I just made an interesting observation regarding these new energy credits that will work to the disadvantage of family child care providers:

• The Nonbusiness Energy Property Credit - equal to 30% of the cost of certain qualifying improvements, up to a maximum of $1,500 (for 2009 and 2010 combined)
• The Residential Energy Efficient Property Credit - equal to 30% of other qualifying improvements, but it goes through 2016 and doesn't have the $1,500 cap

Both credits apply only to the taxpayer's main home and not to business property or rental real estate.

Here's the nasty bit from the Form 5695 instructions that will reduce these credits for most child care providers:

If less than 80% of the use of an item is for nonbusiness [meaning personal] purposes, only that portion of the costs that are allocable to the nonbusiness [personal] use can be used to determine the credits.

Put another way, if the business percentage for your home business is higher than 20%, you will not be able to take the maximum credits.

...

I find that it's pretty rare for regular home business to take up more than 20% of a home's floor space. Family child care providers, on the other hand, use a business percentage that combines business time and business space into something called the time/space percentage. Most ALL day care providers have a time/space percentage higher than 20%.

So child care providers, be aware that if you claim one of these energy credits, you will most likely have to allocate as shown in the following example and take something less than the maximum credit.

Example

Karen reports a time/space business percentage of 33.19% on line 7 of her Form 8829 Business Use of Home form. She upgraded to a new energy efficient furnace in 2009 that cost $4,000.

If Karen were NOT operating the day care business in her home, her credit would be figured as 30% times $4,000, which is $1,200.

Because her business percentage is over 20%, however, Karen must calculate her credit based only on personal usage of the new furnace. Since her business percentage is 33.19%, that makes her personal use percentage equal to 100% minus 33.19%, which is 66.81%.

Based on how Form 5695 works, Karen should multiply the $4,000 cost of her furnace by her personal use percentage of 66.81%, which results in $2,672. This is the cost of the furnace that Karen can allocate to personal usage. She should enter $2,672 as the cost of the furnace on Form 5695, NOT the total of $4,000.

Karen's allowable Nonbusiness Energy Property Credit on Form 5695 will be calculated as 30% times $2,672 (cost of the furnace allocated to personal usage), which is $802. She lost $398 of the maximum possible credit of $1,200.

This is a real disappointment, I have to say. Family child care providers deserve better. They are going to be the main ones to face this limitation.

Here's another tidbit that affects all taxpayers: You must reduce the cost basis of your home by the amount of any energy credits. This will have the effect of increasing any gain at the time your home is eventually sold, though such gain may not be taxable if you meet certain requirements.

Last updated 4 March 2010

Posted on 2010-01-29 00:55:55