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In Focus

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he current economic climate has spurred

unprecedented interest and investment in

“green” or renewable energy systems. While

renewable energy is not a new concept, its

recent popularity stems from its potential to produce jobs

and spur economic growth. Passed in February 2009, the

American Recovery and Reinvestment Act (see

www.recovery.gov/?q=content/act) included significant

renewable energy provisions. Since then, the nation’s unem-

ployment rate has continued to rise; it is currently at 9.6%,

with states such as Michigan and Rhode Island reaching

peaks as high as 14.9% and 13.4%, respectively, according

to the U.S. Department of Labor Bureau of Labor Statistics.

T

By Matt Bourgeois, Kevin Breaux, Michael Chiasson, and Shawn Mauldin

Tax Incentives of GoingGreen

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As the misfortune has spread, pundits havebeen calling for government intervention.The Obama administration has respondedwith talk of further environmental regula-tions, such as a “cap and trade” programand taxes on carbon emissions.

With the green bandwagon continuingto gain momentum, the incentive to pur-sue renewable energy projects has neverbeen greater. Corporations such asGoogle and Wal-Mart have even jumpedon board. Google completed a solar instal-lation at its corporate headquarters inCalifornia, and California’s Solar InitiativeProgram estimates that Google recoupedabout 34% of the cost of the system fromthe state of California alone. Google wasalso able to take advantage of federal taxincentives. Wal-Mart, the world’s largestretailer, intends to install solar panels onthe roofs of 22 stores in California andHawaii. Other large retailers, such as Targetand Kohl’s, have also announced similarplans to undertake renewable energy pro-jects at its stores (Sandra Upson, “TheGreening of Google,” IEEE Spectrum,October 2007).

Energy Tax IncentivesWhile the incentives to pursue renew-

able energy projects have never beengreater, recent changes in legislation havemodified existing incentives as well ascreated new ones. The incentives comein a variety of forms, such as tax deduc-tions, tax credits, tax exemptions, loans,and grants. As awareness of these renew-able energy systems and the potential taxbenefits grows, taxpayers are likely to askprofessional preparers about the topic.In order to best serve their clients, tax

professionals will need to be aware of thepossible benefits for these systems. Thetax advantages for renewable energy sys-tems could determine a project’s feasi-bility, and tax professionals could becalled upon to help make that determi-nation. The following is a summary ofthe tax incentives available for green pro-jects and guidance for maximizing theavailable tax benefits. Because tax incen-tives vary in each state, they are exclud-ed from this analysis, but remain impor-tant to consider because these may reducea project’s cost and impact its acceptanceor rejection.

There are eight different tax incentivesdiscussed below, five of which apply tobusinesses, one that applies to both busi-nesses and individuals, and two that applyonly to individuals. The tax incentives thatpertain to businesses include: the invest-ment tax credit for renewable energy (IRCsection 48), a deduction for energy effi-cient commercial buildings (IRC section179[d]), the renewable electricity produc-tion credit (IRC section 45[a]), the energy-efficient appliance credit (IRC section45M[a]), and the energy-efficient homecredit (IRC section 45L[a]). Of the taxincentives available to businesses, threeof these—section 45(a), 45M(a), and sec-tion 45L(a)—are part of the IRC section38 general business credit. After the busi-ness incentives are covered, individualincentives will be reviewed. The discus-sion will begin with the tax incentivesthat have the greatest reach and then moveto ones that are more specific in scope.Finally, tax advisors must also consider thelimitations of incentives based on theamount of tax liability and the interaction

of the tax credits and the alternative minimum tax.

Business Tax Credits, Deductions, and Exclusions

Investment tax credit for renewableenergy (IRC section 48). The investmenttax credit (ITC) for renewable energy is acredit available to businesses for invest-ments in qualified energy projects.Provisions within this section allow forenergy projects that relate to solar, geother-mal, fuel cells, combined heat and power,wind, and microturbine technologies. TheITC is available for qualifying projects thatare completed before the end of the 2016tax year. The credits available vary depend-ing upon the technology.

Solar. Solar projects are eligible in avariety of forms. Systems that use solarenergy to generate electricity, to heat orcool a structure, to provide hot water, toprovide process heat (heating of swimmingpools excluded), and to illuminate theinside of a building using a fiber-optic dis-tribution system are all eligible for thiscredit. A qualifying system is eligible fora credit worth 30% of the value of theinstalled system, with no maximum.

Geothermal. Systems that use energyfrom geothermal sources to generate elec-tricity are eligible for this credit. The gen-eration equipment and the distribution sys-tem equipment are both eligible, up to thepoint of electrical transmission. In addition,systems that use the ground or groundwater to heat or cool a building are alsoeligible. Eligible equipment and systemsare allowed a credit of 10% of the valueof the installed system, with no maximum.

Fuel cells. Fuel cell power plants are anintegrated system of components that con-vert fuel into electricity using an electro-chemical process. Fuel cell projects are qual-ified if they meet the following criteria: Fuelcell power plants must have a minimum pro-duction rating of 500 watts, with a genera-tion efficiency greater than 30%. Qualifyingsystems are eligible for a credit of 30% ofexpenditures related to the system, but thecredit cannot exceed $1,500 for each 500watts of capacity installed.

Combined heat and power systems.Combined heat and power systems are sys-tems that use the same energy source to gen-erate electrical power, mechanical power,and heating, such as through the use ofsteam. The system must produce at least

With the green bandwagon continuing to gain momentum,

the incentive to pursue renewable energy projects

has never been greater.

NOVEMBER 2010 / THE CPA JOURNAL 21

20% of its total useful energy to produceelectrical or mechanical power, and at least20% of its total useful energy in the formof thermal energy that is not used for elec-trical or mechanical processes. The energyefficiency of the system must exceed 60%,and the system capacity cannot be greaterthan 50 megawatts. The credit is worth 10%of the related expenditures toward the sys-tem, and there is no maximum.

Qualified small wind energy. Wind ener-gy property comes in the form of wind tur-bines that are used to generate electricity.In order to qualify, the wind turbine musthave a generation capacity less than 100kilowatts. Qualifying wind property is allot-ted a credit equal to 30% of expendituresassociated with the system, and there isno maximum credit.

Microturbines. Microturbines are station-ary power plants used to generate electrici-ty. Microturbines use a turbine engine, com-bustor, and a recuperator or regenerator toturn the alternator and create electricity. Inorder to be eligible, a system must have ageneration capacity less than 2 megawattsand a generation efficiency greater than 26%.Electricity generation efficiency is definedas the percentage of the total useful powerproduced by the system at normal operat-ing rates divided by the lower heatingvalue of the fuel sources for the system. Thecredit for microturbines is worth 10% ofthe value of the system, but the credit amountcannot exceed $200 per kilowatt of capaci-ty installed.

Taxpayers should use IRS Form 3468 tofile for the ITC. Additional information aboutthis credit is available in the instructions forForm 3468 and in IRS Notice 2009-52.

Deduction for energy-efficient com-mercial buildings, IRC section 179(D).The energy-efficient commercial buildingstax deduction is allowed to offset the costof qualified energy-efficient building com-ponents installed and in service during atax year. The energy-efficient buildingcomponents applicable to this deductionare termed as depreciable assets installedin a U.S. building that are a part of light-ing, heating, cooling, ventilation, or hotwater systems. In order to qualify, thesystems being installed must reduce thebuilding’s total annual energy consumptioncosts by 50% or more when compared toa comparable building that meets thestandards set forth by the American Societyof Heating, Refrigerating and Air-

Conditioning Engineers (ASHRAE, 90.1-2001). In addition, the building must becertified by an individual recognized by theIRS as being capable of determiningcompliance by using an approved computersoftware program. The list of approvedsoftware is maintained by the Departmentof Energy (www1.eere.energy.gov/buildings/qualified_software.html).

Buildings certified as meeting all of therequirements above are eligible to take adeduction of $1.80 per square foot of thecertified building space. Buildings withcertified systems installed that contributeto a building’s energy efficiency but donot meet the 50% reduction requirementare eligible to take a 60¢-per-square-footdeduction. In most situations, this deduc-tion would apply to the building owner,as he would be the one to incur the costof installing these systems; however, thecredit goes to the entity that incurs thecost of the system, which means thattenants of a rental property are eligible ifthey pay for the improvements. In addi-tion, there are also provisions for improve-ments to buildings owned by federal,state, and local governments. In caseswhere improvements are made to a gov-ernment-owned building or facility, thecredit is available to the designer of thesystem. Eligible designers can be archi-tects, engineers, consultants, or contrac-tors who create the technical specifica-tions for the design of the system. In theevent that more than one party contribut-ed to the system design, the owner ofthe building may determine which design-er is primarily responsible and allocate thefull deduction to that designer, or mayallocate the deduction among severaldesigners at his discretion.

There are no special forms or worksheetsnecessary to claim this deduction. The IRSinstructions for business forms indicate thatthe amount should be included in the “otherdeductions” line of the tax return. The tax-payer should include an attachment thatshows how the other deductions total wascomputed, as well as copies of the certifi-cation documentation. Additional informa-tion on this deduction can be found inIRS Notice 2008-40 and from theCommercial Building Tax DeductionCoalition (www.efficientbuildings.org).

Renewable electricity production cred-it, IRC section 45(a). The renewableelectricity production credit (REPC) is acredit for the production of electricity fromqualified energy resources owned by thetaxpayer that is then sold to an unrelatedperson or entity during the tax year. Thiscredit will apply mainly to utility compa-nies, because most other owners of relat-ed qualified equipment will not engage inselling the electricity to the public. TheREPC and the ITC discussed above areexclusive of one another and cannot betaken simultaneously. Energy-producingsystems that qualify for this credit consistof wind, closed-loop biomass, open-loopbiomass, geothermal, solar, small irrigationpower, municipal solid waste, hydropow-er, and marine/hydrokinetic systems. Thecredit is allocated based on the number ofkilowatt-hours (kWh) of electricity pro-duced by the approved system. The cred-it begins in the year the energy-producingfacility was placed in service, and lastsfor a period of 10 years. The currentexpiration date for this credit is December31, 2013, for all technology types exceptwind, which has an expiration date ofDecember 31, 2012.

The energy-efficient commercial buildings tax deduction

is allowed to offset the cost of qualified energy-efficient

building components installed and in service during a tax year.

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Wind. Facilities that are eligible for thiscredit consist of any property that useswind energy to generate electricity that isnot included under any other section. Thecredit allows a credit of 2.1¢/kWh ofelectricity produced.

Closed-loop biomass. Closed-loopbiomass refers to facilities that utilize plantsthat are used exclusively for the purpose ofproducing electricity at a qualified facility.An approved facility is eligible to receive acredit of 2.1¢/kWh of electricity produced.

Open-loop biomass. Open-loop biomassrefers to facilities that utilize any of the fol-lowing means to generate electricity:■ Agricultural livestock waste nutrients;■ Any solid, nonhazardous, cellulosicwaste material;■ Forestry-related waste products pro-duced from milling or land clearing forcommercial developments;■ Solid wood waste materials, such aspallets, crates, and construction byproducts;and■ Agricultural waste products, such astree crops or tree trimmings.

Approved open-loop biomass facilitiesare eligible for a credit of 1.1¢/kWh ofelectricity produced. The only restrictionfor facilities in this category applies tothose that utilize agricultural livestockwaste as a fuel source. Such facilities musthave a minimum capacity of 150 kilowatts.

Municipal solid waste. Facilities of thistype utilize solid waste as a fuel source forgenerating electricity. Eligible solid wasteproducts are defined by the Solid WasteDisposal Act. These facilities are allowed1.1¢/kWh of electricity produced.

Geothermal. Geothermal facilities use theearth’s thermal energy as a fuel source for

generating electricity. Geothermal facilitiesare eligible for a credit equal to 2.1¢/kWhof electricity produced.

Solar. Solar facilities use the energy radi-ated from the sun as a fuel source forproducing electricity. A credit of 2.1¢/kWhof electricity produced is available to oper-ators of qualified solar facilities.

Small irrigation power. Small irrigationpower facilities are facilities that generateelectricity using water flowing through aditch or canal without the impediment of adam or other type of impoundment. In orderto be eligible, systems must have a ratedcapacity between 150 and 5,000 kilowatts.Qualified facilities of this type are alloweda credit of 1.1¢/kWh of electricity produced.

Hydropower. Hydropower refers to gen-eration facilities such as hydroelectricdams. New facilities are eligible for thiscredit as well as improvements to existingfacilities. The credit would then apply onlyto electricity generated by the improve-ments to the existing facility. Facilities ofthis type are allowed a credit of 1.1¢/kWhof electricity produced.

Marine and hydrokinetic. Marine andhydrokinetic energy facilities use energyderived from oceans, rivers, and lakesthat are naturally occurring and are notinfluenced by dams or diversionary struc-tures. Examples of such power sourcesinclude waves, tides, ocean currents, andfree-flowing water in rivers or lakes.Facilities of this type have to maintain arated generation capacity of at least 150kilowatts. Qualified facilities are eligible toreceive a tax credit of 1.1¢/kWh of elec-tricity produced.

Taxpayers can claim the REPC by usingIRS Form 8835 to determine the amount

of the credit which is then reported on IRSForm 3800 as part of general business cred-its. Additional information regarding thiscredit can also be found in IRS Notice2009-52.

Energy-efficient appliance credit, IRCsection 45M(a). The energy efficient appli-ance tax credit is available for manufac-turers of high-efficiency, residential-styleappliances, such as dishwashers, clotheswashers, and refrigerators. The credit isonly eligible for units produced in theUnited States during the tax year in excessof the average number of units producedover the previous two years. The maximumaggregate credit for all types of appli-ances cannot exceed $75 million.According to the general instructions forIRS Form 8909, the following credits areavailable:

Dishwashers. For a dishwasher to be eli-gible, it must comply with the energy con-servation standards established by the U.S.Department of Energy. Eligible units canfall into two types, based on the level ofenergy savings: Dishwashers that use nomore than 325 kWh of electricity peryear and 5.8 gallons of water per cycleare allowed a $45 credit per eligible unit.Dishwashers that use no more than 307kWh of electricity per year and 5 gallonsof water per cycle are allowed a $75credit per eligible unit.

Clothes washers. Clothes washers areclassified into four groups, based on themodified energy factor and water con-sumption factor of the unit. The factors areset by the Department of Energy toensure compliance with federal energy con-servation standards. In order to be eligible,a unit should meet the minimum modi-fied energy factor (MEF) and should notexceed the water consumption factor(WCF). The credit for clothes washers iscalculated per unit, based upon the fol-lowing table: Type MEF WCF Credit/UnitA 1.72 8.00 $ 75 B 1.80 7.50 $125 C 2.00 6.00 $150 D 2.20 4.50 $250

Refrigerators. In order for a refrigera-tor to be eligible, it must be a residentialmodel with an internal volume of at least16.5 cubic feet, and the unit has to exceedthe 2001 energy conservation standardsissued by the Department of Energy (10CFR 430.32). There are four classes of

RESOURCES

Additional information regarding the various technologies mentioned in this article can be found through the following organizations:

■ American Wind Energy Association (www.awea.org)

■ Solar Energy Industries Association (www.seia.org)

■ Geothermal Energy Association (www.geo-energy.org)

■ U.S. Department of Energy Office of Energy Efficiency and Renewable Energy(www.eere.energy.gov)

■ National Renewable Energy Laboratory (www.nrel.gov)

■ Database of State Incentives for Renewables and Energy (www.dsire.org)

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■ Electric heat pump water heaters;■ Electric heat pumps;■ Central air conditioners;■ Natural gas, propane, or oil waterheaters;■ Biomass-fueled stoves;■ Natural gas, propane, or oil furnacewater boilers; and■ Advanced main air-circulating fans.

The nonbusiness energy property taxcredit was extended to cover the 2009and 2010 tax years, meaning that the costof the system has to be incurred duringthese tax years and the system has to befully implemented and in service before theend of the 2010 tax year. While the cred-it is good for 30% of the sum of all pro-jects incurred during these years, there isa limitation as well. The aggregate amountof the credits allowed under this section forthe two years is not to exceed $1,500. Thiscredit is currently set to expire at the endof the 2010 tax year.

Tax preparers can refer to IRS Notice2009-53 for additional guidance on thiscredit and to IRS Form 5695 for filinginstructions. Due to the varying specifica-tions and eligibility requirements for thedifferent systems mentioned above, itmay be helpful to discuss a specific situa-tion with the equipment provider and visitthe Energy Star website (www.energystar.gov/taxcredits) to verify that the equipmentmeets the required criteria for this credit.

Residential energy-efficient property taxcredit, IRC section 25D. The residentialenergy-efficient property tax credit providesa credit to individuals for investments inrenewable energy systems designed toincrease the energy efficiency of adwelling. The credit is worth 30% of theinstalled cost, which includes the associ-

ated labor and installation costs. The sys-tems that may be eligible for this creditinclude solar water-heating systems, solarelectricity systems, fuel cells, small windgenerators, and geothermal heat pumps.Credits associated with these systems inexcess of the tax liability for the yearinstalled may be carried forward to suc-ceeding tax years.

This credit has existed since 2005 in var-ious forms, and it was most recentlymodified by the American Recovery andReinvestment Act of 2009, which removedlimitations that were once in place for thiscredit. Systems that are installed afterJanuary 1, 2009, are no longer subject toa maximum credit allowance. The oneexception applies to fuel cells: The creditvalue for fuel cell systems is the lesser of30% of the fuel cell system cost, or $500for each 500 watts of fuel cell capacity.

This credit currently applies to quali-fied systems installed through the end oftax year 2016. IRS Form 5695 is used forresidential energy credits and includes fil-ing instructions and information about thecredit. Additionally, IRS Notice 2009-41contains detailed information regarding thiscredit. Because of the varying specifica-tions regarding renewable energy tech-nologies, the Energy Star website is a help-ful resource for the latest information oneligibility requirements and equipmentspecifications.

Limitations and the Alternative Minimum Tax

Like most tax credits, the green tax cred-its discussed above are nonrefundable.Therefore, the amount of the credit that canbe realized is limited to the taxpayer’s taxliability. With regard to the tax credits

discussed above and the alternative mini-mum tax (AMT), IRC section 26(a)(1) lim-its nonrefundable credits to the excess ofthe regular tax liability for the tax year overthe tentative minimum tax for the taxyear (determined without regard to theAMT foreign tax credit). Congress hasprovided an AMT patch for taxable years2000 through 2009, however, and it seemslikely that patches will be provided forfuture tax years as well. For taxable yearsbeginning in 2000–2009, the tax credits areallowed to the extent they do not exceedthe regular tax liability (reduced by the for-eign tax credit) and the tentative minimumtax (IRC section 55[a]).

The Benefits of GreenThe tax incentives mentioned above pro-

vide a tremendous benefit to investing inenergy-saving technologies. Due to the largecapital investment required to install someof these systems, the tax incentives couldprove to be the deciding factor when deter-mining whether to pursue projects of thistype. By lowering the investment cost ofthese systems, the payback period of thesesystems is also reduced—an added bonus.As the popularity of green technologiesadvances, increased demand should putdownward pressure on the current price pre-miums being charged for these systems.While certain large corporations have posi-tioned themselves as industry leaders throughtheir implementation of energy-saving poli-cies, the resulting lower cost of renewableenergy and energy-efficient technologies haseffectively begun to make investments inthese technologies a reasonable alternativefor smaller businesses and individualsalike. As legislation continues to expandtax incentives and regulations becomemore stringent with regard to energy poli-cy, the future availability of tax credits anddeductions for green technologies looksbright. ❑

Matt Bourgeois is a graduate student,Kevin Breaux, PhD, is an assistant pro-fessor of accounting, Michael Chiasson,DBA, is the Betsy Ayo Endowed Professorand head of the department of accountingand information systems, and ShawnMauldin, PhD, is the dean of the collegeof business administration and a professorof accounting, all at Nicholls StateUniversity, Thibodaux, La.

Due to the large capital investment required to install some

of these systems, the tax incentives could prove to be the deciding

factor when determining whether to pursue projects of this type.