Congress's tax double header.

In August 2005, President Bush signed two major tax bills. While in recent years, it has become unusual to enact a single significant tax act in one year, 2005 has so far produced two. Each is industry-specific--the first addresses energy and the second, transportation.

EPA '05--Overview

On Aug. 8, 2005, the President signed the Energy Policy Act of 2005 (EPA '05). (1) Consistent with its title, the legislation is directed at the oil and gas industry and amends the Code to provide incentives ranging from depreciation of natural gas distribution lines (EPA '05 Section 1325(a) and (b)), to amortization of geological and geophysical expenditures (Section 1329(a) and (b)), to expensing by small refiners (Section 1323(a) and (b)).

The EPA '05 also includes a number of provisions relating to the electric industry, ranging from depreciation of power transmission lines (Section 1308(a) and (b)), to extending the income tax exemption for nuclear decommissioning transactions (Section 1304(a) and (b)), to incentives for clean coal (Section 1307(a) and (b)) and renewable energy sources (Section 1303(a)-(c)). Overall, the incentives will cost the Federal government $14.5 billion. (2) Such costs are partially offset by revenue raising provisions, including reinstating the Oil Spill Liability Trust Fund tax (if certain conditions exist in 2006) (Section 1361), and extending the Leaking Underground Storage Tank (LUST) Trust Fund through Sept. 30, 2011 (Section 1362(a)), provisions that will raise nearly $3 billion.

The EPA '05 is not entirely devoted to large energy and power companies, however. Some of its provisions will undoubtedly affect many individuals. For example, EPA '05 Section 110 extends daylight saving time. Beginning in 2007, it will start on the first Sunday in March (March 11, 2007) and end on the first Sunday in November (Nov. 4, 2007). The EPA '05 also includes energy efficiency and conservation measures.

Almost completely unrelated to oil and gas or electrical power, the EPA '05 also includes a change to the taxation of Sec. 197 intangibles, under Section 1363, amending Sec. 1245 (b) (9). If a taxpayer sells multiple intangible assets in a single transaction or series of transactions, any recapture is calculated as if the taxpayer sold a single asset. Thus, gain on the sale or disposition of Sec. 197 intangibles is recaptured as ordinary income to the extent of ordinary depreciation previously claimed on such assets, effective for property dispositions after Aug. 8, 2005.

Alternative Vehicle Credits

The EPA '05 includes a number of provisions on hybrid and electric cars.

Credit for "qualified fuel cell motor vehicles": EPA '05 Section 1341(a) creates a new credit (Sec. 30B(b)) for the purchase of a fuel cell motor vehicle. The credit is determined by the vehicle's weight class, with an additional credit based on the rated fuel economy, for cars and light trucks (effective for property placed in service after 2005 and before 2015).

Credit for "qualified alternative fuel motor vehicles": Under EPA '05 Section 1341(a), adding Sec. 30B(e), the credit for alternative fuel motor vehicles is applied against the excess of the regular tax over the alternative minimum tax (AMT) (generally effective for property placed in service after 2005 and before 2011).

Hybrid motor and lean burn fuel vehicles: Pursuant to EPA '05 Section 1341(a), adding Sec. 30B(d), the new credit for hybrid and lean fuel vehicles is based on both the vehicle's fuel economy and the estimated lifetime fuel savings (as compared to a 2002 model year), generally effective for property placed in service after 2005 and before 2010.

Present credit for clean fuel vehicles: Sec. 179A sunsets on Dec. 31, 2005, under EPA Section 1348, amending Sec. 179A(f).

Alternative Fuel Credits

In addition to tax credits for alternative motor vehicles, businesses may claim credits for certain costs of alternative fuel production.

Small producer biodiesel and ethanol credit: EPA '05 Section 1344(b) adds to the Sec. 40A biodiesel fuels credit, a small agri-biodiesel (as defined in Sec. 40A(d)(2)) producer credit of 10 cents per gallon for up to 15 million gallons of agri-biodiesel produced, effective for tax years after the date of enactment; the provision sunsets on Dec. 31, 2008. EPA '05 Section 1347(c) expands the Sec. 40(g) small ethanol producer credit to producers with annual production capacity of 60 million gallons (up from 30 million gallons), for tax years ending after Aug. 8, 2005.

Credit for installing alternative fuel vehicle refueling property: Under EPA '05 Section 1342(a) and (b)(1), (2) and (4), adding Sec. 30C, businesses installing clean-fuel vehicle refueling property, after 2005 and before 2010, may claim a 30% credit (capped) for the installation cost.

Diesel-water fuel emulsion: Under EPA '05 Section 1343(a) and (c), a special tax rate of 19.7 cents per gallon (down from 24.3 cents) is provided for diesel fuel blended with water into a diesel-water fuel emulsion, to reflect the reduced British thermal unit content per gallon resulting from the water. The provision is effective starting 2006.

Extend excise and income tax credit for biodiesel: EPA '05 Section 1344(a) extends the income tax credit, excise tax credit and refund provisions through the end of 2008, and creates a similar income tax credit, excise tax credit and refund system for renewable diesel fuel.

Business and Residential Energy Credits

The EPA '05 also adds incentives to construct and renovate property.

Residential energy-efficient property purchases: EPA '05 Section 1335(a), adding Sec. 25D, provides a 30% credit (capped) for the purchase of photovoltaic and solar water heating property (unless the property is used for heating swimming pools or hot tubs) and qualified fuel cell property.

Business installation of fuel cells and microturbine power plants: EPA '05 Section 1336, amending Sec. 48, provides a 30% business tax credit (capped) for the purchase of qualified fuel cell power plants, and a 10% credit (capped) for the purchase of qualifying stationary microturbine power plants.

All of the above credits apply to property placed in service in 2006 or 2007.

Energy-efficient existing homes: Under EPA '05 Section 1333, adding Sec. 25C, there is a personal tax credit for (1) improvements to a building envelope; (2) advanced main air circulating fans; (3) natural gas, propane or oil furnaces, or hot water boilers; and (4) other qualified energy-efficient property (e.g., heat pumps, water heaters and central air conditioners) placed in service after 2005 and before 2008. The credit amount hinges on the type of property purchased.

Energy-efficient new homes: EPA '05 Section 1332 allows a builder to claim a credit, under new Sec. 45L, for new, qualified energy-efficient homes sold after 2005 and before 2008.

Energy-efficient commercial buildings: There is a new deduction for energy-efficient commercial buildings that reduce annual energy and power consumption, if placed in service in 2006 or 207, under Sec. 179D, added by EPA '05 Section 1331. (3)

Energy-efficient appliances: Finally, EPA '05 Section 1334 created Sec. 45M, a credit for the manufacture of efficient dishwashers, clothes washers and refrigerators manufactured in 2006 or 2007.

SAFETEA-LU 

Signed by President Bush on Aug. 10, 2005, the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users' (4) (SAFETEA-LU's) main objective is to extend highway-related taxes and trust funds, and modify adjustments of apportionments. The SAFETEA-LU also reforms certain excise taxes and tries to simplify their application.

Alcoholic beverages: In an odd mix, the SAFETEA-LU includes provisions taxing alcoholic beverages. Effective July 1, 2008, Section 11125 repeals the special occupational taxes on producers and marketers of alcoholic beverages. The SAFETEA-LU also offers, in Section 11126, an income tax credit under Secs. 38(b)(20) and 5011, for certain distilled spirits wholesalers and for the costs of carrying Federal excise taxes on bottled distilled spirits, effective for tax years beginning after Sept. 30, 2005.

Gas guzzler tax: Limousines rated at more than 6,000 pounds unloaded gross vehicle weight are now exempt from the gas guzzler tax, as they are excluded from the definition of an automobile. This change is effective Oct. 1, 2005, under SAFETEA-LU Section 11111(a), amending Sec. 4064(b)(1)(A).

Harbor maintenance tax: This tax is repealed for exports, for periods before, on and after Aug. 10, 2005, under SAFETEA-LU Section 11116 (c), amending Secs. 4461(c)(1) and (2) and 4462(d). It had already been ruled unconstitutional. (5)

Conclusion

Several additional tax bills are pending in Congress, which may affect the AMT, the estate tax, pension reform, retirement savings and additional tax incentives. Tax advisers should keep an eye out for further developments.

MARK A. MUNTEAN, J.D., LL.M., OF COUNSEL, ROBERT W. WOOD, P.C., SAN FRANCISCO, CA

(1) P.L. 109-58, 109th Cong., 1st Sess. (8/08/05).

(2) See Greene, "Bush Signs Energy Bill, Touting Independence," available at www.npr.org/templates/story/story.php?storyId=4791049.

(3) For details, see News Notes, "Energy-Efficient Buildings," 36 The Tax Adviser 585 (October 2005).

(4) RL. 109-59, 109th Cong., 1st Sess. (8/10/05).

(5) See U.S. Shoe Corp., 523 US 360 (1998).