Since the American Recovery and Reinvestment Act of 2009 went into effect, many of our clients have been grappling with questions about exactly what they can and can’t legally do when advertising and using tax credit information.
Truth in Advertising
Some contractors, for example, are running advertising pieces with tags such as, “We will match your $1,500 tax credit,” “We will double the government’s tax credit,” or “Save $1,500 with tax credits.”
Statements such as these are misleading and factually impossible to support. A number of jurisdictions, including New York City and California, have already begun cracking down on advertising such as this. Remember that when you go into a home you really have no idea how much tax credit a prospective customer may be entitled to, if any at all.
A more accurate presentation would be something such as: “We will match the government’s $1,500 tax credit with our own $1,500 savings,” or “If you don’t qualify for the government’s full $1,500 tax credit, we will make up the difference in savings,” or “Save up to $1,500 with government tax credits.”
In a related issue, many contractors are also unintentionally misrepresenting the tax credit in the home or are failing to provide to the customer the paperwork necessary to obtain the tax credit after the sale.
For improvements to the building envelope — windows, doors, skylights, roofing, and insulation — the tax credits are limited to 30% of the cost of the qualifying goods, with a maximum credit of $1,500. Keep in mind that this is a one-time-only credit. In other words, if a homeowner purchased windows qualifying for the full $1,500 credit and then purchased a roof that also qualified for the tax credit, he or she would be eligible to claim only a single credit of $1,500.
Also remember that, for the building envelope, the 30% cannot be applied against the costs of installation, only against the cost of the products. The work order or other supporting document should break out the cost of the product from the overall price of the job or from the cost of the labor to install the product. A great way to do this is to use the back of the manufacturer’s certificate to set forth the costs of the products versus the costs of the job or of the installation. Some of our manufacturing clients have even been providing certificates to their dealers with a simple pre-printed form on the back for this very purpose.
There is no legal ruling on whether sales tax may be included as “cost of goods.” Until there is, we counsel clients to break out the costs of goods but list the sales tax separately. Remember, too, to break out the costs of those items that qualify for the tax credit and those that don’t.
Product Plus Labor
With HVAC and renewables, however, the 30% tax credit is not capped, and the credit is based on product and installation. A homeowner could, for example, qualify for a $1,500 tax credit for windows based on product only, and also qualify for a tax credit for a qualifying solar water heating system based on 30% of the solar system’s total purchase price, including installation.
Many contractors provide a lump sum price for the purchase and installation of product, so we are often asked if there is a formula to use to break out labor versus product. Breaking out the costs of labor can be challenging and, unfortunately, there is no formula approved by the IRS and none that we could recommend. We recommend against ignoring the issue by simply saying, “Installation is free,” and trying to allocate the entire purchase price to the cost of the goods themselves — that is not going to withstand scrutiny.
A reasonable way to go about it if you do not have a way of proving actual installation costs is to simply take a flat percentage of every job (say 25% or 30%) and allocate that as the cost of the installation, with the balance being the cost of the goods themselves. The issue is unlikely to be raised in a tax audit of the customer and even more unlikely to ever come back to the contractor so long as the ratio appears at least somewhat reasonable on its face. Remember, the issue is not what the windows cost you, it is what the windows cost the customer to purchase from you.
Have Certification In Hand
We have seen a great deal of confusion regarding the use of the manufacturer’s certification. The manufacturer’s certification is a signed statement from the product manufacturer certifying that a particular product or component qualifies for the energy tax credit. No contractor should suggest that a product qualifies for the ARRA tax credits unless the product has a manufacturer’s certification with it. The IRS encourages manufacturers to provide these statements to facilitate identification of qualified products.
Some manufacturers provide a downloadable statement on their websites; others don’t. Some provide it as a letter, although it is best used during the sales process in the form of a leave-behind certificate. The contractor should have the manufacturer’s certificate in hand at the time of sale and provide a copy to the customer in order to prove to the customer that the goods qualify.
Clients are ultimately responsible for keeping the manufacturer’s certification with their paperwork to prove they qualify for the tax credit, but it does not have to be submitted to the IRS to claim the tax credit. For record-keeping purposes, it is advisable for homeowners to retain the work orders or receipts for the qualifying improvement.
Check back from time to time, as the IRS “tinkers” with the interpretations of the tax credits. Many contractors are still unaware that in May the IRS issued a notice that effectively “warped” the qualification for the ARRA tax credits for exterior windows and doors from the SHGC/U-factor minimums of 0.30 to the lesser burden of the Energy Star ratings — but only until June 1, 2009. In other words, if between Jan. 1, 2009 and June 1, 2009 a contractor sells, or already has sold, exterior windows or doors that meet Energy Star ratings, those products are now eligible for the energy tax credit of 30% of the cost of the windows, to the maximum of $1,500, even though the ARRA has different energy saving requirements.
—D.S. Berenson is the Washington, D.C., managing partner of Johanson Berenson LLP (www.homeimprovementlaw.com), a national law firm specializing in the representation of contractors and the home improvement industry. He may be reached at firstname.lastname@example.org.
This article is provided for informational purposes only and should not be construed as legal advice.