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Could 'Green Energy' Tax Credits Deliver More Green for Your Business?

By Steve Isakson, CPA, CGMA

Renewable energy has been attractive to business owners for years, both for its potential cost savings and marketability. In light of the Bipartisan Budget Act of 2018, powering your business with solar, wind, or geothermal energy will continue to be tax-advantageous.   

Business owners who invest in renewable energy can apply general business tax credits equal to 30 or 10 percent of the basis (i.e., the "tax cost" for computing depreciation deductions, as well as gain or loss on disposition) of qualifying property. But the credits won't be around for long—they're set to phase out in 2024. To qualify for either credit, the property must be under construction before calendar year 2022.

Could these "green energy" tax credits deliver more green for your business? Here's what you should know:

To qualify, renewable energy property must fit into one of the following categories:

  • Solar electric property for heating purposes: Equipment that uses solar energy to generate electricity for heating and cooling structures or hot water, or for heat used in industrial or commercial processes (except for heating swimming pools).
  • Solar electric property for lighting purposes: Equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.
  • Fuel cell property: Equipment that turns fuel into electricity by electrochemical means.
  • Small wind energy property: Equipment that uses a wind turbine to generate electricity.

Certain types of property qualify for a tax credit equal to 10 percent of the property's basis:

  • Equipment used to produce, distribute, or use energy derived from a geothermal deposit
  • Cogeneration property
  • Micro-turbine property
  • Equipment that uses the ground or groundwater to heat or cool a structure

Do the credits have restrictions?

Yes, there are several restrictions on the credit. For example, it isn't available for property acquired with certain types of non-recourse financing. Additionally, for all types of qualifying property, the basis is reduced by 50 percent of the allowable credit. Your tax advisor can help you identify other restrictions that may apply.

On the other hand, one particularly favorable aspect of the credit is the possibility that the credit can sometimes be used in combination with other subsidies—for example, federal income tax expensing or utility rebates—for the same property.

Consider all of your options for alternative energy.

Some business owners choose to use renewable energy without owning the equipment, even though this means forgoing the tax credits. Some contractors will install solar equipment for free, keep ownership of it, and charge you for energy use. It's worth weighing this arrangement against an acquisition of property subsidized by the tax credit. And if you do choose to own equipment, it's important to have a plan for managing the costs, in terms of both money and time, associated with the maintenance and operation of alternative energy property.

Take action now to make the most of this green opportunity.

As I mentioned, the alternative energy tax credits will phase out in 2024. Acting sooner rather than later gives you more of a tax advantage. For property under construction in 2018 or 2019, the credit rate is 30 percent. If you begin construction in 2020, the rate drops 4 percent to 26 percent. If you begin construction in 2021, the rate is further reduced to 22 percent. Regardless of when construction begins, property must be placed in service before calendar year 2024 to qualify.

There are many issues to consider in deciding whether and how to use renewable energy. If you have questions about these credits and how they could help your business save, please give me a call. And remember—there is a solar tax credit available for individual taxpayers to consider, too.