Credits Benefiting the Environment

Currently, the largest group of tax credits are those designed to encourage energy conservation or other activities that benefit the environment. However, most of these credits are narrowly targeted, so the number of people eligible for them is actually quite small. The seven credits in this group are the credit for electric vehicles, the energy credit, the reforestation credit, the alternative fuels credit, the alcohol fuels credit, the enhanced oil recovery credit, and the renewable resources electricity production credit.

Credit for qualified electric vehicles. If you purchase a new electric vehicle and place it in service before 2005, you can receive a tax credit for 10 percent of the purchase price (up to $4,000). Any part of the cost that you elect to expense under Section 179 is not eligible for the credit, and the credit amount reduces the tax basis of the vehicle. The credit is claimed on Form 8834, Qualified Electric Vehicle Credit.

Energy credit. An energy credit is allowed for 10 percent of the cost of the following types of property placed in service during the year: (1) equipment that uses solar energy to generate electricity, heat or cool a structure, provide hot water, or provide solar process heat; or (2) equipment used to produce, distribute, or use geothermal energy stored in rocks, water, or steam. The property must be depreciable (i.e., used in your business). The energy credit is part of the investment tax credit, and can be recaptured (paid back to the IRS) if the qualifying property is sold or disposed of before the end of its recovery period. It is claimed on Form 3468, Investment Tax Credit.

Reforestation credit. For those in timber production, the 10 percent reforestation credit applies to up to $10,000 of the expenses you incur each year to forest or reforest your property. Eligible expenses include the costs of site preparation, seeds or seedlings, labor, and tools, including depreciation on machinery and equipment. The property must be held for growing trees for sale or use in the commercial production of timber products. The reforestation credit is part of the investment tax credit and is claimed on Form 3468, Investment Tax Credit.

Alternative fuels credit. A producer of "alternative fuels" can claim a tax credit for the domestic production and sale of such fuels to unrelated persons. The fuels eligible for the credit include oil and gas produced from nonconventional sources like shale and tar sands, geopressured brine, Devonian shale, coal seams, biomass, coal, certain types of processed wood, etc. The production facilities or wells must have been placed in service or drilled before 1993. Subsequent legislation extended the placed-in-service date for gas produced from biomass and synthetic fuel produced from coal through June 30, 1998, under a written binding contract in effect before 1997.

The credit must be reduced by any energy investment credit allowed for the property used to produce the alternative fuel. There's no IRS form for this credit - if you want to claim it, you (or your tax pro) must attach a page showing how you computed it to your Form 1040, U.S. Individual Income Tax Return.

Alcohol fuels credit. Producers of alcohol fuels or mixtures such as gasohol or ethanol can receive a tax credit for any sale or use of such fuels. The credit will expire after September 30, 2005. No carryforward of the credit is permitted for any tax year beginning after 1994. The alcohol fuels credit is part of the general business credit. It's claimed on Form 6478, Credit for Alcohol Used as Fuel.

Enhanced oil recovery credit. If you begin or significantly expand a domestic oil recovery project that uses certain tertiary recovery methods - such as the injection of liquids, gasses, or other matter - to increase crude oil production, you can take a credit for 15 percent of your qualified enhanced oil recovery costs for the tax year. The enhanced oil recovery credit is part of the general business credit. It's claimed on Form 8830, Enhanced Oil Recovery Credit.

The renewable resources electricity production credit. This credit is based on electricity that is produced before 2002 from wind or closed-loop biomass facilities (organic material grown exclusively for electricity production) and sold to third parties. The credit for calendar year 2001 is 1.7 cents per kilowatt hour of such electricity sold. The credit is part of the general business credit. It's claimed on Form 8835, Renewable Electricity Production Credit.