With the growing costs of utilities, more families and business owners are turning to renewable energy alternatives. There are many benefits to using renewable energy such as the long term savings, less maintenance, decreasing your carbon footprint, and even possibly saving money on your taxes!
Credits for Businesses
For starters, let us discuss the energy credits available to business owners. A 30% tax credit is available for energy property such as solar, fuel cells and small wind. A 10% tax credit is available for other types of energy property including geothermal, microturbines and CHP (combined heat and power). The most common energy property purchased by companies are solar products, which includes property that uses solar energy to generate electricity, to heat or cool a structure, or to illuminate the inside of a structure using fiber optic distributed sunlight. Eligible energy property must be new and not previously owned and the property must be operational in the year in which the credit is first taken.
A nice tax benefit for business owners is the tax basis of the property for depreciation purposes is only reduced by half of the credit taken. For example, if a business purchases solar panels eligible for the 30% tax credit, the depreciable tax basis of the property is only reduced to 85% of the purchase price. If available, please note that bonus depreciation may also be utilized to deduct even more of the tax basis in the year the property is placed in service.
Other possible incentives to take into consideration are the savings from rebates, sales and use tax exemptions, property tax exemptions, low interest financing and state tax credits for certain states and certain types of equipment. For businesses that do not have large enough tax liabilities to utilize the credit there are other options to take advantage of the tax benefits of purchasing eligible energy property. Three models commonly used are sale-leasebacks, partnership flips and inverted leases. A common option in the dairy industry is for the dairy to lease solar energy property from the lessor, who claims the credit and then passes it back to the dairy business via reduced lease payments.
There are also residential energy property credits available for improvements to a taxpayer’s home. A 30% tax credit is available for the cost of alternative energy equipment installed on or in your home, including solar hot water heaters, solar electric equipment, wind turbines and fuel cell property. There are certain restrictions to the credit depending on the type of property purchased. Unlike business energy credits, the residential energy credits reduce the tax basis of the property dollar for dollar.
Some other useful information about energy tax credits:
- Make sure you keep the manufacturer’s tax credit certification for all types of energy property purchased in case you are audited.
- The tax credit vests at 20% per year, which means the taxpayer must retain ownership of the property until the 6th year or the IRS will require to be paid back a portion of the tax credit.
- The tax credits are non-refundable, which means the taxpayer will not receive a tax refund for any amount that exceeds the taxpayer’s tax liability for the year. The unused portion of a business energy credit is available for a one-year carryback and 20-year carry forward. Currently, without further IRS guidance, the unused portion of a residential energy credit can only be carried forward to 2016.
- Labor, installation costs and other costs may be included in the tax basis of eligible energy property for the purpose of calculating the tax credit.
- For residential energy property, there are restrictions to the eligibility of the credit for a second home.
- Before purchasing energy property it is a good idea to determine the return on investment (ROI) to ensure your purchase will actually save you money. ROI can be calculated by determining the system’s cost, the length of its useful life and the current likely future cost of conventional energy the system will replace.
The tax credits for business and residential energy property are both set to expire on December 31, 2016. If extended, most experts expect a reduction in the credit for certain property from 30% to 10%.
For those of you considering alternative energy, the clock is ticking.