Energy Incentive Programs: Good for the Earth and the Bottom Line (Part 2 of 2)
This article originally appeared in the March 2017 TaxStringer and is reprinted with permission from the New York State Society of Certified Public Accountants.
In Part One of this blog, we focused on the powerful 179D deduction. If you missed it, or would like to refresh your memory, please click here. This week we’ll discuss several other powerful federal incentives available to the thoughtful taxpayer.
The 45L tax credit is like 179D’s little brother. It’s not quite as powerful, and it’s a bit different, but it’s still a good guy to have around. The 45L tax credit offers a one-time $2,000 credit per residential unit to eligible developers of energy-efficient residential dwellings. The credit is available for properties constructed prior to Dec. 31, 2016 and may apply to townhomes, condos, single-family homes, and apartment buildings no more than three stories above grade. In order for the tax credit to be claimed, a third-party expert must test each dwelling unit to verify a 50% reduction in energy consumption in relation to the benchmark set by the 2004 International Energy Conservation Code (a different metric than 179D’s ASHRAE). Just because one residential unit meets the criteria and earns the credit does not mean that all units in a property will do the same—a sampling of units is not sufficient to draw a conclusion and earn the 45L credit. Credits can be earned on newly constructed or rehabilitated property, but they may be difficult to claim retroactively due to logistical challenges in quantifying costs of materials.
Solar power—perhaps the ultimate renewable energy source—has also been incentivized by a federal program since 2005. (Many states have complementary programs as well.) This one-time tax credit applies to photovoltaics and solar heating systems. The incentive offers a 30% credit on project costs in the year the system was placed in service. There is no “look-back” option and no benefit in future—the incentive must be taken in the year the system was placed in service. Taxpayers must have a tax liability to take the credit, which is claimed via Form 3468. The size of the credit will begin to decrease in 2020, and it is expected to expire on Dec. 31, 2021. For the moment, however, this incentive may confer a sizable benefit, especially since solar systems are classified as short-lived MACRS five-year life and may be eligible for significant bonus depreciation under the PATH Act.
Energy Star, another federal tax credit program, applies mainly to residential properties and offers credits that may range from 10-30% of project cost. Some caps do apply, but the program offers incentives on a tremendous range of building assets: insulation, lighting, appliances, windows, doors, solar systems, and much more. Visit www.energystar.gov for a better look at this incentive and the broad scope of assets to which it applies.
The programs discussed until now are federally administered. Many states, however, have their own programs, and several cities have instituted energy-benchmarking programs. Property owners must annually release utility consumption data to the public, for better or for worse. This transparency regarding energy consumption encourages energy efficiency, if only for the sake of good publicity. There is no official incentive attached to this benchmarking, but buildings that prove themselves energy-efficient generally have higher rents, resale values, and occupancy rates.
Energy incentive programs can be a very significant part of an overall tax strategy. Being mindful of the triple bottom line—people, planet, profit—is more important than ever. Please feel free to contact us – we look forward to helping you explore these powerful initiatives.