The recently enacted Energy Tax Incentives Act of 2005 provides a number of new tax credits designed to encourage energy conservation through the purchase and construction of energy-saving equipment and property. These credits are available to both individuals and businesses.

Here is a quick rundown of the key new credits.

Energy-saving home improvements

     A homeowner can claim a nonrefundable personal tax credit, up to a maximum of $500, for improvements to their principal residences. The credit has two parts:

1. 10% credit for qualifying improvements to the "building envelope." These include insulation material, exterior windows (including skylights), and exterior doors that meet certain energy standards.

2. A credit of:

   1. $50 for each advanced main air circulating fan,

   2. $150 for each qualified natural gas, propane, or oil furnace or hot water boiler, and

   3. $300 for qualified energy-efficient property, including heat pumps, water heaters, and central air conditioners.

     The energy standards that must be met are quite technical, but you should be able to identify qualifying property through manufacturers' certification and labeling.

     Residential alternative energy equipment. This new credit, officially known as the credit for "residential energy efficient property," is available for the purchase of equipment that heats water or generates electricity for use around the home.

A homeowner can claim a credit for energy efficient property equal to the sum of:

• 30% of "qualified photovoltaic property" expenses incurred during the tax year, up to a maximum credit of $2,000,

• 30% of "qualified solar water heating property" expenses incurred during the tax year, up to a maximum credit of $2,000, and

• 30% of "qualified fuel cell property" incurred during the tax year, up to a maximum credit of $500 for each 0.5 kilowatt of capacity [IRC Sec. 25D(a)].

Hybrid automobile credit

     Anyone that buys a gasoline/electric hybrid automobile qualifies for a $2,000 deduction for 2005. However, the new Energy Act converts the deduction to a tax credit, starting in 2006. The amount of the new credit is the sum of two factors: a fuel efficiency credit and a conservation credit. The fuel economy credit is based on a vehicle's increase in fuel economy over a 2002 comparable vehicle standard. The conservation credit is based on the estimated lifetime fuel savings of a qualifying vehicle compared to a comparable 2002 model year vehicle. The largest credit available for a passenger automobile is $3,400.

     The credit is both time-and unit-limited. The tax credit is available only for automobiles placed in service before January 1, 2011. And the credit is limited to 60,000 per manufacturer. When a manufacturer has sold 60,000 eligible hybrids, the vehicles sold during the next four calendar quarters will only be eligible for a portion of the full credit.

Energy-related tax incentives for businesses.

The new Energy Act also contains a number of new tax credits and deductions designed to encourage businesses to produce and use energy-saving property. For example, the new law provides:

• A new deduction ($1.80 per square foot) for energy-efficient commercial buildings with energy and power costs equal to 50% or less of a minimum industry standard;

• A new, up-to-$2,000 business tax credit for each qualifying energy-efficient residence constructed by a homebuilder or producer of manufactured homes; and

• A new business tax credit for manufacturers of certain energy-efficient home appliances.