Your HOA’s board of directors and manager has probably seen tons of articles or flyers from vendors about how you can save taxes by installing solar heating devices, new windows, new water heaters, insulation, etc. But how much of this is true, and how do you figure it all out? This article will discuss what, if any, kinds of government incentives there are and how they apply to homeowner associations
There has been a lot of talk about alternative energy devices and energy efficient improvements, and what kinds of government incentives there are to encourage the purchase and installation of these kinds of expenditures. Your HOA’s board and manager has no doubt been sent articles or flyers from vendors about how you can save taxes by installing solar heating devices, new windows, new water heaters, insulation, etc. This article will discuss what, if any, kinds of government incentives there are and how they apply to homeowner associations.
Tax Incentives: What Are They and Where Do They Come From?
At the present, California does not give homeowner associations or their members any sort of income tax incentives for the purchase and installation of solar or other energy efficient improvements. The federal government, however, does have different kinds of tax credits available. First of all, you need to know the difference between a tax credit and a tax deduction.
- Tax credit is a dollar for dollar reduction in your or your association’s income tax.
- Tax deduction is merely a reduction of the amount of income subject to income tax.
Ultimately, tax credits then are worth much more than tax deductions.
Learning the Lingo of Federal Energy Efficient Tax Credits
To make heads and tails of the solar and energy efficient tax credits, you’ll have to learn the lingo that the federal government uses to define each element. The main phrases used for energy-related tax credits are as follows: Residential energy efficient property (Internal Revenue Code (IRC) Section 25D), Qualified energy efficiency improvements(IRC Section 25C(c)), Residential energy property expenditures (IRC Section 25C(d)).
Residential Energy Efficient Property
A residential energy efficient property is a property that has:
- Qualified solar electric property expenditures – IRC Section 25D(d)(2)
- Qualified solar water heating property expenditures – IRC Section 25D(d)(1)
- Other expenditures: geothermal heat pumps, fuel cells, and small wind electric generators
“Qualified” simple means that the manufacturer has certified that the property meets the IRS’s criteria for the tax credit. Solar water heating property expenditures does not include any amount spent to heat swimming pools or hot tubs (IRC Section 25D(e)(3)). However, if you install a storage tank to hold the solar heated water for domestic use, this would qualify for the credit. If the heated water is going to a swimming pool or hot tub, then this would not be a qualifying expenditure with respect to the tax credit.
The tax credit on these expenditures is equal to 30 percent of the total expenditure. Total expenditures include not only the actual device but also its installation. Moreover, these credits are the best credits available because they do not expire until the year 2017 (this, of course, is always subject to change) and the credit is unlimited—more about this later in the article.
Qualified Energy Efficiency Improvements
Qualified energy efficiency improvements include:
- Certain insulating materials
- Exterior windows and doors
- Metal roofs
The meaning of term “qualified” is the same as in the previous paragraph. And remember, eligible costs only include the cost of the device and not its installation. This credit does have an expriation date. The credit is equal to 30 percent of the cost but is limited to $1,500 in total for both 2014 and 2015 combined—more about this later in the article.
Residential Energy Property Expenditures
Residential energy property expenditures are:
- Energy-efficient building property such as electric heat pump water heaters, high efficiency central air conditioners or high efficiency natural gas, propane or oil water heaters
- High efficiency natural gas or propane furnaces
- Advanced main air circulating fans
The meaning of term “qualified” is the same as in the previous paragraph. Eligible costs include both the cost of the device and its installation. This credit does have an expriation date. The credit is equal to 30 percent of the cost but is limited to $1,500 in total for both 2014 and 2015 combined—more about this later in the article.
Technical Matters for Determining Your HOA’s Tax Credits
The year that counts for determining what year you can claim the credit is the year that the installation is complete. In other words, if you install solar electric panels and the work begins in December 2014 but is not finished and paid in full until March 2015, the credit year is 2015.
If you get subsidized financing from any governmental program, then any amount received must be subtracted from the total of otherwise qualifying expenditures the association made. Homeowner associations, generally, are not the ones that get these tax credits; like a partnership, the qualifying expenditures “pass-through” to the owners in the association (IRC Section 25D(e)(6)). In the words of the Internal Revenue Code, “such individual shall be treated as having made the individual’s proportionate share of any expenditure of such association.” In most CC&Rs, the wording “proportionate share” usually refers to the division of assessments. If your CC&Rs say, for example, that assessments are divided equally among the owners, then the solar or other energy-efficient expenditures are likewise divided equally among the owners. The same methodology would apply if the CC&Rs say that assessments are divided among the owners based on a variable percentage. If your CC&Rs say assessments are partially divided on an equal basis and partially on a variable basis, the advice of legal counsel should probably be considered about how solar and other energy-efficient expenditures are divided among the owners.
It is the expenditures that are allocated to the owners and not any tax credit. Each individual owner is informed of the total amount of and what kind of qualifying expenditures have been allocated to them. Each individual owner calculates their credit amount on Form 5695. As stated previously, tax credits from residential energy efficient property are unlimited. Tax credits from the two other kinds of expenditures are limited to $1,500 for 2014 and 2015 combined with each other and combined for both years. Management will need to notify the association’s owners, probably no later than January 31 of each year, if the association incurred any qualifying solar or energy-efficient expenditures and what their respective share was for the prior year.
An Example of How This All Works Out
Facts: A 20-unit condominium building installs a solar water heating device (to be used for residential purposes) and a solar electric panel to provide electricity to the building. The total cost of the equipment is $200,000 and installation is another $100,000. The work was paid and completed by December 31, 2014. The association paid for the work with a special assessment to the owners of $300,000. According to the CC&Rs, assessments are divided equally among the owners.
- Total allowable expenditures to be allocated to owners = $300,000 ($200,000 equipment + $100,000 installation).
- Notice to owners by January 31, 2015 stating they each are allocated qualifying solar expenditures of $15,000.
- Each owner has an available tax credit for the 2014 year of $4,500 ($15,000 X 30%)
While this article discussed, in general, solar and energy-efficiency federal tax credits, you should consult with your individual income tax preparer on the treatment of these tax credits in your individual income tax return. This article only discussed in a general way what kinds of qualifying energy efficient expenditures there are. You and management need to discuss thoroughly with any vendors whether or not any contemplated work qualifies for the tax credits and to get a written certification from them that the work does qualify.
Bill Erlanger is a partner at Levy Erlanger & Co, CPAs, and past chair of ECHO’s Accountants’ Resource Panel.