmented coatings specifically designed to reduce heat gain which meet Energy Star program requirements.

"Qualified Energy Property" is defined as:

  • Electric heat pump water heater with EF of 2.0 or greater
  • Electric air source heat pumps with HSPF of 9.0 or greater
  • Geothermal heat pumps:
    • Closed loop products with EER of 16.2 and COP of 3.3 or greater
    • Open loop products with EER of 14.1 and COP of 3.3 or greater
    • Direct expansion (DX) products with EER of 15 and COP of 3.5 or greater
  • Central air conditioner that receives the highest efficiency tier established by the Consortium of Energy Efficiency as of January 1, 2006(http://www.cee1.org/resid/rs-ac/res-ac_specs.pdf).
  • Natural gas, propane or oil water heater with EF or 0.80 or greater
  • Natural gas, propane or oil furnace or hot water boiler with AFUE of
    95% or greater
  • Advanced main air circulating fan used in natural gas, propane or oil furnace that uses no more than 2% of the total annual energy use of the furnace.

Credit limitations on qualified energy property are as follows:

  • $50 for any advanced main air circulating fan
  • $150 for any qualified natural gas, propane, or oil furnace or hot water boiler
  • $300 for any item of qualified energy property.

IRS rules for qualification of this tax credit may be found in IRS Notice 2006-26.

Residential Fuel Cells

This provision offers cost-based 30% tax credits to individuals for qualified residential fuel cell property expenditures up to a maximum credit limitation of $500 for each 500 watts installed capacity.

IRS rules for qualification of this tax credit may be found in IRS Notice 2006-26.

Fuel Cells and Microturbines Used in a Business

This provision offers tax credits for fuel cells and microturbines used in a business. To qualify for the credit, fuel cells are required to be 500 watt capacity or greater with a generation efficiency of 30% or greater. Microturbines are required to be of 2,000 kilowatt capacity or less with an efficiency of 26% at International Standards Organization conditions. Tax credits and limitations are as follows:

  • For fuel cells, a tax credit of 30% of the expenditure up to a maximum of $500 per 500 watts of capacity.
  • For microturbines, a tax credit of 10% of the expenditure with a credit limitation of $200/kW.

IRS rules for qualification of this tax credit may be found in IRS Notice 2006-26.


The efficiency provisions were taken from a bill by Senators Snowe and Feinstein (S. 680) that offered performance-based incentives for new and existing homes and commercial buildings and for building-based solar energy. These incentives lasted until 2009 and 2010 in most cases. In recognition of the fact that incentives longer than two years are needed to transform markets, the legislative history of the Energy Bill will contain the following colloquy between Senator Snowe and Finance Committee Chair Grassley:

Colloquy with Senator Snowe and Senator Grassley
RE: Tax Incentives for Commercial Buildings

Ms Snowe:
Mr. Chairman, I want to thank you for your dedicated work in defending the Senate-passed Energy bill language in conference, particularly concerning the energy efficiency tax incentives. For the first time, there will be energy efficiency tax incentives for commercial buildings for each of the three energy-using systems of the building—the envelope, the heating, cooling and water heating system, and lighting. Each is eligible for one third of the $1.80 per square foot tax incentive if it meets its share of the whole-building savings goal. This will apply to buildings that cut energy use by 50 percent, an ambitious but very important target as buildings account for 35 percent of our nation’s energy usage, and commercial buildings are a large part of that percentage.

My concern is that, because the eligibility period was cut back from the end of 2010 to just two years, this shorter window of effectiveness could undercut the program, since the time it takes to design and construct these large buildings and skyscrapers could take longer than the two years of eligibility. This is especially a concern as the incentives for commercial buildings are one of the fastest ways in the entire energy bill that we can cut down the nation’s energy usage in the short term.

Mr. Grassley:
We are committed to this as the correct policy for large scale commercial projects. In addition we are committed to seeing energy efficient skyscrapers in the sky and recognize that these types of projects take years to design and build. We will continue to work with you to make this a long term policy of the tax code.

Ms. Snowe:
Again, your assistance is greatly appreciated and I look forward to working with you on this matter in the Finance Committee in the coming months.

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Governor Crist Appoints Fenton to Energy Action Team

Jim Fenton, director of UCF’s Florida Solar Energy Center (FSEC) in Cocoa, has been named to the Florida’s Action Team on Energy and Climate Change.

Governor Charlie Crist made the announcement Monday. Crist said he appointed the 21-member committee to “preserve our state’s beautiful natural environment. During the next few months, Florida’s Action Team on Energy and Climate Change will develop further recommendations to reduce greenhouse gas emissions and diversify our energy resources.”

Fenton said the first directive should always be to focus on “efficiency.”

“We have to find ways to make it cost effective for consumers to be more energy efficient,” he said.

Fenton, who specializes in fuel cells, sustainable energy, electrochemical engineering, environmental engineering and pollution prevention, said consumers are often put off by the initial cost of products that, in the end, will not only save them money but will also help the environment.

“I would love to find a way to let people buying a brand new home to demand every energy efficiency measure, and solar electric and water heating on the roof from their builder and get an immediate payback,” he said.

The first phase of the committee’s work, due by November 1, will be to make recommendations regarding Florida’s energy policy, including reduction of greenhouse gas emissions and strategies to diversify fuels used to generate electricity.

Phase two of the work, with a deadline of October 1, 2008, will focus on mitigating the impact of greenhouse gas emissions caused by new growth. One way will be looking at how to lure more “climate friendly” businesses to the state.

Fenton said that might require attracting venture capital funds to help companies that make and install energy efficient products to locate in the state.

CONTACT: Barb Abney, UCF, 407-823-5139 or babney@mail.ucf.edu
Governor’s Press Office: 850-488-5394 [http://www.flgov.com/release/9315]

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Governor Crist Sets New Energy and Environmental Agenda for Florida

On Friday, July 13, 2007, Governor Charlie Crist signed three executive orders that will move Florida from “business as usual” to a national leadership position in renewable energy, energy efficiency and carbon emission reduction.

The first executive order (#07-126) [Adobe Acrobat PDF 20kb] requires state government agencies to “walk the walk.”  Among other things, it requires that green house gasses (GHG) resulting from state operations be reduced by 10% in the next 4 years and then consistently over time to 40% below current levels by 2025.  It establishes the U.S. Green Building Council’s (USGBC) Leadership in Energy and Environmental Design (LEED) program and ENERGY STAR buildings standards as the new “standard practice” for state facilities.  It also directs the establishment of vehicle emissions “baseline” for the government’s state-owned vehicle fleet and then, for new vehicles, the purchase of “only those vehicles with the greatest fuel efficiency in a given class.”

The second order (#07-127) [Adobe Acrobat PDF 23kb] establishes state-wide GHG emission targets.  The Order set targets of reaching 2000 levels by 2017 and 1990 levels by 2025.  The ultimate goal is to reduce 1990 levels by 80% by 2050.  Among other things, this Order directs adoption of maximum allowable GHG emissions by utilities and adoption of the California motor vehicle emission standards.  It also directs the Department of Community Affairs to increase the energy performance of new buildings by 15% through the Florida Building Code.  Additionally, this order requests the Florida Public Service Commission to initiate rulemaking by September 1, 2007, to require Florida utilities to “produce at least 20% of their electricity from renewable sources (Renewable Portfolio Standard) with a strong focus on solar and wind energy.”  The order also requests adoption of IEEE Standard 1547 for Interconnecting Distributed Resources with Electric Power Systems as the statewide standard for utility interconnection and the adoption of net metering on a state-wide basis.

Order number three (#07-128) [Adobe Acrobat PDF 17kb] creates the “Florida Governor’s Action Team on Energy and Climate Change to develop a comprehensive Energy and Climate Change Action Plan that will fully achieve or surpass Executive Order targets for statewide greenhouse gas reductions specified in Executive Order 07-127.”  The Governor will appoint the members of this Action Team and it will be staffed and supported by agencies under his direction, specifically the Department of Environmental Protection, the Department of Community Affairs and the Department of Transportation.  The resulting Action Plan is to be completed in two phases, with Phase I completed by November 1, 2007 and Phase II completed by October 1, 2008.

In addition, the Governor also signed international agreements with the United Kingdom [Adobe Acrobat PDF 155kb] and the Federal Republic of Germany [Adobe Acrobat PDF 125kb]. Florida joins each nation in efforts to reduce greenhouse gas emissions and calls for immediate worldwide action. Florida hopes to strengthen ties with each country while improving upon the science and technologies used for reducing greenhouse gas emissions, improving public policies and overall increasing climate-friendly commerce between Florida, the United Kingdom and Germany.

For Additional Information

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