DESCRIPTION OF THE 

“ENERGY POLICY TAX INCENTIVES ACT OF 2005” 

Scheduled for Markup 

by the 

SENATE COMMITTEE ON FINANCE 

June 16, 2005 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

June 14, 2005 

JCX-44-05 
ii 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

A. Electricity Infrastructure ..................................................................................................... 2 

1. Extension and modification of renewable electricity production tax credit ................. 2 

2. Clean renewable energy bonds ..................................................................................... 5 

3. Treatment of income of certain electric cooperatives................................................... 9 

4. Dispositions of transmission property to implement FERC restructuring policy....... 13 

5. Credit for production of electricity from advanced nuclear power facilities.............. 15 

6. Credit for investment in clean coal facilities .............................................................. 16 

7. Clean energy bonds for certified coal property........................................................... 17 

B. Domestic Fossil Fuel Security .......................................................................................... 21 

1. Credit for investment in clean coke/cogeneration manufacturing facilities ............... 21 

2. Temporary expensing for equipment used in the refining of liquid fuels................... 21 

3. Pass through to patrons the deduction for capital costs incurred by cooperative 

for complying with environmental protection agency sulfur regulations for small 

refiners ........................................................................................................................ 23 

4. Enhanced oil recovery credit for carbon dioxide injections ....................................... 24 

5. Natural gas distribution lines treated as fifteen-year property.................................... 25 

C. Conservation and Energy Efficiency Provisions .............................................................. 26 

1. Energy efficient commercial building deduction........................................................ 26 

2. Energy efficient new homes........................................................................................ 28 

3. Deduction for business energy property ..................................................................... 29 

4. Credit for non-business energy property..................................................................... 30 

5. Energy credit for combined heat and power system property .................................... 31 

6. Energy efficient appliances......................................................................................... 33 

7. Residential solar hot water, photovoltaics and fuel cell property............................... 34 

8. Credit for business installation of qualified fuel cells and stationary microturbine 

power plants................................................................................................................ 35 

9. Business solar investment tax credit........................................................................... 36 

D. Alternative Motor Vehicles and Fuels Incentives............................................................. 38 

1. Alternative vehicle credit............................................................................................ 38 

2. Electric vehicle credit ................................................................................................. 43 

3. Alternative fuel refueling property credit ................................................................... 44 

4. Volumetric excise tax credit for alternative fuels....................................................... 45 

5. Extend excise tax provisions and income tax credit for biodiesel.............................. 47 

E. Energy Related Technical Corrections ............................................................................. 50 

1. Technical corrections relating to the expansion of the credit for electricity 

produced from certain renewable resources ............................................................... 50 
1 

INTRODUCTION 

The Senate Committee on Finance has scheduled a markup on June 16, 2005, of the 

“Energy Policy Tax Incentives Act of 2005.” This document,1

 prepared by the staff of the Joint 

Committee on Taxation, provides a description of provisions of the “Energy Policy Tax 

Incentives Act of 2005.

 1

 This document may be cited as follows: Joint Committee on Taxation, Description of the 

“Energy Policy Tax Incentives Act of 2005,” (JCX-44-05) June 14, 2005. 
2

A. Electricity Infrastructure 

1. Extension and modification of renewable electricity production tax credit 

Present Law

In general

An income tax credit is allowed for the production of electricity from qualified facilities 

sold by the taxpayer to an unrelated person (sec. 45). Qualified facilities comprise wind energy 

facilities, closed-loop biomass facilities, open-loop biomass (including agricultural livestock 

waste nutrients) facilities, geothermal energy facilities, solar energy facilities, small irrigation 

power facilities, landfill gas facilities, and trash combustion facilities. In addition, an income tax 

credit is allowed for the production of refined coal. 

Credit amounts and credit period

In general

The base amount of the credit is 1.5 cents per kilowatt-hour (indexed for inflation) of 

electricity produced. The amount of the credit is 1.9 cents per kilowatt-hour for 2005. A 

taxpayer may claim credit for the 10-year period commencing with the date the qualified facility 

is placed in service. The credit is reduced for grants, tax-exempt bonds, subsidized energy 

financing, and other credits. The amount of credit a taxpayer may claim is phased out as the 

market price of electricity (or refined coal in the case of the refined coal production credit) 

exceeds certain threshold levels. 

Reduced credit amounts and credit periods

In the case of open-loop biomass facilities (including agricultural livestock waste nutrient 

facilities), geothermal energy facilities, solar energy facilities, small irrigation power facilities, 

landfill gas facilities, and trash combustion facilities, the 10-year credit period is reduced to five 

years commencing on the date the facility is placed in service. In general, for eligible preexisting facilities and other facilities placed in service prior to January 1, 2005, the credit period 

commences on January 1, 2005. In the case of a closed-loop biomass facility modified to co-fire 

with coal, to co-fire with other biomass, or to co-fire with coal and other biomass, the credit 

period begins no earlier than October 22, 2004. 

In the case of open-loop biomass facilities (including agricultural livestock waste nutrient 

facilities), small irrigation power facilities, landfill gas facilities, and trash combustion facilities, 

the otherwise allowable credit amount is 0.75 cent per kilowatt-hour, indexed for inflation 

measured after 1992. 

Credit applicable to refined coal

The amount of the credit for refined coal is $4.375 per ton (also indexed for inflation 

after 1992 and equaling $5.481 per ton for 2005). 
3

Other limitations on credit claimants and credit amounts

In general, in order to claim the credit, a taxpayer must own the qualified facility and sell 

the electricity produced by the facility (or refined coal in the case of the refined coal production 

credit) to an unrelated party. Also, in general, the amount of credit a taxpayer may claim is 

reduced by reason of grants, tax-exempt bonds, subsidized energy financing, and other credits. 

The reduction cannot exceed 50 percent of the otherwise allowable credit.2 

The credit for electricity produced from renewable sources is a component of the general 

business credit (sec. 38(b)(8)). Generally, the general business credit for any taxable year may 

not exceed the amount by which the taxpayer’s net income tax exceeds the greater of the 

tentative minimum tax or so much of the net regular tax liability as exceeds $25,000. Excess 

credits may be carried back one year and forward up to 20 years. 

A taxpayer’s tentative minimum tax is treated as being zero for purposes of determining 

the tax liability limitation with respect to the section 45 credit for electricity produced from a 

facility (placed in service after October 22, 2004) during the first four years of production 

beginning on the date the facility is placed in service. 

 2

 In the case of closed-loop biomass facilities modified to co-fire with coal, to co-fire with other 

biomass, or to co-fire with coal and other biomass, there is no reduction in credit by reason of grants, taxexempt bonds, subsidized energy financing, and other credits. 
4

Summary of credit rate and credit period by facility type

Table 1.–Summary of Section 45 Credit for Electricity Produced 

from Certain Renewable Resources and Refined Coal 

Electricity produced from 

renewable resources 

Credit amount for 

2005 

(cents per kilowatthour; dollars per ton)

Credit period 

(years from 

placed-in-service 

date)1

Wind............................................................... 

Closed-loop biomass...................................... 

Open-loop biomass ........................................ 

 (including agricultural livestock 

 waste nutrient facilities) 

Geothermal..................................................... 

Solar ............................................................... 

Small irrigation power ................................... 

Municipal solid waste .................................... 

 (including landfill gas facilities 

 and trash combustion facilities) 

1.9 

1.9 

0.9 

1.9 

1.9 

0.9 

0.9 

 10 

 10 

 5 

 5 

 5 

 5 

 5 

Refined Coal 5.481 10 

1

 For eligible pre-existing facilities and other facilities placed in service prior to January 1, 2005, the credit period 

commences on January 1, 2005. In the case of certain co-firing closed-loop facilities, the credit period begins no 

earlier than October 22, 2004. 

Periods for which credit allowable

In order to be a qualified facility– 

Wind energy facility

A wind energy facility must be placed in service after December 31, 1993, and before 

January 1, 2006. 

Closed-loop biomass facility

A closed-loop biomass facility must be placed in service after December 31, 1992, and 

before January 1, 2006. In the case of a facility using closed-loop biomass but also co-firing the 

closed-loop biomass with coal, other biomass, or coal and other biomass, a qualified facility 

must be originally placed in service and modified to co-fire the closed-loop biomass at any time 

before January 1, 2006. 

Open-loop biomass (including agricultural livestock waste nutrients) facility

An open-loop biomass facility must be placed in service after October 22, 2004 and 

before January 1, 2006, in the case of a facility using agricultural livestock waste nutrients and 
5

must be placed in service at any time prior to January 1, 2006 in the case of a facility using other 

open-loop biomass. 

Geothermal, solar, small irrigation, landfill gas, and trash combustion facilities

To be a qualifying facility, a geothermal, solar, small irrigation, landfill gas, or trash 

combustion facility must be placed in service after October 22, 2004 and before January 1, 2006. 

Refined coal facility

A refined coal facility must be placed in service after October 22, 2004 and before 

January 1, 2009. 

Description of Proposal

The proposal extends the placed-in-service date by three years (through December 31, 

2008) for the following qualifying facilities: wind facilities; closed-loop biomass facilities 

(including a facility co-firing the closed-loop biomass with coal, other biomass, or coal and other 

biomass); open-loop biomass facilities; geothermal facilities; small irrigation power facilities; 

landfill gas facilities; and trash combustion facilities. The proposal does not extend the placedin-service date for solar facilities (December 31, 2005) or refined coal facilities (December 31, 

2008). 

The proposal adds one new qualifying energy resource, fuel cells. A qualifying fuel cell 

facility is an integrated system comprised of a fuel cell stack assembly and associated balance of 

plant components that convert a fuel into electricity using electrochemical means, and which has 

an electricity-only generation efficiency of greater than 30 percent and generates at least 0.5 

megawatts of electricity, and which is placed in service after December 31, 2005, and before 

January 1, 2009. The taxpayer can claim the 1.5 cents-per-kilowatt-hour (indexed for inflation) 

credit for a five-year period commencing on the date the facility is placed in service. 

Effective Date

The proposal is effective on the date of enactment. 

2. Clean renewable energy bonds 

Present law

Tax-exempt bonds

Interest on State and local government bonds generally is excluded from gross income for 

Federal income tax purposes if the proceeds of the bonds are used to finance direct activities of 

these governmental units or if the bonds are repaid with revenues of the governmental units. 

Activities that can be financed with these tax-exempt bonds include the financing of electric 

power facilities (i.e., generation, transmission, distribution, and retailing). 
6

Interest on State or local bonds to finance activities of private persons (“private activity 

bonds”) is taxable unless a specific exception is contained in the Code (or in a non-Code 

provision of a revenue Act). The term “private person” generally includes the Federal 

Government and all other individuals and entities other than States or local governments. The 

Code includes exceptions permitting States or local governments to act as conduits providing 

tax-exempt financing for certain private activities. In most cases, the aggregate volume of these 

tax-exempt private activity bonds is restricted by annual aggregate volume limits imposed on 

bonds issued by issuers within each State. For calendar year 2005, the State volume cap is the 

greater of $80 per resident or $239 million. The Code imposes several additional restrictions on 

tax-exempt private activity bonds that do not apply to bonds for governmental activities. 

The tax exemption for State and local bonds does not apply to any arbitrage bond.3

 A 

bond is defined as an arbitrage bond if any proceeds of the issue are reasonably expected to be 

used (or intentionally are used) to acquire higher yielding investments or to replace funds that are 

used to acquire higher yielding investments.4

 In general, arbitrage profits may be earned only 

during specified periods (e.g., defined “temporary periods”) before funds are needed for the 

purpose of the borrowing or on specified types of investments (e.g., “reasonably required reserve 

or replacement funds”). Subject to limited exceptions, investment profits that are earned during 

these periods or on such investments must be rebated to the Federal Government. 

An issuer of State or local bonds must file with the IRS certain information about the 

bonds in order for such bonds to be tax-exempt.5

 Generally, this information return is required to 

be filed no later than the 15th day of the second month after the close of the calendar quarter in 

which the bonds were issued. 

Qualified zone academy bonds

As an alternative to traditional tax-exempt bonds, States and local governments may issue 

“qualified zone academy bonds.”6 “Qualified zone academy bonds” are defined as any bond 

issued by a State or local government, provided that (1) at least 95 percent of the proceeds are 

used for the purpose of renovating, providing equipment to, developing course materials for use 

at, or training teachers and other school personnel in a “qualified zone academy” and (2) private 

entities have promised to contribute to the qualified zone academy certain equipment, technical 

assistance or training, employee services, or other property or services with a value equal to at 

least 10 percent of the bond proceeds. A school is a “qualified zone academy” if (1) the school is 

a public school that provides education and training below the college level, (2) the school 

operates a special academic program in cooperation with businesses to enhance the academic 

curriculum and increase graduation and employment rates, and (3) either (a) the school is located 

 3

 Secs. 103(a) and (b)(2). 

4

 Sec. 148. 

5

 Sec. 149(e). 

6

 Sec. 1397E. 
7

in an empowerment zone or enterprise community designated under the Code, or (b) it is 

reasonably expected that at least 35 percent of the students at the school will be eligible for free 

or reduced-cost lunches under the school lunch program established under the National School 

Lunch Act. 

Financial institutions that hold qualified zone academy bonds are entitled to a 

nonrefundable tax credit in an amount equal to a credit rate multiplied by the face amount of the 

bond. The Treasury Department sets the credit rate at a rate estimated to allow issuance of 

qualified zone academy bonds without discount and without interest cost to the issuer. The 

credit is includable in gross income (as if it were a taxable interest payment on the bond), and 

may be claimed against regular income tax and AMT liability. The maximum term of the bond 

is determined by the Treasury Department, so that the present value of the obligation to repay the 

bond is 50 percent of the face value of the bond. 

There is an annual limitation of $400 million on the amount of qualified zone academy 

bonds that may be issued in calendar years 1998 through 2005. The $400 million aggregate 

bond cap is allocated each year to the States according to their respective populations of 

individuals below the poverty line. Each State, in turn, allocates the credit authority to qualified 

zone academies within such State. 

Tax credits for production of electricity from renewable sources

An income tax credit is allowed for the production of electricity from qualified facilities 

sold by the taxpayer to an unrelated person.7 The base amount of the credit is 1.5 cents per 

kilowatt-hour (indexed for inflation) of electricity produced. The amount of the credit is 1.9 cents 

per kilowatt-hour for 2005. A taxpayer may claim credit for the 10-year period commencing 

with the date the qualified facility is placed in service. The credit is reduced for grants, taxexempt bonds, subsidized energy financing, and other credits. The amount of credit a taxpayer 

may claim is phased out as the market price of electricity (or refined coal in the case of the 

refined coal production credit) exceeds certain threshold levels. 

Qualified facilities comprise wind energy facilities, closed-loop biomass facilities, openloop biomass (including agricultural livestock waste nutrients) facilities, geothermal energy 

facilities, solar energy facilities, small irrigation power facilities, landfill gas facilities, and trash 

combustion facilities. In addition, an income tax credit is allowed for the production of refined 

coal. 

To be a qualified facility, a wind energy facility must be placed in service after December 

31, 1993, and before January 1, 2006. A closed-loop biomass facility must be placed in service 

after December 31, 1992, and before January 1, 2006. In the case of a facility using closed-loop 

biomass but also co-firing the closed-loop biomass with coal, other biomass, or coal and other 

biomass, a qualified facility must be originally placed in service and modified to co-fire the 

closed-loop biomass at any time before January 1, 2006. An open-loop biomass facility must be 

 7

 Sec. 45. 
8

placed in service after October 22, 2004 and before January 1, 2006, in the case of facility using 

agricultural livestock waste nutrients, and must be placed in service at any time prior to January 

1, 2006 in the case of a facility using other open-loop biomass. Geothermal, solar, small 

irrigation, landfill gas, and trash combustion facilities all must be placed in service after October 

22, 2004 and before January 1, 2006. In addition, a qualifying refined coal facility is a facility 

producing refined coal that is placed in service after October 22, 2004 and before January 1, 

2009. 

Description of Proposal

The proposal creates a new category of tax credit bonds, “Clean Renewable Energy 

Bonds.” Clean Renewable Energy Bonds are defined as any bond issued by a qualified issuer if, 

in addition to the requirements discussed below, 95 percent or more of the proceeds of such 

bonds are used to finance capital expenditures incurred by qualified borrowers for facilities that 

qualify for the tax credit under section 45 (“qualified projects”), without regard to the placed in 

service date requirements of that section. 

Like qualified zone academy bonds, Clean Renewable Energy Bonds are not interestbearing obligations. Rather, the taxpayer holding a Clean Renewable Energy Bond on a credit 

allowance date would be entitled to a tax credit. The amount of the credit is determined by 

multiplying the bond’s credit rate by the face amount on the holder’s bond. The credit rate on 

the bonds is determined by the Secretary and is to be a rate that permits issuance of Clean 

Renewable Energy Bonds without discount and interest cost to the qualified issuer. The credit is 

includable in gross income (as if it were an interest payment on the bond), and can be claimed 

against regular income tax liability and alternative minimum tax liability. 

The proposal also imposes a maximum maturity limitation on any Clean Renewable 

Energy Bond. The maximum maturity is the term which the Secretary estimates will result in the 

present value of the obligation to repay the principal on a Clean Renewable Energy Bond being 

equal to 50 percent of the face amount of such bond. 

For purposes of the proposal, “qualified issuers” include governmental bodies; the 

Tennessee Valley Authority; mutual or cooperative electric companies (either described in 

section 501(c)(12) or section 1381(a)(2)(C)), or a not-for-profit electric utility which has 

received a loan or guarantee under the Rural Electrification Act); and clean energy bond lenders. 

A clean energy bond lender means a cooperative lending organization which is owned by, or has 

outstanding loans to, 100 or more cooperative electric companies and was in existence on 

February 1, 2002. The term “qualified borrower” includes a governmental body (including an 

Indian tribal government), the Tennessee Valley Authority, and a mutual or cooperative electric 

company. 

Under the proposal, Clean Renewable Energy Bonds are subject to the arbitrage 

requirements of section 148 that apply to traditional tax-exempt bonds. In addition, to qualify as 

Clean Renewable Energy Bonds, 95 percent or more of the proceeds of such bonds must be spent 

on qualified projects within the five-year period that begins on the date of issuance. To the 

extent less than 95 percent of the proceeds are used to finance qualified projects during the fiveyear spending period, bonds will continue to qualify as Clean Renewable Energy Bonds if 
9

unspent proceeds are used within 90 days from the end of such five-year period to redeem an 

amount of outstanding bonds to satisfy the 95 percent expenditure test. The five-year spending 

period also may be extended by the Secretary upon the qualified issuer’s request. 

Unlike qualified zone academy bonds, the proposal requires issuers of Clean Renewable 

Energy Bonds to report issuance to the IRS in a manner similar to the information returns 

required for traditional tax-exempt bonds. Under the proposal, there is a national limitation of $1 

billion of Clean Renewable Energy Bonds that the Secretary may allocate, in the aggregate, to 

qualified projects. The authority to issue Clean Renewable Energy Bonds expires December 31, 

2008. 

Effective Date

The proposal is effective for bonds issued after December 31, 2005. 

3. Treatment of income of certain electric cooperatives 

Present Law

In general

Under present law, an entity must be operated on a cooperative basis in order to be 

treated as a cooperative for Federal income tax purposes. Although not defined by statute or 

regulation, the two principal criteria for determining whether an entity is operating on a 

cooperative basis are: (1) ownership of the cooperative by persons who patronize the 

cooperative; and (2) return of earnings to patrons in proportion to their patronage. The IRS 

requires that cooperatives must operate under the following principles: (1) subordination of 

capital in control over the cooperative undertaking and in ownership of the financial benefits 

from ownership; (2) democratic control by the members of the cooperative; (3) vesting in and 

allocation among the members of all excess of operating revenues over the expenses incurred to 

generate revenues in proportion to their participation in the cooperative (patronage); and (4) 

operation at cost (not operating for profit or below cost).8

 

In general, cooperative members are those who participate in the management of the 

cooperative and who share in patronage capital. As described below, income from the sale of 

electric energy by an electric cooperative may be member or non-member income to the 

cooperative, depending on the membership status of the purchaser. A municipal corporation 

may be a member of a cooperative. 

For Federal income tax purposes, a cooperative generally computes its income as if it 

were a taxable corporation, with one exception--the cooperative may exclude from its taxable 

income distributions of patronage dividends. In general, patronage dividends are the profits of 

the cooperative that are rebated to its patrons pursuant to a pre-existing obligation of the 

 8

 Announcement 96-24, “Proposed Examination Guidelines Regarding Rural Electric 

Cooperatives,” 1996-16 I.R.B. 35. 
10

cooperative to do so. The rebate must be made in some equitable fashion on the basis of the 

quantity or value of business done with the cooperative. 

Except for tax-exempt farmers’ cooperatives, cooperatives that are subject to the 

cooperative tax rules of subchapter T of the Code9

 are permitted a deduction for patronage 

dividends from their taxable income only to the extent of net income that is derived from 

transactions with patrons who are members of the cooperative.10 The availability of such 

deductions from taxable income has the effect of allowing the cooperative to be treated like a 

conduit with respect to profits derived from transactions with patrons who are members of the 

cooperative. 

Cooperatives that qualify as tax-exempt farmers’ cooperatives are permitted to exclude 

patronage dividends from their taxable income to the extent of all net income, including net 

income that is derived from transactions with patrons who are not members of the cooperative, 

provided the value of transactions with patrons who are not members of the cooperative does not 

exceed the value of transactions with patrons who are members of the cooperative.11

Taxation of electric cooperatives exempt from subchapter T

In general, the cooperative tax rules of subchapter T apply to any corporation operating 

on a cooperative basis (except mutual savings banks, insurance companies, other tax-exempt 

organizations, and certain utilities), including tax-exempt farmers’ cooperatives (described in 

sec. 521(b)). However, subchapter T does not apply to an organization that is “engaged in 

furnishing electric energy, or providing telephone service, to persons in rural areas.”12 Instead, 

electric cooperatives are taxed under rules that were generally applicable to cooperatives prior to 

the enactment of subchapter T in 1962. Under these rules, an electric cooperative can exclude 

patronage dividends from taxable income to the extent of all net income of the cooperative, 

including net income derived from transactions with patrons who are not members of the 

cooperative.13

Tax exemption of rural electric cooperatives

Section 501(c)(12) provides an income tax exemption for rural electric cooperatives if at 

least 85 percent of the cooperative’s income consists of amounts collected from members for the 

sole purpose of meeting losses and expenses of providing service to its members. The IRS takes 

the position that rural electric cooperatives also must comply with the fundamental cooperative 

 9

 Sec. 1381, et seq. 

10 Sec. 1382. 

11 Sec. 521. 

12 Sec. 1381(a)(2)(C). 

13 See Rev. Rul. 83-135, 1983-2 C.B. 149. 
11

principles described above in order to qualify for tax exemption under section 501(c)(12).14 The 

85-percent test is determined without taking into account any income from: (1) qualified pole 

rentals; (2) open access electric energy transmission services; (3) open access electric energy 

distribution services; (4) any nuclear decommissioning transaction; (5) any asset exchange or 

conversion transaction.15

Income from open access transactions

Income received or accrued by a rural electric cooperative (other than income received or 

accrued directly or indirectly from a member of the cooperative) from the provision or sale of 

electric energy transmission services or ancillary services on a nondiscriminatory open access 

basis under an open access transmission tariff approved or accepted by Federal Energy 

Regulations Commission (“FERC”) or under an independent transmission provider agreement 

approved or accepted by FERC (including an agreement providing for the transfer of control–but 

not ownership–of transmission facilities) is excluded in determining whether a rural electric 

cooperative satisfies the 85-percent test for tax exemption under section 501(c)(12). 

In addition, income is excluded for purposes of the 85-percent test if it is received or 

accrued by a rural electric cooperative (other than income received or accrued directly or 

indirectly from a member of the cooperative) from the provision or sale of electric energy 

distribution services or ancillary services, provided such services are provided on a 

nondiscriminatory open access basis to distribute electric energy not owned by the cooperative: 

(1) to end-users who are served by distribution facilities not owned by the cooperative or any of 

its members; or (2) generated by a generation facility that is not owned or leased by the 

cooperative or any of its members and that is directly connected to distribution facilities owned 

by the cooperative or any of its members. 

The exclusion for income from open access transactions does not apply to taxable years 

beginning after December 31, 2006. 

Income from nuclear decommissioning transactions

Income received or accrued by a rural electric cooperative from any “nuclear 

decommissioning transaction” also is excluded in determining whether a rural electric 

cooperative satisfies the 85-percent test for tax exemption under section 501(c)(12). The term 

“nuclear decommissioning transaction” is defined as— 

1. any transfer into a trust, fund, or instrument established to pay any nuclear 

decommissioning costs if the transfer is in connection with the transfer of the 

cooperative’s interest in a nuclear powerplant or nuclear powerplant unit; 

 14 Rev. Rul. 72-36, 1972-1 C.B. 151. 

15 Sec. 501(c)(12)(C). 
12

2. any distribution from a trust, fund, or instrument established to pay any nuclear 

decommissioning costs; or 

3. any earnings from a trust, fund, or instrument established to pay any nuclear 

decommissioning costs. 

The exclusion for income from nuclear decommissioning transactions does not apply to 

taxable years beginning after December 31, 2006. 

Income from asset exchange or conversion transactions

Gain realized by a tax-exempt rural electric cooperative from a voluntary exchange or 

involuntary conversion of certain property is excluded in determining whether a rural electric 

cooperative satisfies the 85-percent test for tax exemption under section 501(c)(12). This 

provision only applies to the extent that: (1) the gain would qualify for deferred recognition 

under section 1031 (relating to exchanges of property held for productive use or investment) or 

section 1033 (relating to involuntary conversions); and (2) the replacement property that is 

acquired by the cooperative pursuant to section 1031 or section 1033 (as the case may be) 

constitutes property that is used, or to be used, for the purpose of generating, transmitting, 

distributing, or selling electricity or natural gas. 

The exclusion for income from asset exchange or conversion transactions does not apply 

to taxable years beginning after December 31, 2006. 

Treatment of income from load loss transactions

Tax-exempt rural electric cooperatives

Under present law, income received or accrued by a tax-exempt rural electric cooperative 

from a “load loss transaction” is treated under 501(c)(12) as income collected from members for 

the sole purpose of meeting losses and expenses of providing service to its members.16 

Therefore, income from load loss transactions is treated as member income in determining 

whether a rural electric cooperative satisfies the 85-percent test for tax exemption under section 

501(c)(12). In addition, income from load loss transactions does not cause a tax-exempt electric 

cooperative to fail to be treated for Federal income tax purposes as a mutual or cooperative 

company under the fundamental cooperative principles described above. 

The term “load loss transaction” is generally defined as any wholesale or retail sale of 

electric energy (other than to a member of the cooperative) to the extent that the aggregate 

amount of such sales during a seven-year period beginning with the “start-up year” does not 

exceed the reduction in the amount of sales of electric energy during such period by the 

cooperative to members. The “start-up year” is defined as the first year that the cooperative 

offers nondiscriminatory open access or, if later and at the election of the cooperative, 2004. 

 16 Sec. 501(c)(12)(H). 
13

Present law also excludes income received or accrued by rural electric cooperatives from 

load loss transactions from the tax on unrelated trade or business income. 

The special rule for income received or accrued by a tax-exempt rural electric 

cooperative from a load loss transaction does not apply to taxable years beginning after 

December 31, 2006. 

Taxable electric cooperatives

The receipt or accrual of income from load loss transactions by taxable electric 

cooperatives is treated as income from patrons who are members of the cooperative.17 Thus, 

income from a load loss transaction is excludible from the taxable income of a taxable electric 

cooperative if the cooperative distributes such income pursuant to a pre-existing contract to 

distribute the income to a patron who is not a member of the cooperative. In addition, income 

from load loss transactions does not cause a taxable electric cooperative to fail to be treated for 

Federal income tax purposes as a mutual or cooperative company under the fundamental 

cooperative principles described above. 

The special rule for income received or accrued by a taxable electric cooperative from a 

load loss transaction does not apply to taxable years beginning after December 31, 2006. 

Description of Proposal

The proposal eliminates the sunset date for the rules excluding income received or 

accrued by tax-exempt rural electric cooperatives from open access electric energy transmission 

or distribution services, any nuclear decommissioning transaction, and any asset exchange or 

conversion transaction for purposes of the 85-percent test under section 501(c)(12). The 

proposal also eliminates the sunset date for the rule that allows income from load loss 

transactions to be treated as member income in determining whether a rural electric cooperative 

satisfies the 85-percent test. In addition, the proposal eliminates the sunset date for the rule that 

permits taxable electric cooperatives to treat the receipt or accrual of income from load loss 

transactions as income from patrons who are members of the cooperative. 

Effective Date

The proposal is effective on the date of enactment. 

4. Dispositions of transmission property to implement FERC restructuring policy 

Present Law

Generally, a taxpayer selling property recognizes gain to the extent the sales price (and 

any other consideration received) exceeds the seller’s basis in the property. The recognized gain 

 17 Sec. 501(c)(12)(H). 
14

is subject to current income tax unless the gain is deferred or not recognized under a special tax 

provision. 

One such special tax provision permits taxpayers to elect to recognize gain from 

qualifying electric transmission transactions ratably over an eight-year period beginning in the 

year of sale if the amount realized from such sale is used to purchase exempt utility property 

within the applicable period18 (the “reinvestment property”). If the amount realized exceeds the 

amount used to purchase reinvestment property, any realized gain is recognized to the extent of 

such excess in the year of the qualifying electric transmission transaction. 

A qualifying electric transmission transaction is the sale or other disposition of property 

used by the taxpayer in the trade or business of providing electric transmission services, or an 

ownership interest in such an entity, to an independent transmission company prior to January 1, 

2007. In general, an independent transmission company is defined as: (1) an independent 

transmission provider19 approved by the FERC; (2) a person (i) who the FERC determines under 

section 203 of the Federal Power Act (or by declaratory order) is not a “market participant” and 

(ii) whose transmission facilities are placed under the operational control of a FERC-approved 

independent transmission provider before the close of the period specified in such authorization, 

but not later than January 1, 2007; or (3) in the case of facilities subject to the jurisdiction of the 

Public Utility Commission of Texas, (i) a person which is approved by that Commission as 

consistent with Texas State law regarding an independent transmission organization, or (ii) a 

political subdivision, or affiliate thereof, whose transmission facilities are under the operational 

control of an organization described in (i). 

Exempt utility property is defined as: (1) property used in the trade or business of 

generating, transmitting, distributing, or selling electricity or producing, transmitting, 

distributing, or selling natural gas, or (2) stock in a controlled corporation whose principal trade 

or business consists of the activities described in (1). 

If a taxpayer is a member of an affiliated group of corporations filing a consolidated 

return, the reinvestment property may be purchased by any member of the affiliated group (in 

lieu of the taxpayer). 

Description of Proposal

The proposal extends the deferral provision to sales or dispositions to an independent 

transmission company prior to January 1, 2008. 

 18 The applicable period for a taxpayer to reinvest the proceeds is four years after the close of the 

taxable year in which the qualifying electric transmission transaction occurs. 

19 For example, a regional transmission organization, an independent system operator, or and 

independent transmission company. 
15

Effective Date

The proposal is effective for transactions occurring after the date of enactment. 

However, because the proposal is an extension of a present law provision which expires on 

December 31, 2006, only transactions occurring after December 31, 2006 and prior to January 1, 

2008 will be affected. 

5. Credit for production of electricity from advanced nuclear power facilities 

Present Law

An income tax credit is allowed for production of electricity from qualified facilities sold 

by the taxpayer to an unrelated person (sec. 45). Qualified facilities comprise wind energy 

facilities, closed-loop biomass facilities, open-loop biomass (including agricultural livestock 

waste nutrients) facilities, geothermal energy facilities, solar energy facilities, small irrigation 

power facilities, landfill gas facilities, and trash combustion facilities. The base amount of the 

credit is 1.5 cents per kilowatt-hour (indexed for inflation) of electricity produced. The amount 

of the credit is 1.9 cents per kilowatt-hour for 2005. However, electricity produced at open-loop 

biomass, small irrigation power, and municipal solid waste facilities receives only 50 percent of 

the credit, or 0.9 cents per kilowatt-hour for 2005. Generally, wind and closed-loop biomass 

facilities may claim this credit for 10 years from the placed-in-service date of the facility. Other 

qualified facilities may claim the credit for only five years from the placed-in-service date. 

Present law does not provide a credit for electricity produced at advanced nuclear power 

facilities. 

Description of Proposal

The proposal permits a taxpayer producing electricity at a qualifying advanced nuclear 

power facility to claim a credit equal to 1.8 cents per kilowatt-hour of electricity produced for the 

eight-year period starting when the facility is placed in service.20 The aggregate amount of credit 

that a taxpayer may claim in any year during the eight-year period is subject to limitation based 

on allocated capacity and an annual limitation as described below. 

A qualifying advanced nuclear facility is an advanced nuclear facility for which the 

taxpayer has received an allocation of megawatt capacity from the Secretary of Treasury, in 

consultation with the Secretary of Energy, and is placed in service before January 1, 2021. The 

taxpayer may only claim credit for production of electricity equal to the ratio of the allocated 

capacity that the taxpayer receives from the Secretary of Treasury to the rated nameplate 

capacity of the taxpayer’s facility. For example, if the taxpayer receives an allocation of 750 

megawatts of capacity from the Secretary and the taxpayer’s facility has a rated nameplate 

 20 The 1.8-cents credit amount is reduced, but not below zero, if the annual average contract price 

per kilowatt-hour of electricity generated from advanced nuclear power facilities in the preceding year 

exceeds eight cents per kilowatt-hour. The eight-cent price comparison level is indexed for inflation after 

1992. 
16

capacity of 1,000 megawatts, then the taxpayer may claim three-quarters of the otherwise 

allowable credit, or 1.35 cents per kilowatt-hour, for each kilowatt-hour of electricity produced at 

the facility (subject to the annual limitation described below). The Secretary of Treasury may 

allocate up to 6,000 megawatts of capacity. 

A taxpayer operating a qualified facility may claim no more than $125 million in tax 

credits per 1,000 megawatts of allocated capacity in any one year of the eight-year credit period. 

If the taxpayer operates a 1,350 megawatt rated nameplate capacity system and has received an 

allocation from the Secretary for 1,350 megawatts of capacity eligible for the credit, the 

taxpayer’s annual limitation on credits that may be claimed is equal to 1.35 times $125 million, 

or $168.75 million. If the taxpayer operates a facility with a nameplate rated capacity of 1,350 

megawatts, but has received an allocation from the Secretary for 750 megawatts of credit eligible 

capacity, then the two limitations apply such that the taxpayer may claim a credit equal to 1.35 

cents per kilowatt-hour of electricity produced (as described above) subject to an annual credit 

limitation of $93.75 million in credits (three-quarters of $125 million). 

An advanced nuclear facility is any nuclear facility for the production of electricity, the 

reactor design for which was approved after 1993 by the Nuclear Regulatory Commission. For 

this purpose, a qualifying advanced nuclear facility does not include any facility for which a 

substantially similar design for a facility of comparable capacity was approved before 1994. 

In addition, the credit allowable to the taxpayer is reduced by reason of grants, taxexempt bonds, subsidized energy financing, and other credits, but such reduction cannot exceed 

50 percent of the otherwise allowable credit. The credit is treated as part of the general business 

credit and, under a special transition rule may not be carried back to a taxable year ending before 

or on the effective date of the provision. 

Effective Date

The proposal applies to electricity produced in taxable years beginning after the date of 

enactment. 

6. Credit for investment in clean coal facilities 

Present Law

Present law does not provide an investment credit for electricity production facilities 

property that uses coal as a fuel or for the gasification of coal or other materials. However, a 

nonrefundable, 10-percent investment tax credit (“energy credit”) is allowed for the cost of new 

property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a 

structure, or to provide solar process heat, or (2) that is used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage (sec. 48). The energy credit is a component of the 

general business credit (sec. 38(b)(1)). 
17

Description of Proposal

The proposal adds two new 20-percent investment tax credits to the energy credit. Both 

credits are available only to projects certified by the Secretary of Treasury, in consultation with 

the Secretary of Energy. Certifications are issued using a competitive bidding process. 

With respect to the first investment tax credit, the proposal establishes a 10-year program 

to produce 6,500 megawatts of power generation capacity using integrated gasification combined 

cycle and other advanced coal-based electricity generation technologies. Qualified projects must 

be economically feasible and use the appropriate clean coal technologies. In determining which 

qualified projects to certify, the Secretary of Treasury shall give priority to projects that include 

carbon capture capability, increased by-product utilization and other benefits. The Secretary of 

Treasury, in consultation with the Secretary of Energy, must allocate up to 3,575 megawatts of 

power generation capacity to credit-eligible projects using an integrated gasification combined 

cycle technology. The remaining 2,925 megawatts of power generation capacity must be 

allocated to credit-eligible projects that use other advanced coal-based technologies. 

With respect to the second investment tax credit, the proposal authorizes the certification 

of certain gasification projects. Qualified gasification projects convert coal, petroleum residue, 

biomass, or other materials recovered for their energy or feedstock value into a synthesis gas 

composed primarily of carbon monoxide and hydrogen for direct use or subsequent chemical or 

physical conversion. Under the proposal, certified gasification projects are eligible for the new 

20 percent investment tax credit. The total value of credit-eligible expenditures on all certified 

gasification projects may not exceed $4 billion. In addition, no single project may claim a 

gasification investment tax credit in excess of $200 million. 

Effective Date

The proposal applies to projects certified after the date of enactment. 

7. Clean energy bonds for certified coal property 

Present law

Tax-exempt bonds

Interest on State and local government bonds generally is excluded from gross income for 

Federal income tax purposes if the proceeds of the bonds are used to finance direct activities of 

these governmental units or if the bonds are repaid with revenues of the governmental units. 

Activities that can be financed with these tax-exempt bonds include the financing of electric 

power facilities (i.e., generation, transmission, distribution, and retailing). 

Interest on State or local bonds to finance activities of private persons (“private activity 

bonds”) is taxable unless a specific exception is contained in the Code (or in a non-Code 

provision of a revenue Act). The term “private person” generally includes the Federal 

Government and all other individuals and entities other than States or local governments. The 

Code includes exceptions permitting States or local governments to act as conduits providing 

tax-exempt financing for certain private activities. In most cases, the aggregate volume of these 
18

tax-exempt private activity bonds is restricted by annual aggregate volume limits imposed on 

bonds issued by issuers within each State. For calendar year 2005, the State volume cap is the 

greater of $80 per resident or $239 million. The Code imposes several additional restrictions on 

tax-exempt private activity bonds that do not apply to bonds for governmental activities. 

The tax exemption for State and local bonds does not apply to any arbitrage bond.21 A 

bond is defined as an arbitrage bond if any proceeds of the issue are reasonably expected to be 

used (or intentionally are used) to acquire higher yielding investments or to replace funds that are 

used to acquire higher yielding investments.22 In general, arbitrage profits may be earned only 

during specified periods (e.g., defined “temporary periods”) before funds are needed for the 

purpose of the borrowing or on specified types of investments (e.g., “reasonably required reserve 

or replacement funds”). Subject to limited exceptions, investment profits that are earned during 

these periods or on such investments must be rebated to the Federal Government. 

An issuer of State or local bonds must file with the IRS certain information about the 

bonds in order for such bonds to be tax-exempt.23 Generally, this information return is required 

to be filed no later than the 15th day of the second month after the close of the calendar quarter in 

which the bonds were issued. 

Qualified zone academy bonds

As an alternative to traditional tax-exempt bonds, States and local governments may issue 

“qualified zone academy bonds.”24 “Qualified zone academy bonds” are defined as any bond 

issued by a State or local government, provided that (1) at least 95 percent of the proceeds are 

used for the purpose of renovating, providing equipment to, developing course materials for use 

at, or training teachers and other school personnel in a “qualified zone academy” and (2) private 

entities have promised to contribute to the qualified zone academy certain equipment, technical 

assistance or training, employee services, or other property or services with a value equal to at 

least 10 percent of the bond proceeds. A school is a “qualified zone academy” if (1) the school is 

a public school that provides education and training below the college level, (2) the school 

operates a special academic program in cooperation with businesses to enhance the academic 

curriculum and increase graduation and employment rates, and (3) either (a) the school is located 

in an empowerment zone or enterprise community designated under the Code, or (b) it is 

reasonably expected that at least 35 percent of the students at the school will be eligible for free 

or reduced-cost lunches under the school lunch program established under the National School 

Lunch Act. 

 21 Secs. 103(a) and (b)(2). 

22 Sec. 148. 

23 Sec. 149(e). 

24 Sec. 1397E. 
19

Financial institutions that hold qualified zone academy bonds are entitled to a 

nonrefundable tax credit in an amount equal to a credit rate multiplied by the face amount of the 

bond. The Treasury Department sets the credit rate at a rate estimated to allow issuance of 

qualified zone academy bonds without discount and without interest cost to the issuer. The 

credit is includable in gross income (as if it were a taxable interest payment on the bond), and 

may be claimed against regular income tax and AMT liability. The maximum term of the bond 

is determined by the Treasury Department, so that the present value of the obligation to repay the 

bond is 50 percent of the face value of the bond. 

There is an annual limitation of $400 million on the amount of qualified zone academy 

bonds that may be issued in calendar years 1998 through 2005. The $400 million aggregate 

bond cap is allocated each year to the States according to their respective populations of 

individuals below the poverty line. Each State, in turn, allocates the credit authority to qualified 

zone academies within such State. 

Description of Proposal

The proposal creates a new category of tax credit bonds, “Clean Energy Coal Bonds.” 

Clean Energy Coal Bonds are defined as any bond issued by a qualified issuer if, in addition to 

the requirements discussed below, 95 percent or more of the proceeds of such bonds are used to 

finance capital expenditures incurred by qualified borrowers for “certified coal property.” 

Certified coal property is defined as any property that is part of a qualifying advanced coal 

project certified by the Secretary of Energy. 

Like qualified zone academy bonds, Clean Energy Coal Bonds are not interest-bearing 

obligations. Rather, the taxpayer holding a Clean Energy Coal Bond on a credit allowance date 

would be entitled to a tax credit. The amount of the credit is determined by multiplying the 

bond’s credit rate by the face amount on the holder’s bond. The credit rate on the bonds is 

determined by the Secretary and is to be a rate that permits issuance of Clean Energy Coal Bonds 

without discount and interest cost to the qualified issuer. The credit is includible in gross income 

(as if it were an interest payment on the bond), and can be claimed against regular income tax 

liability and alternative minimum tax liability. 

For purposes of the proposal, “qualified issuers” include governmental bodies; the 

Tennessee Valley Authority; mutual or cooperative electric companies (either described in 

section 501(c)(12) or section 1381(a)(2)(C)), or a not-for-profit electric utility which has 

received a loan or guarantee under the Rural Electrification Act); and clean energy bond lenders. 

A clean energy bond lender means a cooperative lending organization which is owned by, or has 

outstanding loans to, 100 or more cooperative electric companies and was in existence on 

February 1, 2002. The term “qualified borrower” includes a governmental body (including an 

Indian tribal government), the Tennessee Valley Authority, and a mutual or cooperative electric 

company. 

Under the proposal, Clean Energy Coal Bonds are subject to the arbitrage requirements of 

section 148 that apply to traditional tax-exempt bonds. In addition, to qualify as Clean Energy 

Coal Bonds, 95 percent or more of the proceeds of such bonds must be spent on certified coal 

property within the five-year period that begins on the date of issuance. To the extent less than 
20

95 percent of the proceeds are used to finance qualified projects during the five-year spending 

period, bonds will continue to qualify as Clean Energy Coal Bonds if unspent proceeds are used 

within 90 days from the end of such five-year period to redeem an amount of outstanding bonds 

to satisfy the 95 percent expenditure test. The five-year spending period also may be extended 

by the Secretary upon the qualified issuer’s request. 

The proposal also imposes a maximum maturity limitation on any Clean Energy Coal 

Bond. The maximum maturity is the term which the Secretary estimates will result in the present 

value of the obligation to repay the principal on a Clean Energy Coal Bond being equal to 50 

percent of the face amount of such bond. 

Unlike qualified zone academy bonds, the proposal requires issuers of Clean Energy Coal 

Bonds to report issuance to the IRS in a manner similar to the information returns required for 

tax-exempt bonds. Under the proposal, there is a national limitation of $1 billion of Clean 

Energy Coal Bonds that the Secretary may allocate, in the aggregate, to certified coal property 

projects. The authority to issue Clean Energy Coal Bonds expires December 31, 2010. 

Effective Date

The proposal is effective for bonds issued after December 31, 2005.
21

B. Domestic Fossil Fuel Security 

1. Credit for investment in clean coke/cogeneration manufacturing facilities 

Present Law

Present law does not provide a credit for investment in clean coke/cogeneration 

manufacturing facilities property. 

Description of Proposal

The proposal provides a 20-percent investment tax credit for qualified investments in 

clean coke/cogeneration facilities property. The proposal defines clean coke/cogeneration 

manufacturing facilities property as depreciable real and tangible personal property located in the 

United States that meets certain emission limitations and is used for the manufacture of 

metallurgical coke or for the production of steam or electricity from waste heat generated during 

the production of metallurgical coke. 

The qualified investment for any taxable year is the basis of each coke/cogeneration 

facilities property placed in service by the taxpayer during such taxable year. The proposal 

excludes the credit from the basis adjustment rules for investment credit property set out in 

section 50(c) of the Code. Under the basis adjustment rules, the basis in investment credit 

property is generally reduced by the amount of the investment credit. 

Effective Date

The proposal applies to property placed in service after the date of enactment and before 

December 31, 2009. 

2. Temporary expensing for equipment used in the refining of liquid fuels 

Present Law

Depreciation of refinery assets

Under present law, depreciation allowances for property used in a trade or business 

generally are determined under the Modified Accelerated Cost Recovery System (“MACRS”) of 

section 168 of the Internal Revenue Code. Under MACRS, petroleum refining assets are 

depreciated for regular tax purposes over a 10-year recovery period using the double declining 

balance method. Petroleum refining assets are assets used for distillation, fractionation, and 

catalytic cracking of crude petroleum into gasoline and its other components. Present law also 

provides a special expensing rule for small refiners for capital costs incurred in complying with 

Environmental Protection Agency sulfur regulations. 

Taxation of cooperatives and their patrons

For Federal income tax purposes, a cooperative generally computes its income as if it 

were a taxable corporation, with one exception–the cooperative may exclude from its taxable 
22

income distributions of patronage dividends. In general, patronage dividends are the profits of 

the cooperative that are rebated to its patrons pursuant to a pre-existing obligation of the 

cooperative to do so. The rebate must be made in some equitable fashion on the basis of the 

quantity or value of business done with the cooperative. 

Except for tax-exempt farmers’ cooperatives, cooperatives that are subject to the 

cooperative tax rules of subchapter T of the Code25 are permitted a deduction for patronage 

dividends from their taxable income only to the extent of net income that is derived from 

transactions with patrons who are members of the cooperative.26 The availability of such 

deductions from taxable income has the effect of allowing the cooperative to be treated like a 

conduit with respect to profits derived from transactions with patrons who are members of the 

cooperative. 

Cooperatives that qualify as tax-exempt farmers’ cooperatives are permitted to exclude 

patronage dividends from their taxable income to the extent of all net income, including net 

income that is derived from transactions with patrons who are not members of the cooperative, 

provided the value of transactions with patrons who are not members of the cooperative does not 

exceed the value of transactions with patrons who are members of the cooperative.27

Description of Proposal

The proposal provides a temporary election to expense qualified refinery property. 

Qualified refinery property includes assets used in the refining of liquid fuels: (1) with respect to 

the construction of which there is a binding construction contract before January 1, 2008; (2) 

which is placed in service before January 1, 2012; (3) which increases the capacity of an existing 

refinery by at least five percent or increases throughput of qualified fuels (as defined in section 

29(c)) by at least 25 percent; and (4) which meets all applicable environmental laws in effect 

when the property is placed in service. 

The proposal also allows cooperatives to pass through to patrons the deduction permitted 

for qualified refinery property. To the extent the deduction for qualified refinery property is 

passed through to patrons, the cooperative is denied the deduction for such property or any 

depreciation deductions under sections 167 or 168 with respect to such property. 

Effective Date

The proposal is effective for property placed in service after the date of enactment, the 

original use of which begins with the taxpayer, provided the property is not subject to a binding 

contract for construction as of June 14, 2005. 

 25 Sec. 1381, et seq. 

26 Sec. 1382. 

27 Sec. 521. 
23

3. Pass through to patrons the deduction for capital costs incurred by cooperative for 

complying with environmental protection agency sulfur regulations for small refiners 

Present Law

Expensing and credit for small refiners

Taxpayers generally may recover the costs of investments in refinery property through 

annual depreciation deductions. In addition, the Code permits small business refiners to 

immediately deduct as an expense up to 75 percent of the costs paid or incurred for the purpose 

of complying with the Highway Diesel Fuel Sulfur Control Requirements of the Environmental 

Protection Agency (“EPA”). Costs qualifying for the deduction are those costs paid or incurred 

with respect to any facility of a small business refiner during the period beginning on January 1, 

2003 and ending on the earlier of the date that is one year after the date on which the taxpayer 

must comply with the applicable EPA regulations or December 31, 2009. 

The Code also provides that a small business refiner may claim credit equal to five cents 

per gallon for each gallon of low sulfur diesel fuel produced during the taxable year that is in 

compliance with the Highway Diesel Fuel Sulfur Control Requirements. The total production 

credit claimed by the taxpayer is limited to 25 percent of the capital costs incurred to come into 

compliance with the EPA diesel fuel requirements. As with the deduction permitted under 

present law, costs qualifying for the credit are those costs paid or incurred with respect to any 

facility of a small business refiner during the period beginning on January 1, 2003 and ending on 

the earlier of the date that is one year after the date on which the taxpayer must comply with the 

applicable EPA regulations or December 31, 2009. The taxpayer’s basis in property with respect 

to which the credit applies is reduced by the amount of production credit claimed. 

For these purposes a small business refiner is a taxpayer who is within the business of 

refining petroleum products, employs not more than 1,500 employees directly in refining, and 

has less than 205,000 barrels per day (average) of total refinery capacity. The deduction is 

reduced, pro rata, for taxpayers with capacity in excess of 155,000 barrels per day. 

In the case of a qualifying small business refiner that is owned by a cooperative, the 

cooperative is allowed to elect to pass any production credits to patrons of the organization. 

Present law does not permit cooperatives to pass through to members the deduction permitted for 

the costs paid or incurred for the purpose of complying with the Highway Diesel Fuel Sulfur 

Control Requirements. 

Taxation of cooperatives and their patrons

For Federal income tax purposes, a cooperative generally computes its income as if it 

were a taxable corporation, with one exception–the cooperative may exclude from its taxable 

income distributions of patronage dividends. In general, patronage dividends are the profits of 

the cooperative that are rebated to its patrons pursuant to a pre-existing obligation of the 

cooperative to do so. The rebate must be made in some equitable fashion on the basis of the 

quantity or value of business done with the cooperative. 
24

Except for tax-exempt farmers’ cooperatives, cooperatives that are subject to the 

cooperative tax rules of subchapter T of the Code28 are permitted a deduction for patronage 

dividends from their taxable income only to the extent of net income that is derived from 

transactions with patrons who are members of the cooperative.29 The availability of such 

deductions from taxable income has the effect of allowing the cooperative to be treated like a 

conduit with respect to profits derived from transactions with patrons who are members of the 

cooperative. 

Cooperatives that qualify as tax-exempt farmers’ cooperatives are permitted to exclude 

patronage dividends from their taxable income to the extent of all net income, including net 

income that is derived from transactions with patrons who are not members of the cooperative, 

provided the value of transactions with patrons who are not members of the cooperative does not 

exceed the value of transactions with patrons who are members of the cooperative.30

Description of Proposal

The proposal allows cooperatives to pass through to patrons the deduction permitted 

under section 179B for costs paid or incurred for the purpose of complying with the Highway 

Diesel Fuel Sulfur Control Requirements. To the extent the deduction is passed through to 

patrons, the cooperative is denied the deduction it would otherwise be entitled under section 

179B or for depreciation deductions under sections 167 or 168 with respect to costs attributable 

to calculation of the patrons’ allowable section 179B deduction. 

Effective Date

The proposal is effective for costs paid or incurred with respect to any facility of a small 

business refiner during the period beginning on January 1, 2003, and ending on the earlier of the 

date that is one year after the date on which the taxpayer must comply with the applicable EPA 

regulations or December 31, 2009. 

4. Enhanced oil recovery credit for carbon dioxide injections 

Present Law

Taxpayers may claim a credit equal to 15 percent of enhanced oil recovery (“EOR”) 

costs. Qualified EOR costs include the following costs associated with an EOR project: (1) 

amounts paid for depreciable tangible property; (2) intangible drilling and development 

expenses; (3) tertiary injectant expenses; and (4) construction costs for certain Alaskan natural 

gas treatment facilities. The EOR credit is phased out when oil prices exceed a threshold 

amount. 

 28 Sec. 1381, et seq. 

29 Sec. 1382. 

30 Sec. 521. 
25

Description of Proposal

The proposal modifies the EOR credit to increase the credit rate to 20 percent with 

respect to any new EOR project or substantial expansion of an existing EOR project that occurs 

after the effective date and that uses carbon dioxide flooding or injection as an oil recovery 

method. The increased credit is available only for qualified EOR projects that use carbon 

dioxide that is (1) from a man-made, industrial source or (2) separated from natural gas and 

natural gas liquids at a natural gas processing plant. 

Effective Date

The proposal applies to property placed in service after December 31, 2005, and before 

January 1, 2010. 

5. Natural gas distribution lines treated as fifteen-year property 

Present Law

The applicable recovery period for assets placed in service under the Modified 

Accelerated Cost Recovery System is based on the class life of the property. The class lives of 

assets placed in service after 1986 are generally set forth in Revenue Procedure 87-56.31 Natural 

gas distribution pipelines are assigned a 20-year recovery period and a class life of 35 years. 

Description of Proposal

The proposal establishes a statutory 15-year recovery period and a statutory class life of 

35 years for natural gas distribution lines placed in service before January 1, 2008. 

Effective Date

The proposal is effective for property placed in service after the date of enactment, the 

original use of which commences with the taxpayer and which is not subject to a binding 

contract for acquisition by the taxpayer as of June 14, 2005. 

 31 1987-2 C.B. 674 (as clarified and modified by Rev. Proc. 88-22, 1988-1 C.B. 785). 
26

C. Conservation and Energy Efficiency Provisions 

1. Energy efficient commercial building deduction 

Present Law

No special deduction is currently provided for expenses incurred for energy-efficient 

commercial building property. 

Description of Proposal

In general

The proposal provides a deduction equal to energy-efficient commercial building 

property expenditures made by the taxpayer. Energy-efficient commercial building property 

expenditures is defined as property: (1) which is installed on or in any building located in the 

United States, (2) which is installed as part of (i) the interior lighting systems, (ii) the heating, 

cooling, ventilation, and hot water systems, or (iii) the building envelope, and (3) which is 

certified as being installed as part of a plan designed to reduce the total annual energy and power 

costs with respect to the interior lighting systems, heating, cooling, ventilation, and hot water 

systems of the building by 50 percent or more in comparison to a reference building which meets 

the minimum requirements of Standard 90.1-2001 of the American Society of Heating, 

Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of 

North America (“ASHRAE/IESNA”). The deduction is limited to an amount equal to $2.25 per 

square foot of the property for which such expenditures are made. The deduction is allowed in 

the year in which the property is placed in service. 

Eligible buildings may include any residential rental property, including any low-rise 

multifamily structure or single family housing property which is not within the scope of Standard 

90.1-2001. 

Certain certification requirements must be met in order to qualify for the deduction. The 

Secretary, in consultation with the Secretary of Energy, will promulgate regulations that describe 

methods of calculating and verifying energy and power costs using qualified computer software 

based on the provisions of the 2005 California Nonresidential Alternative Calculation Method 

Approval Manual or, in the case of residential property, the 2005 California Residential 

Alternative Calculation Method Approval Manual. The methods for calculation shall be fuel 

neutral, such that the same energy efficiency features shall qualify a building for the deduction 

under this subsection regardless of whether the heating source is a gas or oil furnace or boiler or 

an electric heat pump. The calculation methods shall provide appropriate calculated energy 

savings for design methods and technologies not otherwise credited in either Standard 90.1-2001 

or in the 2005 California Nonresidential Alternative Calculation Method Approval Manual, 

including the following: (i) Natural ventilation, (ii) Evaporative cooling, (iii) Automatic lighting 

controls such as occupancy sensors, photocells, and timeclocks, (iv) Daylighting, (v) Designs 

utilizing semi-conditioned spaces which maintain adequate comfort conditions without air 

conditioning or without heating, (vi) Improved fan system efficiency, including reductions in 

static pressure, (vii) Advanced unloading mechanisms for mechanical cooling, such as multiple 
27

or variable speed compressors, (viii) The calculation methods may take into account the extent of 

commissioning in the building, and allow the taxpayer to take into account measured 

performance which exceeds typical performance, (ix) On-site generation of electricity, including 

combined heat and power systems, fuel cells, and renewable energy generation such as solar 

energy, and (x) Wiring with lower energy losses than wiring satisfying Standard 90.1-2001 

requirements for building power distribution systems. 

The Secretary shall prescribe procedures for the inspection and testing for compliance of 

buildings that are comparable, given the difference between commercial and residential 

buildings, to the requirements in the Mortgage Industry National Accreditation Procedures for 

Home Energy Rating Systems. Individuals qualified to determine compliance shall only be those 

recognized by one or more organizations certified by the Secretary for such purposes. 

For energy-efficient commercial building property expenditures made by a public entity, 

such as public schools, the Secretary shall promulgate regulations that allow the deduction to be 

allocated to the person primarily responsible for designing the property in lieu of the public 

entity. 

Partial allowance of deduction

In the case of a building that does not meet the overall building requirement of a 50-

percent energy savings, a partial deduction is allowed with respect to each separate building 

system that comprises energy efficient property and which is certified by a qualified professional 

as meeting or exceeding the applicable system-specific savings targets established by the 

Secretary of the Treasury. The applicable system-specific savings targets to be established by 

the Secretary are those that would result in a total annual energy savings with respect to the 

whole building of 50 percent, if each of the separate systems met the system specific target. The 

separate building systems are (1) the interior lighting system, (2) the heating, cooling, ventilation 

and hot water systems, and (3) the building envelope. The maximum allowable deduction is 

$0.75 per square foot for each separate system. 

In the case of system-specific partial deductions, in general no deduction is allowed until 

the Secretary establishes system-specific targets. However, in the case of lighting system 

retrofits, until such time as the Secretary issues final regulations, the system-specific energy 

savings target for the lighting system is deemed to be met by a reduction in Lighting Power 

Density of 40 percent (50 percent in the case of a warehouse) of the minimum requirements in 

Table 9.3.1.1 or Table 9.3.1.2 of ASHRAE/IESNA Standard 90.1-2001. Also, in the case of a 

lighting system that reduces lighting power density by 25 percent, a partial deduction of 37.5 

cents per square foot is allowed. A pro-rated partial deduction is allowed in the case of a lighting 

system that reduces lighting power density between 25 percent and 40 percent. Certain lighting 

level and lighting control requirements must also be met in order to qualify for the partial 

lighting deductions. 

Effective Date

The proposal is effective for property placed in service after the date of enactment and 

prior to January 1, 2010. 
28

2. Energy efficient new homes 

Present Law

A nonrefundable, 10-percent business energy credit is allowed for the cost of new 

property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a 

structure, or to provide solar process heat, or (2) used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage. 

The business energy tax credits are components of the general business credit (sec. 

38(b)(1)). The business energy tax credits, when combined with all other components of the 

general business credit, generally may not exceed for any taxable year the excess of the 

taxpayer’s net income tax over the greater of (1) 25 percent of net regular tax liability above 

$25,000 or (2) the tentative minimum tax. For credits arising in taxable years beginning after 

December 31, 1997, an unused general business credit generally may be carried back one year 

and carried forward 20 years (sec. 39). 

A taxpayer may exclude from income the value of any subsidy provided by a public 

utility for the purchase or installation of an energy conservation measure. An energy 

conservation measure means any installation or modification primarily designed to reduce 

consumption of electricity or natural gas or to improve the management of energy demand with 

respect to a dwelling unit (sec. 136). 

There is no present-law credit for the construction of new energy-efficient homes. 

Description of Proposal

The proposal provides a credit to an eligible contractor of an amount equal to the 

aggregate adjusted bases of all energy-efficient property installed in a qualified new energyefficient home during construction. The credit cannot exceed $1,000 ($2,000) in the case of a 

new home that has a projected level of annual heating and cooling costs that is 30 percent (50 

percent) less than a comparable dwelling constructed in accordance with the standards of chapter 

4 of the 2003 International Energy Conservation Code as in effect (including supplements) on 

the date of enactment, and any applicable Federal minimum efficiency standards for equipment. 

With respect to homes that meet the 30-percent standard, 1/3 of such 30 percent savings must 

come from the building envelope, and with respect to homes that meet the 50-percent standard, 

1/5 of such 50 percent savings must come from the building envelope. 

The eligible contractor is the person who constructed the home, or in the case of a 

manufactured home, the producer of such home. Energy efficiency property is any energyefficient building envelope component (insulation materials or system specifically and primarily 

designed to reduce heat loss or gain, and exterior windows, including skylights, and doors) and 

any energy-efficient heating or cooling equipment or system that can, individually or in 

combination with other components, meet the standards for the home. 

To qualify as an energy-efficient new home, the home must be: (1) a dwelling located in 

the United States, (2) substantially completed after the date of enactment, and (3) certified in 
29

accordance with guidance prescribed by the Secretary to have a projected level of annual heating 

and cooling energy consumption that meets the standards for either the 30-percent or 50-percent 

reduction in energy usage. 

Manufactured homes certified by a method prescribed by the Administrator of the 

Environmental Protection Agency under the Energy Star Labeled Homes program are eligible for 

the $1,000 credit provided criteria (1) and (2) are met. 

The credit is part of the general business credit. No credits attributable to energy efficient 

homes can be carried back to any taxable year ending on or before the effective date of the 

credit. No deduction is allowed for that portion of expenses for a qualifying new home 

otherwise allowable as a deduction for the taxable year which is equal to the amount of the credit 

for such taxable year. If a credit is allowed for any expenditure, the basis of such property is 

reduced by the amount of the credit. 

Effective Date

The credit applies to homes whose construction is substantially completed after the date 

of enactment, and which are purchased during the period beginning on the date of enactment and 

ending on December 31, 2009 (December 31, 2007 in the case of the $1,000 credit). 

3. Deduction for business energy property 

Present Law

There is no special deduction provided for energy-efficient property. 

Description of Proposal

The proposal provides a deduction for the purchase of qualified energy property. The 

allowable deduction for each energy property is (1) $150 for each advanced main air circulating 

fan or a Tier 1 natural gas, propane, or oil water heater, and (2) $900 for each Tier 2 energyefficient building property. 

An advanced main air circulating fan is a fan used in a natural gas, propane, or oil 

furnace originally placed in service by the taxpayer during the taxable year, including a fan 

which uses a brushless permanent magnet motor or another type of motor which achieves similar 

or higher efficiency at full and half speed, as determined by the Secretary. 

A Tier 1 natural gas, propane, or oil water heater is a natural gas, propane, or oil water 

heater with an energy factor of at least 0.65. 

Tier 2 energy-efficient building property is: (1) an electric heat pump water heater which 

yields an energy factor of at least 2.0 in the standard Department of Energy test procedure, (2) an 

electric heat pump which has a heating seasonal performance factor (HSPF) of at least 9, a 

seasonal energy efficiency ratio (SEER) of at least 15, and an energy efficiency ratio (EER) of at 

least 13, (3) a geothermal heat pump which (i) in the case of a closed loop product, has an energy 

efficiency ratio (EER) of at least 14.1 and a heating coefficient of performance (COP) of at least 
30

3.3, (ii) in the case of an open loop product, has an energy efficiency ratio (EER) of at least 16.2 

and a heating coefficient of performance (COP) of at least 3.6, and (iii) in the case of a direct 

expansion (DX) product, has an energy efficiency ratio (EER) of at least 15 and a heating 

coefficient of performance (COP) of at least 3.5, (4) a central air conditioner which has a 

seasonal energy efficiency ratio (SEER) of at least 15 and an energy efficiency ratio (EER) of at 

least 13, and (5) a natural gas, propane, or oil water heater which has an energy factor of at least 

0.80. 

The proposal also provides a deduction for energy efficient residential rental building 

property. The deduction with respect to each dwelling unit is $6,000 if the building achieves a 

50 percent reduction in energy costs relative to the original condition of the building. In the case 

of a building that achieves a reduction in energy costs between 20 and 50 percent, the allowable 

deduction is $12,000 times the percentage reduction. No deduction is allowed in the case of 

energy cost savings of less than 20 percent. With respect to property potentially eligible for the 

specific deductions delineated above or for the residential rental building property deduction, the 

taxpayer must elect which deduction the property is eligible for. In order to be eligible for the 

credit, the building’s energy savings must be certified according to regulations established by the 

Secretary that follow various rules and procedures. In the case of energy efficient residential 

rental building property which is public property, the Secretary shall promulgate a regulation to 

allow the allocation of the deduction to the person primarily responsible for designing the 

improvements to the property in lieu of the public entity which is the owner of such property. 

If a deduction is allowed under this proposal with respect to any property, the basis of 

such property is reduced by the amount of the deduction so allowed. 

Effective Date

The credit applies to property placed in service after the date of enactment and prior to 

January 1, 2009. 

4. Credit for non-business energy property 

Present Law

There is no credit provided for non-business energy-efficient property. 

Description of Proposal

The proposal provides a credit for the purchase of qualified energy property. The 

allowable credit is (1) $50 for each advanced main air circulating fan or Tier 1 natural gas, 

propane, or oil water heater, and (2) $300 for each Tier 2 energy efficient property. 

An advanced main air circulating fan is a fan used in a natural gas, propane, or oil 

furnace originally placed in service by the taxpayer during the taxable year, including a fan 

which uses a brushless permanent magnet motor or another type of motor which achieves similar 

or higher efficiency at full and half speed, as determined by the Secretary. 
31

A Tier 1 natural gas, propane, or oil water heater is a natural gas, propane, or oil water 

heater with an energy factor of at least 0.65. 

Tier 2 energy-efficient property is: (1) an electric heat pump water heater which yields an 

energy factor of at least 2.0 in the standard Department of Energy test procedure, (2) an electric 

heat pump which has a heating seasonal performance factor (HSPF) of at least 9, a seasonal 

energy efficiency ratio (SEER) of at least 15, and an energy efficiency ratio (EER) of at least 13, 

(3) a geothermal heat pump which (i) in the case of a closed loop product, has an energy 

efficiency ratio (EER) of at least 14.1 and a heating coefficient of performance (COP) of at least 

3.3, (ii) in the case of an open loop product, has an energy efficiency ratio (EER) of at least 16.2 

and a heating coefficient of performance (COP) of at least 3.6, and (iii) in the case of a direct 

expansion (DX) product, has an energy efficiency ratio (EER) of at least 15 and a heating 

coefficient of performance (COP) of at least 3.5, (4) a central air conditioner which has a 

seasonal energy efficiency ratio (SEER) of at least 15 and an energy efficiency ratio (EER) of at 

least 13, and (5) a natural gas, propane, or oil water heater which has an energy factor of at least 

0.80. 

The proposal also provides a credit for highly energy efficient principal residences. The 

credit with respect to a principal residence is $2,000 if the principal residence achieves a 50 

percent reduction in energy costs relative to the original condition of the building. In the case of 

a principal residence that achieves a reduction in energy costs between 20 and 50 percent, the 

allowable credit is $4,000 times the percentage reduction. No credit is allowed in the case of 

energy cost savings of less than 20 percent. With respect to property potentially eligible for the 

specific credits delineated above or for the principal residence credit, the taxpayer must elect 

which credit the property is eligible for. In order to be eligible for the credit, the residence’s 

energy savings must be certified according to regulations established by the Secretary that follow 

various rules and procedures. 

Special proration rules apply in the case of jointly owned property, condominiums, and 

tenant-stockholders in cooperative housing corporations. Certain restrictions and limitations 

apply with respect to property financed by subsidized energy financing or obtained through grant 

programs. If less than 80 percent of the property is used for nonbusiness purposes, only that 

portion of expenditures that is used for nonbusiness purposes is taken into account. If a credit is 

allowed under this proposal with respect to any property, the basis of such property is reduced by 

the amount of the credit so allowed. 

Effective Date

The credit applies to property placed in service after December 31, 2005, and prior to 

January 1, 2009. 

5. Energy credit for combined heat and power system property 

Present Law

A nonrefundable, 10-percent business energy credit is allowed for the cost of new 

property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a 
32

structure, or to provide solar process heat, or (2) used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage. 

The business energy tax credits are components of the general business credit (sec. 

38(b)(1)). The business energy tax credits, when combined with all other components of the 

general business credit, generally may not exceed for any taxable year the excess of the 

taxpayer’s net income tax over the greater of (1) 25 percent of net regular tax liability above 

$25,000 or (2) the tentative minimum tax. For credits arising in taxable years beginning after 

December 31, 1997, an unused general business credit generally may be carried back one year 

and carried forward 20 years (sec. 39). 

A taxpayer may exclude from income the value of any subsidy provided by a public 

utility for the purchase or installation of an energy conservation measure. An energy 

conservation measure means any installation or modification primarily designed to reduce 

consumption of electricity or natural gas or to improve the management of energy demand with 

respect to a dwelling unit (sec. 136). 

There is no present-law credit for combined heat and power (“CHP”) property. 

Description of Proposal

The proposal provides a 10-percent credit for the purchase of CHP property. 

CHP property is property: (1) that uses the same energy source for the simultaneous or 

sequential generation of electrical power, mechanical shaft power, or both, in combination with 

the generation of steam or other forms of useful thermal energy (including heating and cooling 

applications); (2) that has an electrical capacity of not more than 15 megawatts or a mechanical 

energy capacity of no more than 2000 horsepower or an equivalent combination of electrical and 

mechanical energy capacities; (3) that produces at least 20 percent of its total useful energy in the 

form of thermal energy that is not used to produce electrical or mechanical power, and produces 

at least 20 percent of its total useful energy in the form of electrical or mechanical power (or a 

combination thereof); and (4) the energy efficiency percentage of which exceeds 60 percent. 

CHP property does not include property used to transport the energy source to the generating 

facility or to distribute energy produced by the facility. 

Additionally, the proposal provides that systems whose fuel source is at least 90 percent 

bagasse and that would qualify for the credit but for the failure to meet the efficiency standard 

are eligible for a credit that is reduced in proportion to the degree to which the system fails to 

meet the efficiency standard. For example, a system that would otherwise be required to meet 

the 60-percent efficiency standard, but which only achieves 30-percent efficiency, would be 

permitted a credit equal to one-half of the otherwise allowable credit (i.e., a 5-percent credit). 

Effective Date

The credit applies to property placed in service after the date of enactment and before 

January 1, 2008. 
33

6. Energy efficient appliances 

Present Law

A nonrefundable, 10-percent business energy credit is allowed for the cost of new 

property that is equipment: (1) that uses solar energy to generate electricity, to heat or cool a 

structure, or to provide solar process heat; or (2) used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage. 

The business energy tax credits are components of the general business credit (sec. 

38(b)(1)). The business energy tax credits, when combined with all other components of the 

general business credit, generally may not exceed for any taxable year the excess of the 

taxpayer’s net income tax over the greater of: (1) 25 percent of net regular tax liability above 

$25,000 or (2) the tentative minimum tax. For credits arising in taxable years beginning after 

December 31, 1997, an unused general business credit generally may be carried back one year 

and carried forward 20 years (sec. 39). 

A taxpayer may exclude from income the value of any subsidy provided by a public 

utility for the purchase or installation of an energy conservation measure. An energy 

conservation measure means any installation or modification primarily designed to reduce 

consumption of electricity or natural gas or to improve the management of energy demand with 

respect to a dwelling unit (sec. 136). 

There is no present-law credit for the manufacture of energy-efficient appliances. 

Description of Proposal 

The proposal provides a credit for the eligible production of certain energy-efficient 

dishwashers, clothes washers and refrigerators. 

The credit for dishwashers applies to dishwashers produced in 2006 and 2007 that meet 

the Energy Star standards for 2007. The credit amount equals $3 multiplied by the percentage by 

which the efficiency of the 2007 standards (not yet known) exceeds that of the 2005 standards. 

The credit may not exceed $100 per dishwasher. 

The credit for clothes washers equals (1) $50 for clothes washers manufactured in 2005 

that have a modified energy factor (MEF) of at least 1.42, (2) $100 for clothes washers 

manufactured in 2005-2007 that meet the requirements of the Energy Star program which are in 

effect for clothes washers in 2007, or (3) the minimum of (i) $200 or (ii) $10 multiplied by the 

average of the energy and water savings percentages of the 2010 Energy Star standards relative 

to the 2007 Energy Star standards, for clothes washers manufactured in 2008-2010 that meet the 

requirements of the Energy Star program which are in effect for clothes washers in 2010. 

The credit for refrigerators is based on energy savings and year of manufacture. The 

energy savings are determined relative to the energy conservation standards promulgated by the 

Department of Energy that took effect on July 1, 2001. Refrigerators that achieve a 15 to 20 

percent energy saving and that are manufactured in 2005 or 2006 receive a $75 credit. 
34

Refrigerators that achieve a 20 to 25 percent energy saving receive a (i) $125 credit if 

manufactured in 2005-2007, or (ii) $100 credit if manufactured in 2008. Refrigerators that 

achieve at least a 25 percent energy saving receive a (i) $175 credit if manufactured in 2005-

2007, or (ii) $150 credit if manufactured in 2008-2010. 

Appliances eligible for the credit include only those that exceed the average amount of 

production from the 3 prior calendar years for each category of appliance. In the case of 

refrigerators, eligible production is production that exceeds 110 percent of the average amount of 

production from the three prior calendar years. Proration rules apply in the case of credits for 

2005 production. 

A dishwasher is any a residential dishwasher subject to the energy conservation standards 

established by the Department of Energy. A refrigerator must be an automatic defrost 

refrigerator-freezer with an internal volume of at least 16.5 cubic feet to qualify for the credit. A 

clothes washer is any residential clothes washer, including a residential style coin operated 

washer that satisfies the relevant efficiency standard. 

The taxpayer may not claim credits in excess of $75 million for all taxable years, and 

may not claim credits in excess of $20 million with respect to clothes washers eligible for the 

$50 credit and refrigerators eligible for the $75 credit. A taxpayer may elect to increase the $20 

million limitation described above to $25 million provided that the aggregate amount of credits 

with respect to such appliances, plus refrigerators eligible for the $100 and $125 credits, is 

limited to $50 million for all taxable years. 

Additionally, the credit allowed for all appliances may not exceed two percent of the 

average annual gross receipts of the taxpayer for the three taxable years preceding the taxable 

year in which the credit is determined. 

The credit is part of the general business credit. 

Effective Date

The credit applies to appliances produced after the date of enactment and prior to 

January 1, 2011 (January 1, 2008 in the case of dishwashers). 

7. Residential solar hot water, photovoltaics and fuel cell property 

Present Law

There is no present-law personal tax credit for energy efficient residential property. 

Description of Proposal

The proposal provides a personal tax credit for the purchase of qualified photovoltaic 

property and qualified solar water heating property that is used exclusively for purposes other 

than heating swimming pools and hot tubs. The credit is equal to 30 percent of qualifying 

expenditures, with a maximum credit for each of these systems of property of $2,000. The 
35

provision also provides a 30 percent credit for the purchase of qualified fuel cell power plants. 

The credit for any fuel cell may not exceed $500 for each 0.5 kilowatt of capacity. 

Qualifying solar water heating property means an expenditure for property to heat water 

for use in a dwelling unit located in the United States and used as a residence if at least half of 

the energy used by such property for such purpose is derived from the sun. Qualified 

photovoltaic property is property that uses solar energy to generate electricity for use in a 

dwelling unit. A qualified fuel cell power plant is an integrated system comprised of a fuel cell 

stack assembly and associated balance of plant components that converts a fuel into electricity 

using electrochemical means, and which has an electricity-only generation efficiency of greater 

than 30 percent and that generates at least 0.5 kilowatts of electricity. The qualified fuel cell 

power plant must be installed on or in connection with a dwelling unit located in the United 

States and used by the taxpayer as a principal residence. 

The credit is nonrefundable, and the depreciable basis of the property is reduced by the 

amount of the credit. Expenditures for labor costs allocable to onsite preparation, assembly, or 

original installation of property eligible for the credit are eligible expenditures. 

Certain equipment safety requirements need to be met to qualify for the credit. Special 

proration rules apply in the case of jointly owned property, condominiums, and tenantstockholders in cooperative housing corporations. If less than 80 percent of the property is used 

for nonbusiness purposes, only that portion of expenditures that is used for nonbusiness purposes 

is taken into account. 

Effective Date

The credit applies to equipment installed after December 31, 2005, and prior to 

January 1, 2010. 

8. Credit for business installation of qualified fuel cells and stationary microturbine power 

plants 

Present Law

A nonrefundable, 10-percent business energy credit is allowed for the cost of new 

property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a 

structure, or to provide solar process heat, or (2) used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage. 

The business energy tax credits are components of the general business credit (sec. 

38(b)(1)). The business energy tax credits, when combined with all other components of the 

general business credit, generally may not exceed for any taxable year the excess of the 

taxpayer’s net income tax over the greater of (1) 25 percent of net regular tax liability above 

$25,000 or (2) the tentative minimum tax. For credits arising in taxable years beginning after 

December 31, 1997, an unused general business credit generally may be carried back one year 

and carried forward 20 years (sec. 39). 
36

There is no present-law credit for fuel cell or microturbine power plant property. 

Description of Proposal

The proposal provides a 30 percent business energy credit for the purchase of qualified 

fuel cell power plants for businesses. A qualified fuel cell power plant is an integrated system 

comprised of a fuel cell stack assembly and associated balance of plant components that converts 

a fuel into electricity using electrochemical means, and which has an electricity-only generation 

efficiency of greater than 30 percent and generates at least 0.5 kilowatts of electricity. The credit 

for any fuel cell may not exceed $500 for each 0.5 kilowatts of capacity. 

Additionally, the proposal provides a 10 percent credit for the purchase of qualifying 

stationary microturbine power plants. A qualified stationary microturbine power plant is an 

integrated system comprised of a gas turbine engine, a combustor, a recuperator or regenerator, a 

generator or alternator, and associated balance of plant components which converts a fuel into 

electricity and thermal energy. Such system also includes all secondary components located 

between the existing infrastructure for fuel delivery and the existing infrastructure for power 

distribution, including equipment and controls for meeting relevant power standards, such as 

voltage, frequency and power factors. Such system must have an electricity-only generation 

efficiency of not less that 26 percent at International Standard Organization conditions and a 

capacity of less than 2,000 kilowatts. The credit is limited to the lesser of 10 percent of the basis 

of the property or $200 for each kilowatt of capacity. 

The credit is nonrefundable. The taxpayer’s basis in the property is reduced by the 

amount of the credit claimed. 

Effective Date

The credit for businesses applies to property placed in service after December 31, 2005, 

and before January 1, 2010 (January 1, 2009 in the case of microturbines), under rules similar to 

rules of section 48(m) of the Internal Revenue Code of 1986 (as in effect on the day before the 

date of enactment of the Revenue Reconciliation Act of 1990). 

9. Business solar investment tax credit 

Present Law

A nonrefundable, 10-percent business energy credit is allowed for the cost of new 

property that is equipment (1) that uses solar energy to generate electricity, to heat or cool a 

structure, or to provide solar process heat, or (2) used to produce, distribute, or use energy 

derived from a geothermal deposit, but only, in the case of electricity generated by geothermal 

power, up to the electric transmission stage. 

The business energy tax credits are components of the general business credit (sec. 

38(b)(1)). The business energy tax credits, when combined with all other components of the 

general business credit, generally may not exceed for any taxable year the excess of the 

taxpayer’s net income tax over the greater of (1) 25 percent of net regular tax liability above 

$25,000 or (2) the tentative minimum tax. For credits arising in taxable years beginning after 
37

December 31, 1997, an unused general business credit generally may be carried back one year 

and carried forward 20 years (sec. 39). 

Description of Proposal

The proposal increases the 10-percent credit to 30 percent in the case of solar energy 

property placed in service after December 31, 2005 and before January 1, 2010. 

Effective Date

The credit applies to solar energy property placed in service after December 31, 2005 and 

before January 1, 2010. 
38 

D. Alternative Motor Vehicles and Fuels Incentives 

1. Alternative vehicle credit 

Present Law

Certain costs of qualified clean-fuel vehicle may be expensed and deducted when such 

property is placed in service (sec. 179A). Qualified clean-fuel vehicle property includes motor 

vehicles that use certain clean-burning fuels (natural gas, liquefied natural gas, liquefied 

petroleum gas, hydrogen, electricity and any other fuel at least 85 percent of which is methanol, 

ethanol, any other alcohol or ether).32 The maximum amount of the deduction is $50,000 for a 

truck or van with a gross vehicle weight over 26,000 pounds or a bus with seating capacities of at 

least 20 adults; $5,000 in the case of a truck or van with a gross vehicle weight between 10,000 

and 26,000 pounds; and $2,000 in the case of any other motor vehicle. Qualified electric 

vehicles do not qualify for the clean-fuel vehicle deduction. The deduction is reduced to 25 

percent of the otherwise allowable deduction in 2006 and is unavailable for purchases after 

December 31, 2006. 

Description of Proposal

Alternative motor vehicle credits

The proposal provides a credit for the purchase of a new qualified fuel cell motor vehicle, 

a new qualified hybrid motor vehicle, and a new qualified alternative fuel motor vehicle. In 

general the proposal provides that the buyer claims the credit, unless the buyer is a tax-exempt 

entity in which case the seller or lessor of the vehicle may claim the credit. The taxpayer may 

carry forward unused credits for 20 years or carry unused credits back for three years (but not to 

any taxable year beginning before the date of enactment). Qualified vehicles fuel cell motor 

vehicles are vehicles placed in service before 2015. Qualified hybrid motor vehicles are vehicles 

placed in service before 2010. Qualified alternative fuel motor vehicles are vehicles placed in 

service before 2011. Any deduction otherwise allowable under sec. 179A is reduced by the 

amount of credit allowable. 

Fuel cell vehicles

A qualifying fuel cell vehicle is a motor vehicle that is propelled by power derived from 

one or more cells which convert chemical energy directly into electricity by combining oxygen 

with hydrogen fuel which is stored on board the vehicle and may or may not require reformation 

prior to use. The amount of credit for the purchase of a fuel cell vehicle is determined by a base 

credit amount that depends upon the weight class of the vehicle and, in the case of automobiles 

or light trucks, an additional credit amount that depends upon the rated fuel economy of the 

vehicle compared to a base fuel economy. For these purposes the base fuel economy is the 2002 

model year city fuel economy rating for vehicles of various weight classes (see below). Table 2, 

below, shows the proposed base credit amounts. 

 32 A hybrid-electric vehicle may qualify as a clean-fuel vehicle under present law. 
39 

Table 2.–Base Credit Amount for Fuel Cell Vehicles 

Vehicle Gross Weight Rating in Pounds Credit Amount 

Vehicle ≤ 8,500 ................................................. $8,000 

8,500 < vehicle ≤ 14,000.................................... $10,000 

14,000 < vehicle ≤ 26,000.................................. $20,000 

26,000 < vehicle................................................. $40,000 

In the case of a fuel cell vehicle weighing less than 8,500 pounds and placed in service 

after December 31, 2009, the $8,000 amount in Table 2, above is reduced to $4,000. 

Table 3, below, shows the proposed additional credits for passenger automobiles or light 

trucks. 

Table 3.–Credit for Qualifying Fuel Cell Vehicles 

If Fuel Economy of the Fuel Cell Vehicle Is:

Credit 

At least but less than 

$1,000 150% of base fuel economy 175% of base fuel economy 

$1,500 175% of base fuel economy 200% of base fuel economy 

$2,000 200% of base fuel economy 225% of base fuel economy 

$2,500 225% of base fuel economy 250% of base fuel economy 

$3,000 250% of base fuel economy 275% of base fuel economy 

$3,500 275% of base fuel economy 300% of base fuel economy 

$4,000 300% of base fuel economy 
40 

Hybrid motor vehicles

A qualifying hybrid vehicle is a motor vehicle that draws propulsion energy from onboard sources of stored energy which include both an internal combustion engine or heat engine 

using combustible fuel and a rechargeable energy storage system (e.g., batteries). A qualifying 

hybrid motor vehicle must be placed in service before January 1, 2010. 

In the case of an automobile or light truck (vehicles weighing 8,500 pounds or less), the 

amount of credit for the purchase of a hybrid vehicle is the sum of two components: a fuel 

economy credit amount that varies with the rated fuel economy of the vehicle compared to a 

2002 model year standard and a conservation credit based on the estimated lifetime fuel savings 

of a qualifying vehicle compared to a comparable 2002 model year vehicle. A qualifying hybrid 

automobile or light truck must have a maximum available power from the rechargeable energy 

storage system of at least five percent. In addition, the vehicle must meet or exceed certain EPA 

emissions standards. For a vehicle with a gross vehicle weight rating of 6,000 pounds or less the 

applicable emissions standards are the Bin 5 Tier II emissions standards. For a vehicle with a 

gross vehicle weight rating greater than 6,000 pounds and less than or equal to 8,500 pounds, the 

applicable emissions standards are the Bin 8 Tier II emissions standards. 

Table 4, below, shows the fuel economy credit available to a hybrid passenger 

automobile or light truck whose fuel economy (on a gasoline gallon equivalent basis) exceeds 

that of a base fuel economy. 

Table 4.–Fuel Economy Credit 

If Fuel Economy of the Fuel Cell Vehicle Is:

Credit 

At least but less than 

$400 125% of base fuel economy 150% of base fuel economy 

$800 150% of base fuel economy 175% of base fuel economy 

$1,200 175% of base fuel economy 200% of base fuel economy 

$1,600 200% of base fuel economy 225% of base fuel economy 

$2,000 225% of base fuel economy 250% of base fuel economy 

$2,400 250% of base fuel economy 
41 

In the case of a qualifying hybrid motor vehicle weighing more than 8,500 pounds, the 

amount of credit is determined by the estimated increase in fuel economy and the incremental 

cost of the hybrid vehicle compared to a comparable vehicle powered solely by a gasoline or 

diesel internal combustion engine and that is comparable in weight, size, and use of the vehicle. 

For a vehicle that achieves a fuel economy increase of at least 30 percent but less than 40 

percent, the credit is equal to 20 percent of the incremental cost of the hybrid vehicle. For a 

vehicle that achieves a fuel economy increase of at least 40 percent but less than 50 percent, the 

credit is equal to 30 percent of the incremental cost of the hybrid vehicle. For a vehicle that 

achieves a fuel economy increase of 50 percent or more, the credit is equal to 40 percent of the 

incremental cost of the hybrid vehicle. 

The credit is subject to certain maximum applicable incremental cost amounts. For a 

qualifying hybrid motor vehicle weighing more than 8,500 pounds but not more than 14,000 

pounds, the maximum allowable incremental cost amount is $7,500. For a qualifying hybrid 

motor vehicle weighing more than 14,000 pounds but not more than 26,000 pounds, the 

maximum allowable incremental cost amount is $15,000. For a qualifying hybrid motor vehicle 

weighing more than 26,000 pounds, the maximum allowable incremental cost amount is 

$30,000. 

A qualifying hybrid motor vehicle weighing more than 8,500 pounds but not more than 

14,000 pounds must have a maximum available power from the rechargeable energy storage 

system of at least 10 percent. A qualifying hybrid vehicle weighing more than 14,000 pounds 

must have a maximum available power from the rechargeable energy storage system of at least 

15 percent. 

Alternative fuel vehicle

The credit for the purchase of a new alternative fuel vehicle would be 50 percent of the 

incremental cost of such vehicle, plus an additional 30 percent if the vehicle meets certain 

emissions standards, but not more than between $4,000 and $32,000 depending upon the weight 

of the vehicle. Table 5, below, shows the maximum permitted incremental cost for the purpose 

of calculating the credit for alternative fuel vehicles by vehicle weight class. 

Table 5.–Maximum Allowable Incremental Cost for Calculation 

of Alternative Fuel Vehicle Credit 

Vehicle Gross Weight Rating in Pounds Maximum Allowable 

Incremental Cost 

Vehicle ≤ 8,500 .................................................. $5,000 

8,500 < vehicle ≤ 14,000.................................... $10,000 

14,000 < vehicle ≤ 26,000.................................. $25,000 

26,000 < vehicle................................................. $40,000 
42 

Alternative fuels comprise compressed natural gas, liquefied natural gas, liquefied 

petroleum gas, hydrogen, and any liquid fuel that is at least 85 percent methanol. Qualifying 

alternative fuel motor vehicles are vehicles that operate only on qualifying alternative fuels and 

are incapable of operating on gasoline or diesel (except in the extent gasoline or diesel fuel is 

part of a qualified mixed fuel, described below). 

Certain mixed fuel vehicles, that is vehicles that use a combination of an alternative fuel 

and a petroleum-based fuel, are eligible for a reduced credit. If the vehicle operates on a mixed 

fuel that is at least 75 percent alternative fuel, the vehicle is eligible for 70 percent of the 

otherwise allowable alternative fuel vehicle credit. If the vehicle operates on a mixed fuel that is 

at least 90 percent alternative fuel, the vehicle is eligible for 90 percent of the otherwise 

allowable alternative fuel vehicle credit. 

Base fuel economy

The base fuel economy is the 2002 model year city fuel economy for vehicles by inertia 

weight class by vehicle type. The “vehicle inertia weight class” is that defined in regulations 

prescribed by the Environmental Protection Agency for purposes of Title II of the Clean Air Act. 

Table 6, below, shows the 2002 model year city fuel economy for vehicles by type and by inertia 

weight class. 

Table 6.–2002 Model Year City Fuel Economy 

Vehicle Inertia

Weight Class 

Pounds 

Passenger Automobile 

(miles per gallon) 

Light Truck 

(miles per gallon) 

1,500 45.2 39.4 

1,750 45.2 39.4 

2,000 39.6 35.2 

2,250 35.2 31.8 

2,500 31.7 29.0 

2,750 28.8 26.8 

3,000 26.4 24.9 

3,500 22.6 21.8 

4,000 19.8 19.4 
43 

Vehicle Inertia

Weight Class 

Pounds 

Passenger Automobile 

(miles per gallon) 

Light Truck 

(miles per gallon) 

4,500 17.6 17.6 

5,000 15.9 16.1 

5,500 14.4 14.8 

6,000 13.2 13.7 

6,500 12.2 12.8 

7,000 11.3 12.1 

8,500 11.3 12.1 

Effective Date

The proposal is effective for property placed in service after the date of enactment. 

2. Electric vehicle credit 

Present Law

A 10-percent tax credit is provided for the cost of a qualified electric vehicle, up to a 

maximum credit of $4,000. A qualified electric vehicle generally is a motor vehicle that is 

powered primarily by an electric motor drawing current from rechargeable batteries, fuel cells, or 

other portable sources of electrical current. The full amount of the credit is available for 

purchases prior to 2006. The credit is reduced to 25 percent of the otherwise allowable amount 

for purchases in 2006 and is unavailable for purchases after December 31, 2006. 

Description of Proposal

The proposal repeals the phaseout of the credit under present law. The proposal also 

modifies present law to provide for a credit equal to the lesser of $1,500 or 10 percent of the 

manufacturer’s suggested retail price of certain vehicles that conform to the Motor Vehicle 

Safety Standard 500. For all other electric vehicles, Table 7, below describes the credit. 
44 

Table 7.–Credit for Qualifying Battery Electric Vehicles 

Vehicle Gross Weight Rating in Pounds Credit Amount 

Vehicle ≤ 8,500 ................................................. $4,000 

8,500 < vehicle ≤ 14,000.................................... $10,000 

14,000 < vehicle ≤ 26,000.................................. $20,000 

26,000 < vehicle................................................. $40,000 

If an electric vehicle weighing not more than 8,500 pounds has an estimated driving 

range of at least 100 miles on a single charge of the vehicle’s batteries or if it is capable of a 

payload capacity of at least 1,000 pounds, then the credit amount in Table 7 is $6,000. 

In the case of property purchased by tax-exempt persons, the seller may claim the credit. 

The proposal allows taxpayers to carry forward unused credits for 20 years or carry unused 

credits back for three (but not to any taxable year before the date of enactment). 

Effective Date

The proposal is effective for property placed in service after the date of enactment and 

before January 1, 2010. 

3. Alternative fuel refueling property credit 

Present Law

Clean-fuel vehicle refueling property may be expensed and deducted when such property 

is placed in service (sec. 179A). Clean-fuel vehicle refueling property comprises property for the 

storage or dispensing of a clean-burning fuel, if the storage or dispensing is the point at which 

the fuel is delivered into the fuel tank of a motor vehicle. Clean-fuel vehicle refueling property 

also includes property for the recharging of electric vehicles, but only if the property is located at 

a point where the electric vehicle is recharged. Up to $100,000 of such property at each location 

owned by the taxpayer may be expensed with respect to that location. The deduction is 

unavailable for costs incurred after December 31, 2006. 

For the purpose of sec. 179A clean fuels comprise natural gas, liquefied natural gas, 

liquefied petroleum gas, hydrogen, electricity, and any other fuel at least 85 percent of which is 

methanol, ethanol, or any other alcohol or ether. 
45 

Description of Proposal

The proposal permits taxpayers to claim a 50-percent credit for the cost of installing 

clean-fuel vehicle refueling property to be used in a trade or business of the taxpayer or installed 

at the principal residence of the taxpayer. In the case of retail clean-fuel vehicle refueling 

property the allowable credit may not exceed $30,000. In the case of residential clean-fuel 

vehicle refueling property the allowable credit may not exceed $1,000. 

Under the proposal clean fuels are any fuel at least 85 percent of the volume of which 

consists of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied 

petroleum gas, and hydrogen. 

The taxpayer’s basis in the property is reduced by the amount of the credit and the 

taxpayer may not claim deductions under section 179A with respect to property for which the 

credit is claimed. In the case of refueling property installed on property owned or used by a taxexempt person, the taxpayer that installs the property may claim the credit. To be eligible for the 

credit, the property must be placed in service before January 1, 2010. The credit allowable for 

any taxable year cannot exceed the amount by which the taxpayer’s regular tax (reduced by 

certain other credits) exceeds the taxpayer’s tentative minimum tax. The taxpayer may carry 

forward unused credits for 20 years. 

In the case of hydrogen fuel refueling property, to be eligible for the credit, the property 

must be placed in service before January 1, 2015. 

Effective Date

The proposal is effective for property placed in service after the December 31, 2005. 

4. Volumetric excise tax credit for alternative fuels 

Present Law

A 24.3-cents-per-gallon excise tax is imposed on diesel fuel to finance the Highway Trust 

Fund. Gasoline and most special motor fuels are subject to tax at 18.3 cents per gallon for the 

Trust Fund.33 The statutory rates for certain special motor fuels and compressed natural gas are 

determined on an energy equivalent basis, as follows: 

 33 Sec. 4041(a)(2)(A)(i). An additional 0.1 cent per gallon tax is imposed for the Leaking 

Underground Storage Tank Trust Fund on the sale or use of any liquid (other than liquefied petroleum gas 

and other than liquefied natural gas) if any tax was applicable under section 4041(a)(1) (relating to diesel 

fuel and kerosene) or 4041(a)(2) (relating to special motor fuels). See sec. 4041(d). 
46 

Liquefied petroleum gas (propane) 13.6 cents per gallon 

Liquefied natural gas 11.9 cents per gallon 

Methanol derived from petroleum or natural gas 9.15 cents per gallon 

Compressed natural gas 48.54 cents per MCF 

Under section 4041, tax is imposed on special motor fuels (any liquid other than gas oil, 

fuel oil or any product taxable under section 4081) when there is a taxable sale by any person to 

an owner, lessee or other operator of a motor vehicle or motorboat, for use as fuel in the motor 

vehicle or motorboat or used by any person as a fuel in a motor vehicle or motorboat unless there 

was a prior taxable sale. No excise tax credit is provided for the sale or use of those fuels. 

Liquid hydrogen, when sold or used as fuel in a motor vehicle or motorboat, is a special 

motor fuel for purposes of the tax on special motor fuels and would be subject to tax at 18.4 

cents per gallon.34 Compressed hydrogen gas used or sold as a fuel is not subject to tax. 

Prior to the American Jobs Creation Act of 2004, gasohol and gasoline to be blended into 

gasohol was taxed at a reduced rate based on the amount of ethanol contained in the mixture 

(e.g., 10 percent, 7.7 percent or 5.5 percent alcohol in the mixture). The Act eliminated reduced 

rates of excise tax for most alcohol-blended fuels. In place of the reduced rates, the Act 

amended the Code to create two new excise tax credits: the alcohol fuel mixture credit and the 

biodiesel mixture credit.35 The sum of these credits may be taken against the tax imposed on 

taxable fuels (by section 4081). A person may also file a claim for payment equal to the amount 

of these credits for biodiesel or alcohol used to produce an eligible mixture.36 The credits and 

payments are paid out of the General Fund. If the alcohol is ethanol with a proof of 190 or 

greater, the credit or payment amount is 51 cents per gallon. For agri-biodiesel, the credit or 

payment amount is $1.00 per gallon; for biodiesel other than agri-biodiesel, the credit or payment 

amount is 50 cents per gallon. Under the Code’s coordination rules, a claim may be taken only 

once with respect to any particular gallon of alcohol or biodiesel. 

Description of Proposal

Under the proposal, the liquefied petroleum gas, and P Series fuels (as defined by the 

Secretary of Energy under 42 U.S.C. sec. 13211(2)) are taxed at 18.3 cents per gallon under 

section 4041. Compressed natural gas is taxed at 18.3 cents per energy equivalent of a gallon of 

gasoline, and liquefied natural gas, any liquid fuel derived from coal and liquid hydrocarbons 

 34 This includes an additional 0.1 imposed by section 4041(d) for the Leaking Underground 

Storage Tank Trust Fund. 

35 Sec. 6426. The Act also created an income tax credit for biodiesel and biodiesel mixtures. 

Sec. 40A. 

36 Sec. 6427(e). 
47 

derived from biomass would be taxed at 24.3 cents per gallon under section 4041. Under the 

proposal, hydrogen (whether in liquid or gas form) is exempt from the tax imposed by section 

4041, however, persons selling hydrogen as fuel for motor vehicles or motorboats are required to 

register with the Secretary. Collectively, these fuels (including hydrogen) are referred to as 

“alternative fuels.” 

In addition, the proposal creates two new excise tax credits, the alternative fuel credit, 

and the alternative fuel mixture credit. The credits are allowed against section 4041 liability. 

The alternative fuel credit is 50 cents per gallon of alternative fuel or gasoline gallon equivalents 

of nonliquid alternative fuel sold by the taxpayer for use as a motor fuel in a highway vehicle. 

The alternative fuel mixture credit is 50 cents per gallon of alternative fuel used in producing an 

alternative fuel mixture for sale or use in a trade or business of the taxpayer. The mixture must 

be sold by the taxpayer for use as a fuel in a highway vehicle or used by the taxpayer for use as a 

fuel in a highway vehicle. Liquid fuel derived from coal would only qualify for the credits if 

derived from the Fischer-Tropsch process. The credits generally expire after September 30, 

2009. The proposal also allows persons to file a claim for payment equal to the amount of the 

alternative fuel credit and alternative fuel mixture credits. These payment provisions generally 

also expire after September 30, 2009. Both credits and payments are made out of the General 

Fund. Under coordination rules, a claim for payment or credit may only be taken once with 

respect to any particular gallon or gasoline-gallon equivalent of alternative fuel. 

With respect to hydrogen, the credit and payment provisions expire after December 31, 

2014. 

Effective Date

The proposal is effective for any sale, use or removal for any period after September 30, 

2006.

5. Extend excise tax provisions and income tax credit for biodiesel 

Present Law

Biodiesel income tax credit 

Overview

The Code provides an income tax credit for biodiesel and qualified biodiesel mixtures, 

the biodiesel fuels credit.37 The biodiesel fuels credit is the sum of the biodiesel mixture credit 

plus the biodiesel credit and is treated as a general business credit. The amount of the biodiesel 

fuels credit is includable in gross income. The biodiesel fuels credit is coordinated to take into 

account benefits from the biodiesel excise tax credit and payment provisions discussed below. 

The credit may not be carried back to a taxable year ending before or on December 31, 2004. 

The provision does not apply to fuel sold or used after December 31, 2006. 

 37 Sec. 40A. 
48 

Biodiesel is monoalkyl esters of long chain fatty acids derived from plant or animal 

matter that meet (1) the registration requirements established by the Environmental Protection 

Agency under section 211 of the Clean Air Act and (2) the requirements of the American Society 

of Testing and Materials D6751. Agri-biodiesel is biodiesel derived solely from virgin oils 

including oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, 

safflowers, flaxseeds, rice bran, mustard seeds, or animal fats. 

Biodiesel may be taken into account for purposes of the credit only if the taxpayer 

obtains a certification (in such form and manner as prescribed by the Secretary) from the 

producer or importer of the biodiesel which identifies the product produced and the percentage of 

the biodiesel and agri-biodiesel in the product. 

Biodiesel mixture credit

The biodiesel mixture credit is 50 cents for each gallon of biodiesel used by the taxpayer 

in the production of a qualified biodiesel mixture. For agri-biodiesel, the credit is $1.00 per 

gallon. A qualified biodiesel mixture is a mixture of biodiesel and diesel fuel that is (1) sold by 

the taxpayer producing such mixture to any person for use as a fuel, or (2) is used as a fuel by the 

taxpayer producing such mixture. The sale or use must be in the trade or business of the 

taxpayer and is to be taken into account for the taxable year in which such sale or use occurs. No 

credit is allowed with respect to any casual off-farm production of a qualified biodiesel mixture. 

Biodiesel credit

The biodiesel credit is 50 cents for each gallon of biodiesel which is not in a mixture with 

diesel fuel (100 percent biodiesel or B-100) and which during the taxable year is (1) used by the 

taxpayer as a fuel in a trade or business or (2) sold by the taxpayer at retail to a person and 

placed in the fuel tank of such person’s vehicle. For agri-biodiesel, the credit is $1.00 per gallon. 

Biodiesel mixture excise tax credit

The Code also provides an excise tax credit for biodiesel mixtures.38 The credit is 50 

cents for each gallon of biodiesel used by the taxpayer in producing a biodiesel mixture for sale 

or use in a trade or business of the taxpayer. In the case of agri-biodiesel, the credit is $1.00 per 

gallon. A biodiesel mixture is a mixture of biodiesel and diesel fuel that (1) is sold by the 

taxpayer producing such mixture to any person for use as a fuel, or (2) is used as a fuel by the 

taxpayer producing such mixture. No credit is allowed unless the taxpayer obtains a certification 

(in such form and manner as prescribed by the Secretary) from the producer of the biodiesel that 

identifies the product produced and the percentage of biodiesel and agri-biodiesel in the 

product.39 

 38 Sec. 6426(c). 

39 Sec. 6426(c)(4). 
49 

The credit is not available for any sale or use for any period after December 31, 2006. 

This excise tax credit is coordinated with the income tax credit for biodiesel such that credit for 

the same biodiesel cannot be claimed for both income and excise tax purposes. 

Payments with respect to biodiesel fuel mixtures 

If any person produces a biodiesel fuel mixture in such person’s trade or business, the 

Secretary is to pay such person an amount equal to the biodiesel mixture credit.40 To the extent 

the biodiesel fuel mixture credit exceeds any section 4081 liability of a person, the Secretary is to 

pay such person an amount equal to the biodiesel fuel mixture credit with respect to such 

mixture.41 Thus, if the person has no section 4081 liability, the credit is refundable. The 

payment provision does not apply with respect to biodiesel fuel mixtures sold or used after 

December 31, 2006. 

Description of Proposal

The proposal extends the income tax credit, excise tax credit, and payment provisions 

through December 31, 2010. 

Effective Date

The proposal is effective on the date of enactment. 

 40 Sec. 6427(e). 

41 Sec. 6427(e)(2). See also, Internal Revenue Service, Notice 2005-4, 2005-2 I.R.B. (December 

15, 2004). 
50 

E. Energy Related Technical Corrections 

1. Technical corrections relating to the expansion of the credit for electricity produced 

from certain renewable resources 

The technical correction provides that the five-year credit period applicable to open-loop 

biomass facilities that were originally placed in service before the date of enactment begins on 

January 1, 2005. 

The technical correction clarifies that open-loop biomass resources include both 

cellulosic and lignin waste material. 

The technical correction strikes as deadwood the credit eligibility rule for governmentowned poultry waste facilities, as such facilities placed in service after the date of enactment are 

provided for under the rules for agricultural livestock waste nutrient facilities. 

The technical correction clarifies that, for the purpose of section 45, a qualified landfill 

gas facility does not include a facility that uses gas that was produced at a facility, the production 

from which is, or was previously, allowed a credit under section 29 for the production of landfill 

gas. 

The technical correction clarifies that the Act did not change the determination of 

whether property is eligible for a five-year recovery period under section 168(e)(3)(B)(vi)(I). 

The technical correction provides that the poultry waste facilities placed in service on or 

before the date of enactment are unaffected by the new provision relating to agricultural 

livestock waste nutrient facilities.