The Business Energy Investment Tax Credit
The latest installment of the Business Energy Investment Tax Credit (ITC) was adopted by the American Recovery and Reinvestment Act of 2009. The ITC has close relation to the Renewable Energy Production Tax Credit (PTC) in respect to businesses that will qualify for the credit. One major distinction, however, is that solar energy projects were extended under the ITC, whereas they were not extended under the PTC. Aside from this difference, businesses that are eligible for the PTC may instead elect to claim the ITC in lieu of the PTC.
As a reminder, technologies eligible for the ITC are Solar Water Heat, Solar Space Heat, Solar Thermal Electric, Solar Thermal Process Heat, Photovoltaics, Wind, Biomass, Geothermal Electric, Fuel Cells, Geothermal Heat Pumps, CHP/Cogeneration, Solar Hybrid Lighting, Microturbines, and Geothermal Direct-Use. Such technologies would be applicable to the following sectors: Commercial, Industrial, Utility, and Agricultural.
In general, credits are available for eligible systems placed in service on or before December 31, 2016. However, the credit for geothermal property, with the exception of geothermal heat pumps, has no stated expiration date. The credit for solar energy property reverts to 10% after December 31, 2016.
The amount of the credit depends mainly upon the technology that is installed. For instance, in respect to Solar, the credit is equivalent to 30% of expenditures, with no maximum credit limit stated. Eligible solar energy property includes equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water for use in) a structure, or to provide solar process heat. Passive solar systems and solar pool-heating systems are not eligible. However, hybrid solar lighting systems that use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight would qualify.
The credit for Fuel Cells is also equal to 30% of expenditures, with no maximum credit limit. This credit is capped at $1,500 per 0.5 kilowatt (kW) of capacity. Eligible property includes fuel cells with a minimum capacity of 0.5kW that has an electricity-only generation efficiency of 30% or higher. Note that the credit for property placed in service before October 4, 2008, is capped at $500 per 0.5kW.
The credit is also equal to 30% of expenditures, with no maximum credit limit for Small Wind Turbines placed in service after December 31, 2008. Eligible small wind property includes wind turbines up to 100kW in capacity. In general, the maximum credit is $4,000 for eligible property placed in service after October 3, 2008, and before January 1, 2009. The American Recovery and Reinvestment Act of 2009 removed the $4,000 maximum credit for small wind turbines placed in service subsequent to January 1, 2009.
As far as Geothermal Systems are concerned, the credit is equal to 10% of expenditures, with no maximum credit limit stated. Eligible geothermal energy property includes geothermal heat pumps and equipment used to produce, distribute or use energy derived from a geothermal deposit. For electricity produced by geothermal power, equipment qualifies only up to, but not including, the electric transmission stage. For geothermal heat pumps, this credit applies to eligible property placed in service after October 3, 2008.
The credit also extends to Microturbines, by which, the credit is equal to 10% of expenditures, with no maximum credit limit stated. This credit application is capped at $200 per kW of capacity. Eligible property includes microturbines up to two megawatts (MW) in capacity that have an electricity-only generation efficiency of 26% or higher.
Regarding Combined Heat and Power (CHP), the credit is equal to 10% of expenditures, with no maximum limit stated. Eligible CHP property generally includes systems up to 50MW in capacity that exceed 60% energy efficiency, subject to certain limitations and reductions for large systems. The efficiency requirement does not apply to CHP systems that use biomass for at least 90% of the system’s energy source, but the credit may be reduced for less-efficient systems. This credit applies to eligible property placed in service after October 3, 2008.
In general, the original use of the equipment must begin with the taxpayer, or the system must be constructed by the taxpayer. The equipment must also meet any performance and quality standards in effect at the time the equipment is acquired. The energy property must also be operational in the year in which the credit is first taken.
It is also important to note that The American Recovery and Reinvestment Act of 2009 repealed a previous limitation on the use of the credit for eligible projects which are also supported by “subsidized energy financing.” For projects placed in service after December 31, 2008, this limitation no longer applies.
Also keep in mind that taxpayers which are eligible for the ITC may instead elect to receive a Renewable Energy Grant from the U.S. Treasury Department, thus forfeiting the ITC.
Authored by Jason Deirmenjian, CPA
November 14th, 2010