Commercial Tax Benefits
Unlike direct equipment rebates, mechanisms such as tax-favored financing tools, energy tax credits, or grants in lieu of credits typically require that the claimant of the benefit be a taxable business entity. Both the renewable electricity production tax credits in section 45 and investment tax credits in section 48 of the Internal Revenue Service (IRS) code are a subset of the general business credits (benefits) listed in section 38 of the IRS code. Individual taxpayers and nontaxable entities are not eligible for these benefits.
Commercial tax benefits include:
- Production tax credits
- Investment tax credits
- 1603 Grant
- Energy efficiency commercial building deduction
- Accelerated depreciation for onsite generation equipment.
Production Tax Credits
Renewable electricity Production Tax Credits (PTCs) in section 45 of the IRS code are available for the domestic production and sale of electricity from qualified sources and are equal to either $0.022/kilowatt-hour (kWh) —$ 0.015 adjusted for inflation each year; $0.022/kWh is the current value—or or half that amount for certain types of power-producing systems during their first 10 years of operation. For example, electricity generated from utility scale wind, geothermal, and closed-loop biomass systems qualify for the full credit of $0.022/kWh (in 2010). However, electricity generated from open-loop biomass, small irrigation power, landfill gas, trash combustion, hydropower, and hydrokinetic energy qualifies for a credit equal to half that amount.
Investment Tax Credits
The Investment Tax Credit (ITC) in section 45 of the IRS code is also available for energy efficiency and renewable energy improvements. It is equal to 30% of the value of the capitalized basis costs to develop, design, build, and install systems that:
- Use solar energy to generate electricity, or to heat, cool, (or provide hot water for use in) a structure (building), although heating swimming pool water does not qualify,
- Consist of fuel cell property with nameplate capacity of at least 0.5 kilowatts (kW) and an electricity-only efficiency of at least 30% (up to $1,500 per 0.05 kW of capacity),
- Consist of small wind property with a nameplate capacity of 100 kW or less, or
- Use fiber optic distributed sunlight to illuminate the inside of a structure.
Also available is an ITC equal to 10% of the value of the capitalized basis costs to develop, design, build, and install systems for the following types of energy property: (1) geothermal electric systems, (2) micro-turbines (stationary plant of less than 2 megawatts with an electricity-only efficiency of 26%), (3) combined heat and power systems, and (4) geothermal heat pumps.
The date by which each system must be placed in service varies by type of credit and the fuel source/ technology involved. Details are presented in a Summary of Federal Renewable Energy Tax Credits. Under recent rule changes, taxpayers may claim the ITC in lieu of the PTC for nearly all technologies and project types, as shown in the table.
For nearly all technologies and project types that qualify under either the PTC or the ITC, section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA) provides funding to reimburse applicants for a portion (either 10% or 30%) of the cost of eligible property under the IRS Code. Recipients of the 1603 Grant may not claim the PTC or the ITC on the same property for which they are claiming the 1603 Grant. Applicants must apply for the 1603 Grant before October 1, 2011; and either the energy property must be placed in service by the end of 2010, or the project must begin construction by December 31, 2010. The U.S. Treasury is committed to issuing funds within 60 days of whichever occurs later—the submission date of a complete application or the date the system is placed in service.Under federal tax law, if a developer of renewable energy equipment leases the equipment to a governmental entity or a tax-exempt organization (considered “Ineligible Entities”), the developer may not claim the ITC because the property is considered “tax-exempt use property.” In addition, accelerated depreciation cannot be claimed on the property in such a case. However, under the 1603 Grant program, if an energy property owner is otherwise eligible, leasing the property to an Ineligible Entity will not impact the owner’s eligibility for the ITC as long as the lease is considered a “true lease” under IRS guidelines (the IRS has issued a list of factors to consider in that evaluation).
Energy Efficiency Commercial Building Deduction
A commercial income tax deduction is available for new or renovated buildings when energy costs are reduced by at least 50% due to improvements in lighting systems, in the building envelope, and in heating, cooling, and water heating equipment. A unique feature of this deduction is that it may be passed along to a system “designer” that is designated by the building owner if the building is publicly owned. This enables public entities to partner with private taxpayer “designers” to lower the net costs of implementing energy-efficient investments. To qualify, the completed project must meet ASHRAE 90.1-2001 standards (the cost savings are determined using approved computer modeling software) and must be placed in service by December 31, 2013. The project must also be certified as meeting the energy cost savings goal, using approved modeling software.
Accelerated Depreciation for Onsite Generation Equipment
Under the Federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain energy property through accelerated depreciation deductions. MACRS establishes “class lives” for various types of property, and a number of renewable energy properties (systems) are classed as 5-year properties. They include solar-electric and solar thermal property, wind property, geothermal property, combined heat and power equipment, fuel cells, and microturbines. If the property is leased to an Ineligible Entity, however, it is subject to an alternative (longer) depreciation schedule.
The following resources provide more information about commercial tax benefits:
- Database of State Incentives for Renewables & Efficiency
- Tax Incentives Assistance Project
- U.S. Department of Treasury 1603 Grant Program
- IRS Code – Sections 45 and 48