Tax Incentives for Clean Tech Companies

In 1931 Thomas Edison stated: "…we should be using Nature’s inexhaustible sources of energy — sun, wind and tide. ... I'd put my money on the sun and solar energy. What a source of power! I hope we don't have to wait until oil and coal run out before we tackle that." 77 years later, with the then-high price of oil strangling our economy, the United States Congress acted to entice our nation to harness the power of the sun. On October 2, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008. The bill, along with a staggering $700 billion bail-out package to steady the credit markets, contains an extension of various Green Energy Credits. The biggest winner from the tax incentives is the solar energy industry.

Many of the tax incentives for clean and renewable energy were due to expire at the end of this year. The Act extends the time that assets need to be placed in service in order to qualify for the credits and adds for the first time credits for energy produced from marine and hydrokinetics sources (e.g. waves). Solar power, along with fuel cell and microturbine property, received an 8 year extension of the investment tax credit. The solar credit is 30% of the cost of the equipment including the cost of installation. Combining the credit with accelerated depreciation and investments in solar energy, could provide healthy returns if structured properly.

For example, a big-box retailer installs a roof-top solar energy system on its building at a cost of $2 million. The retailer can take a credit of $600,000 in the year the system is placed in service. In addition to the credit, the retailer will depreciate the system over 5 years and generate a tax savings of approximately $700,000. In other words, the government will provide approximately 65% of the cost of the system. With the government kicking in so much of the cost of a system the break-even point could be as little as 5 to 15 years based upon the price of energy and the efficiency of the unit.

Timing of course is everything. The extension of the credits may not have the intended impact due to the current dismal economic outlook and the sudden fall in oil prices. The bill that the clean energy credits share with the bail-out of banks has yet to loosen-up the credit markets. Consequently, many individuals who would like to go green will find it difficult to commit capital to such non-core expenditures.

Other green technologies have also benefitted from the new law. Producers of energy from renewable resources have additional time to place facilities in service in order to qualify for the Production Tax Credit ("PTC"). Producers have until December 31, 2010 to place in service open-loop biomass, closed-loop biomass, geothermal, small irrigation, landfill gas, qualified hydropower, and waste-to-energy. Marine and hydrokinectic energy producers have until December 31, 2011 to place property in service. And wind and refined coal get only a year until December 31, 2009. Sorry, Mr. Pickens. The new law did not change the cent-per-kilowatt credit amounts of the period of years the PTC could be taken.

Although not specific to renewable energy, the new law extends research and development tax credit for amounts incurred prior to December 31, 2009.

We will have to wait and see if the new law will have its intended affect on energy production in the U.S. With only a two year horizon for the Production Tax Credit and credit being tight, the bill may not do much to spur development in facilities. But with Congress handing out two year extensions on tax goodies almost as certain as congressional elections every two years I would not lose hope that the Production Tax Credit will be extended yet again. Hopefully, the credit markets will ease up and solar panels will become more efficient, making a decision to tackle solar before we exhaust the world’s oil supply a no-brainer.

Anthony DiGiacinto CPA, MST is a Senior Manager in the Tax Department of EisnerAmper & a member of the firm’s Technology Group.

Some other changes in the new law include:

The $2000 cap on the investment tax credit for residential solar electric installations has been removed for installations placed into service after December 31, 2008. Homeowners are now able to claim the full 30% investment credit.

For tax years beginning after October 3, 2008, the new law allows taxpayers in the alternative minimum tax to claim solar investment tax credits against their AMT liability.

In tax years ending after February 13, 2008 public utilities can qualify for the investment tax credit. This opens the door for utilities to get into the solar energy production business.

The new law authorizes $800 million in new clean renewable energy bonds and creates a new category of tax credit bonds called Qualified Energy Conservation Bonds to finance state and local initiatives to reduce carbon emissions

The law extends deductions for energy efficient commercial buildings for five years to December 31, 2013. This provision allows businesses to expense the cost of energy efficient commercial building property. The deduction for any building for any tax year can't be more than the excess (if any) of (1) $1.80 × the square footage of the building over (2) the deductions allowed under this provision for earlier years. Energy efficient commercial building property is property that is (1) depreciable or amortizable, (2) installed on or in a building located in the U.S., and (3) certified as being installed as part of a plan that will meet a 50% energy use reduction test. In some situations in which the 50% test isn't satisfied, a partial deduction is allowed.

For tax years beginning after December 31, 2008, the new law adds a tax credit for new qualified plug-in electric drive motor vehicles for property purchased before Jan. 1, 2015. The amount of the credit is the sum of: (1) $2,500; plus (2) $417 for each kilowatt hour of traction battery capacity in excess of 4 kilowatt hours. The credit is subject to a limit based on weight. The full credit is only available until the first calendar quarter after the 250,000th unit is sold in the U.S., so you better get one quick

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