Tax Credits What HVAC Contractors Need To Know About The Stimulus Package 

On Feb. 17, 2009 President Obama signed the “American Recovery and Reinvestment Act of 2009 (ARRA)” into law. This bill combines spending and tax incentives to move the American economy forward by investing in infrastructure and increasing energy efficiency of residential/ commercial buildings in America.

Specifically for the HVAC business, this legislation makes a number of important changes to the existing tax incentives for homeowners who make qualified improvements on high efficiency HVAC products and equipment in their primary residences.

Overall, the tax credits available have been increased up to 30 percent of the installed cost of those improvements, or up to a total of $1,500 for residential HVAC products installed from Jan. 1, 2009 through Dec. 31, 2010. The following are some answers to frequently asked questions.

For residential equipment to get these tax credits? The revised criteria for qualifying residential HVAC equipment under Section 1121 of the ARRA legislation are as follows:

(1) A natural gas, propane or oil furnace rated at 95 percent AFUE or higher. (2) Any furnace equipped with an advanced main air-circulating fan that uses no more than 2 percent of the total energy use. (3) A central air conditioner that achieves the highest efficiency tier established by the Consortium for Energy Efficiency as in effect on Jan. 1, 2009 (which is 16 SEER or higher, 13 EER or higher rating).

(4) An electric air source heat pump that achieves the highest efficiency tier established by the Consortium of Energy Efficiency as in effect on Jan. 1, 2009 (which is 15 SEER or higher, 12.5 EER or higher, 8.5 HSPF or higher rating).

What is an advanced main air circulating fan? An advanced main air circulating fan is a blower/ fan used in a natural gas, propane or oil furnace originally placed in service by the taxpayer during the taxable year, and which has an annual electricity use of no more than 2 percent of the total annual energy use of the furnace (as determined in the standard Department of Energy test procedures).

This criteria and tax credits do not apply to air handlers with variable speed motors, as the benefit of the advanced main air-circulating fan has already been included in the energy efficiency ratings of the outdoor products.

What’s the difference between a tax credit and a tax deduction?

A tax credit applies directly against the taxpayers’ liability. A tax deduction applies against a taxpayer’s income, lowering the adjusted gross income and possibly moving the taxpayer to a lower tax bracket.

Tax credits have a greater benefit to a taxpayer than a tax deduction.

There are two categories of tax credits: Refundable and Non- Refundable. Residential Energy Tax Credits for 2009 and 2010 are considered to be Non-Refundable tax credits under the IRS regulations, just as the pervious tax credits were for 2006 and 2007.

What’s the difference between Non-Refundable and Refundable Tax Credits? Most, but not all, tax credits are referred to as nonrefundable credits. A non-refundable credit is a tax credit that can reduce your tax liability to zero, but not below. You must have tax liability of line 46 of Form 1040, line 18 of Form 1040A, or line 43 of Form 1040NR to claim a nonrefundable tax credit. A refundable tax credit is a tax credit that can reduce your tax liability below zero. Because it is possible to receive a refund based on these types of credits, the credits are referred to as refundable.

Can a homeowner claim $1500 in tax credits for improvements made in 2009, and then again claim tax credits for more improvements made in 2010? No, taxpayers are eligible for a total of $1500 in tax credits for improvements made over the combined two year period.

Does the tax credit apply to the cost of equipment or equipment plus labor? The tax credit applies to the installed cost of the equipment that qualifies for the tax credits, which includes labor for that specific installation.

Can a homeowner use the $1500 tax credit towards a single appliance installation? Yes, since the per appliance caps have been removed by this new legislation, a homeowner may use the entire $1500 in tax credits for installing a single qualified appliance, such as a furnace, air conditioner, heat pump, etc., up to 30 percent of the installed cost of that one appliance.

What happens if the 30 percent of the installed cost is less than the $1500 limit? The homeowner can “bank” the remaining amount of the available tax credit towards the cost of the qualified improvements during the two-year period. Any single item that the installed cost is more than $5000 will instantly reach the $1500 limit.

Can a homeowner claim credits for improvements to a Second home, such as a vacation home? No, the tax credit program is only available for improvements made to the taxpayer’s primary residence or home, and may not be used for second or vacation homes.

Do Energy Star-certified products meet the requirements for these tax credits? Because there are different equipment definitions and product tiers used by the Energy Star program, note that most Energy Star products do meet the criteria for these tax credits, but not all of them do. Refer to the qualifying criteria as shown on the Energy Star website and the criteria for the federal tax credits.

What if a taxpayer had made claims for tax credits on improvements made during 2006 or 2007 tax years? The “lifetime caps” that placed limits on the total tax credits available to any taxpayer have been removed. Any previous claims do not count against the current $1500 tax credit limit.

How do homeowners claim the tax credits and receive their money? Before filing for tax credits on any listed models, it is always recommended that homeowners/ consumers consult with a tax professional to review the provisions of the American Recovery and Revitalization Act of 2009 in reference to Section 25C of the Internal Revenue code. Previously, the IRS has directed taxpayers to use Form 5695, Residential Energy Efficient Property Credit.

Taxpayers should keep copies of invoices and receipts to document their actual expenditures, but only need to file Form 5695 with their tax returns to get the tax credits.

Should a contractor promise a homeowner that they will qualify for the tax credit? No, as each taxpayer’s situation may be different.

The contractor may not know if the taxpayer has already made other improvements that qualify, or if their tax situation will change by the end of the tax year. But to be safe, the contractor can always say, “By installing qualified equipment, the taxpayer may be qualified to claim of 30 percent of the installed costs (up to a $1500 limit) in tax credits.” And the contractor should always advise the homeowner to refer to the applicable IRS forms and regulations.