Sunday, August 1, 2010

Seize tax incentives now for green improvements to housing and commercial properties.

Tax credits and tax deductions are not the same. A tax credit reduces tax liability. If you owe $100,000 in income taxes, but you have a $10,000 credit, your net tax liability is $90,000. A tax deduction reduces your taxable income but not on a dollar-for-dollar basis. Instead, you apply your tax rate to quantify the cut. So, if you have a $100,000 tax deduction and you are in the 35 percent tax bracket, your tax benefit is $35,000.

Generally, federal tax incentives aim at reducing energy consumption and encouraging renewable energy use. Under current code, businesses that purchase a so-called "energy property" to use in the course of commerce can claim a tax credit for up to 30 percent of the cost. An energy property is equipment that uses solar or wind to generate electricity or to heat, cool or light a building. Taxpayers can claim the credit whether they buy equipment or build it.

The federal code also allows a deduction of up to $1.80 a square foot for improvements to make commercial property more energyefficient. The upgrades must improve interior lighting systems, heating, cooling, ventilation and hot water systems, or the building envelope. If improvements don't meet every code requirement, a partial deduction is allowed of $0.60 a square foot. The dollars can be substantial. A landlord with a 50,000 square-foot commercial building who upgrades lighting, building envelope and HVAC systems could achieve a $90,000 tax deduction (50,000 square feet x $1.80).

The code also offers individual tax credits. Under the "residential energy-efficient property" credit, 30 percent of an expenditure for solar-electric equipment, solar water-heating equipment, fuel-cell equipment, small wind-energy equipment and geothermal heat pumps can be claimed. Some credits, but not all, are available only on principal residences. Home-based workers must be careful. The expenditure must be for a nonbusiness purpose; if less than 80 percent of the use of an item is for a nonbusiness (such as living in your house), only that portion of the expenditure qualifies.

For example, say Bob purchases a $6,000 solar panel for his home. If he uses 30 percent of his house for business, his credit is limited to 70 percent. That would be $1,260 ($6,000 multiplied by 30 percent and then by 70 percent). Conversely, if the business use of his home absorbs only 10 percent of its square footage, he would be eligible for the full credit of $1,800 (30 percent of $6,000).