By Jim Manning
Nov. 19, 2009
Becoming “greener” may have its roots in social responsibility, but make no mistake about it-there are a variety of business drivers propelling the cause forward. Chief among them are the various state and federal energy tax incentives that businesses can consider when conducting their year-end planning. Put simply, “green” is the new black. Here are just a few of the incentives of which you might take advantage.
Tax credits for energy-efficient buildings and improvements
The Energy Policy Act of 2005 includes a tax deduction of up to $1.80 per square foot for investments in “energy-efficient commercial building property.” These investments must significantly reduce energy costs by updating the heating and cooling, building envelope and interior lighting components in new or existing commercial buildings (which includes apartment buildings that are four floors or more). In the case of projects owned by a governmental unit, the deduction can be allocated to the person primarily responsible for designing the property.
Tax credits for homeowners investing in energy-efficient improvements
Provisions within the American Recovery and Reinvestment Act (ARRA) have increased the energy tax credit for homeowners who make energy-efficient improvements to their existing homes. The new law increases the credit rate to 30 percent of the cost of all qualifying improvements and raises the maximum credit limit to $1,500 for improvements placed in service in 2009 and 2010. The credit applies to improvements such as adding insulation, energy-efficient exterior windows, and energy-efficient heating and air conditioning systems.
However, there are a few caveats. First, not all products are available for the credit. The standards in the new law are higher than the standards for the credit that was available in 2007 for products that qualify as “energy efficient.” As such, homeowners should verify that the new products meet the IRS regulations for the new energy-efficiency threshold. Second, be aware that the credit is non-refundable. Individuals that don’t pay any federal income tax will not benefit from the energy efficiency credit, though the credit will carry forward. Finally, the $1,500 is an aggregate credit for the years 2009 and 2010.
The AARA also has created a nonrefundable energy tax credit that will help individual taxpayers pay for qualified residential alternative energy equipment, such as solar hot water heaters, geothermal heat pumps, Other Solar Electric Technologies, and residential sized wind turbines. The new law removes the previously imposed maximum credit amount of $2,000 and allows for a credit equal to 30 percent of the cost of qualified property.
New Markets Tax Credits & Rehabilitation Tax Credits
To promote investments in low income communities and rehabilitation of historic structures, taxpayers may claim New Markets Tax Credits (NMTCs) and Federal Rehabilitation Tax Credits. Both credits require that investments meet qualifying standards and that expenditures be documented and meet stated requirements.
The NMTC is intended to encourage investment in low income communities by subsidizing the economic return of lenders and investors, enabling them to pass the subsidy along to businesses that are located in and/or serve low income communities.
The NMTC program permits taxpayers to receive a credit against federal income taxes for making qualified equity investments in designated Community Development Entities (CDEs). Substantially all of the qualified equity investment must in turn be used by the CDE to provide investments in low-income communities. The credit provided to the investor totals 39 percent of the cost of the investment and is claimed over a seven-year credit allowance period.
The Federal Rehabilitation Tax Credit allows companies to claim a credit when rehabilitating certain buildings. In order for a building to be rehabilitated, the rehabilitation expenditures during a 24- or 60-month period must exceed the building’s adjusted basis at the beginning of such period. The credit equals 10 percent for buildings originally constructed prior to 1936 or a 20 percent credit for buildings designated as a Certified Historic Structure. The credit provides an economic incentive for investors in the project to rehabilitate and preserve the look and feel of older structures. In addition, many states have historic tax credits that can be used in conjunction with the Federal Rehabilitation Credit.
Jim Manning, CPA, is a partner at Plante & Moran, PLLC.