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Energy Tax Incentives Act of 2005
~ Impact on Home Builders ~

Last year, Congress passed the Energy Tax Incentives Act of 2005, which added a tax credit to the Internal Revenue Code for certain home builders. Specifically, the credit is available to eligible contractors who construct dwelling units that qualify as new energy-efficient homes. Under the new law, for qualified new energy-efficient homes (other than manufactured homes), the amount of the credit is $2,000. (Additional and different rules apply to builders of manufactured homes, which are beyond the scope of this newsletter.) A dwelling unit qualifies for the credit if it meets all of the following:

• It is located in the United States.
   
• Its construction is substantially completed after August 8, 2005.
   
• It meets the energy-saving requirements of the Code.
   
• It is acquired from the eligible contractor after December 31, 2005, and before January 1, 2008, for use as a residence.

The credit is available on a per-home basis, with no limit on the number of homes that qualify. The credit is treated as a so-called “general business credit,” as a result of which it is not available to reduce the alternative minimum tax. For partnerships and other pass-through entities, the credit is available at the owner level.

Earlier this year, the Internal Revenue Service issued guidance in Notice 2006-27, which sets forth the process under which an eligible contractor who constructs a dwelling unit (other than a manufactured home) may obtain a certification that the unit is a qualified energy-efficient home. According to the Service, in order to meet the energy-saving requirements of the Code, a dwelling unit must be certified to provide a level of heating and cooling energy consumption that is at least 50 percent below that of a comparable dwelling unit that is constructed in accordance with the standards of Section 404 of the 2004 Supplement to the 2003 International Energy Conservation Code (2004 IECC Supplement), and to have building envelope component improvements that provide for a level of heating and cooling energy consumption that is at least 10 percent below that of a comparable dwelling unit. For this purpose, heating and cooling energy and cost savings must be calculated in accordance with the procedures prescribed in Residential Energy Services Network (RESNET) Publication No. 05-001 (November 17, 2005).

A contractor must obtain the certification required under the Internal Revenue Code with respect to a dwelling unit (other than a manufactured home) from an eligible certifier before claiming the credit. A contractor is not required to file the certification with the return on which the credit is claimed. However, the Service’s regulations require that taxpayers maintain books and records as are sufficient to establish the entitlement to, and amount of, any credit claimed by the taxpayer. Accordingly, an eligible contractor claiming a $2,000 credit should retain the certification to satisfy this requirement. The certification will be treated as satisfying the requirements of the Internal Revenue Code if all construction has been performed in a manner consistent with the design specifications provided to the eligible certifier and the certification contains all of the following:

• The name, address, and telephone number of the eligible certifier.
   
• The address of the dwelling unit.
   
• A statement by the eligible certifier that the dwelling unit has a projected level of annual heating and cooling energy consumption that is at least 50 percent below the annual level of heating and cooling energy consumption of a reference dwelling unit in the same climate zone.
   
• A statement that the building envelope component improvements alone account for a level of annual heating and cooling energy consumption that is at least 10 percent below the annual level of heating and cooling energy consumption of a reference dwelling unit in the same climate zone.
   
• A statement that heating and cooling energy and cost savings have been calculated in the manner prescribed by the Internal Revenue Service.
   
• A statement by the eligible certifier that field inspections of the dwelling unit (or of other dwelling units under the sampling protocol described below) performed by the eligible certifier during and after the completion of construction have confirmed that all features of the home affecting such heating and cooling energy consumption comply with the design specifications provided to the eligible certifier. With respect to builders who build at least 85 homes a year or build subdivisions with the same floor plan using the same subcontractors, the eligible certifier may use the sampling protocol found in the current ENERGY STAR® for Homes Sampling Protocol Guidelines instead of inspecting all of the homes. The sampling protocols can be found at the following web address: http://www.energystar.gov/index.cfm?c=bldrs_lenders_raters.pt_homes_policies#SamplingProtocol.
   
• A list identifying the dwelling unit's energy-efficient building envelope components and their respective energy performance rating as required by Section 401.3 of the 2004 IECC Supplement and the energy-efficient heating and cooling equipment installed in the dwelling unit and the energy-efficiency performance of such equipment, as rated under applicable Department of Energy Appliance Standards test procedures.
   
• Identification of the listed software program used to calculate energy consumption.
   
• A declaration, applicable to the certification and any accompanying documents, signed by a person currently authorized to bind the eligible certifier in these matters, in the following form: “Under penalties of perjury, I declare that I have examined this certification, including accompanying documents, and to the best of my knowledge and belief, the facts presented in support of this certification are true, correct, and complete."

In its notice, the Service also provided various definitions. First it defined the term ”building envelope components” to include basement walls, exterior walls, floor, roof, and any other building element that encloses conditioned space, including any boundary between conditioned space and unconditioned space.

The Service defined “climate zone” as a geographical area within which all locations have similar long-term climate conditions as defined in Chapter 3 of the 2004 IECC Supplement.

A “dwelling unit,” according to the Service, is a single unit providing complete independent living facilities for one or more persons, including permanent provisions for living, sleeping, eating, cooking, and sanitation, within a building that is not more than three stories above grade in height.

An “eligible certifier” is a person that is not related to the eligible contractor and has been accredited or otherwise authorized by RESNET (or an equivalent rating network) to use energy performance measurement methods approved by RESNET (or the equivalent rating network). An employee or other representative of a utility or local building regulatory authority may qualify as an eligible certifier if the employee or representative has been accredited or otherwise authorized by RESNET (or an equivalent rating network) to use the approved energy performance measurement methods.

An “eligible contractor” is the person that constructed a qualified new energy efficient home.

A “reference dwelling unit” is a dwelling unit that is comparable to the dwelling unit constructed by the eligible contractor except that the comparable dwelling unit is constructed in accordance with the minimum standards of Chapter 4 of the 2004 IECC Supplement, the comparable dwelling unit's air conditioners have a Seasonal Energy Efficiency Ratio (SEER) of 13, measured in accordance with 10 C.F.R. 430.23(m), and the comparable dwelling unit's heat pumps have a SEER of 13 and a Heating Seasonal Performance Factor (HSPF) of 7.7, measured in accordance with 10 C.F.R. 430.23(m).

For additional guidance, or if you would like to discuss how this will affect your tax planning, please contact our firm at (412) 881-4411. If you do not currently have a contact at Case | Sabatini, simply ask for Jim Dee (our Business Development Director), and he'll put you in touch with the right party.

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Disclaimer: To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties that may be imposed, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

  
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