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Federal – Commercial

Energy-Efficient Commercial Buildings Tax Deduction


State: Federal
Incentive Type: Corporate Deduction
Eligible Efficiency Technologies: Equipment Insulation, Water Heaters, Lighting, Lighting Controls/Sensors, Chillers , Furnaces , Boilers, Heat pumps, Air conditioners, Caulking/Weather-stripping, Duct/Air sealing, Building Insulation, Windows, Doors, Siding, Roofs, Comprehensive Measures/Whole Building
Applicable Sectors: Commercial, Construction, State Government, Fed. Government, (Deductions associated with government buildings are transferred to the designer)
Amount: $0.30-$1.80 per square foot, depending on technology and amount of energy reduction
Maximum Incentive: $1.80 per square foot
Equipment Requirements: Not specified, but building must be certified as meeting specific energy reduction targets as a result of improvements in interior lighting; building envelope; or heating, cooling, ventilation, or hot water systems.
Web Site: http://www.efficientbuildings.org
Authority 1:
Expiration Date
12/31/2013

Summary:

The federal Energy Policy Act of 2005 established a tax deduction for energy-efficient commercial buildings applicable to qualifying systems and buildings placed in service from January 1, 2006, through December 31, 2007. This deduction was subsequently extended through 2008, and then again through 2013 by Section 303 of the federal Energy Improvement and Extension Act of 2008 (H.R. 1424, Division B), enacted in October 2008.

A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install (1) interior lighting; (2) building envelope, or (3) heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2001. Energy savings must be calculated using qualified computer software approved by the IRS. Click here for the list of approved software.

Deductions of $0.60 per square foot are available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems meet target levels that would reasonably contribute to an overall building savings of 50% if additional systems were installed.

The deductions are available primarily to building owners, although tenants may be eligible if they make construction expenditures. In the case of energy efficient systems installed on or in government property, tax deductions will be given to the person primarily responsible for the systems’ design. Deductions are taken in the year when construction is completed.

The IRS released interim guidance (IRS Notice 2006-52) in June 2006 to establish a process to allow taxpayers to obtain a certification that the property satisfies the energy efficiency requirements contained in the statute. IRS Notice 2008-40 was issued in March of 2008 to further clarify the rules. NREL published a report (NREL/TP-550-40228) in February 2007 which provides guidelines for the modeling and inspection of energy savings required by the statute, and the US Department of Energy has compiled a list of qualified computer software for calculating commercial building energy and power cost savings.

Click here for answers to frequently asked questions provided by the Commercial Building Tax Deduction Coalition.

For more information, visit the Energy Star web site.


Contact:

Public Information – IRS
U.S. Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Phone: (800) 829-1040
Web Site: http://www.irs.gov

Modified Accelerated Cost-Recovery System (MACRS) + Bonus Depreciation (2008-2009)


State: Federal
Incentive Type: Corporate Depreciation
Eligible Renewable/Other Technologies: Solar Water Heat, Solar Space Heat, Solar Thermal Electric, Solar Thermal Process Heat, Photovoltaics, Landfill Gas, Wind, Biomass, Geothermal Electric, Fuel Cells, Geothermal Heat Pumps, Municipal Solid Waste, CHP/Cogeneration, Solar Hybrid Lighting, Anaerobic Digestion, Microturbines
Applicable Sectors: Commercial, Industrial
Authority 1:
Date Effective:
1986
Authority 2:
Summary:
Note: While the general Modified Accelerated Cost Recovery System (MACRS) remains in effect, the provision authorizing additional first-year bonus depreciation of 50% of eligible costs expired December 31, 2009. Although it is possible that bonus depreciation could be renewed for projects placed in service in 2010, as of this writing no such renewal had been enacted.

Under the federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover investments in certain property through depreciation deductions. The MACRS establishes a set of class lives for various types of property, ranging from three to 50 years, over which the property may be depreciated. A number of renewable energy technologies are classified as five-year property (26 USC § 168(e)(3)(B)(vi)) under the MACRS, which refers to 26 USC § 48(a)(3)(A), often known as the energy investment tax credit or ITC to define eligible property. Such property currently includes:

  • a variety of solar electric and solar thermal technologies
  • fuel cells and microturbines
  • geothermal electric
  • direct-use geothermal and geothermal heat pumps
  • small wind (100 kW or less)
  • combined heat and power (CHP).
  • The provision which defines ITC technologies as eligible also adds the general term “wind” as an eligible technology, extending the five-year schedule to large wind facilities as well.

In addition, for certain other biomass property, the MACRS property class life is seven years. Eligible biomass property generally includes assets used in the conversion of biomass to heat or to a solid, liquid or gaseous fuel, and to equipment and structures used to receive, handle, collect and process biomass in a waterwall, combustion system, or refuse-derived fuel system to create hot water, gas, steam and electricity.

The 5-year schedule for most types of solar, geothermal, and wind property has been in place since 1986. The federal Energy Policy Act of 2005 (EPAct 2005) classified fuel cells, microturbines and solar hybrid lighting technologies as five-year property as well by adding them to § 48(a)(3)(A). This section was further expanded in October 2008 by the addition of geothermal heat pumps, combined heat and power, and small wind under The Energy Improvement and Extension Act of 2008.

The federal Economic Stimulus Act of 2008, enacted in February 2008, included a 50% first-year bonus depreciation (26 USC § 168(k)) provision for eligible renewable-energy systems acquired and placed in service in 2008. This provision was extended (retroactively to the entire 2009 tax year) under the same terms by The American Recovery and Reinvestment Act of 2009, enacted in February 2009. To qualify for bonus depreciation, a project must satisfy these criteria:

  • the property must have a recovery period of 20 years or less under normal federal tax depreciation rules;
  • the original use of the property must commence with the taxpayer claiming the deduction;
  • the property generally must have been acquired during 2008 or 2009; and
  • the property must have been placed in service during 2008 or 2009

If property meets these requirements, the owner is entitled to deduct 50% of the adjusted basis of the property in 2008 and 2009. The remaining 50% of the adjusted basis of the property is depreciated over the ordinary depreciation schedule. The bonus depreciation rules do not override the depreciation limit applicable to projects qualifying for the federal business energy tax credit. Before calculating depreciation for such a project, including any bonus depreciation, the adjusted basis of the project must be reduced by one-half of the amount of the energy credit for which the project qualifies.

For more information on the federal MACRS, see IRS Publication 946, IRS Form 4562: Depreciation and Amortization, and Instructions for Form 4562. The IRS web site provides a search mechanism for forms and publications. Enter the relevant form, publication name or number, and click “GO” to receive the requested form or publication.

* Note that the definitions of eligible technologies included in this entry are somewhat simplified versions of those contained in tax code, which often contain additional caveats, restrictions, and modifications. Those interested in this incentive should review the relevant sections of the code in detail prior to making business decisions.


Contact:

Public Information – IRS
U.S. Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Phone: (800) 829-1040
Web Site: http://www.irs.gov

Residential Energy Conservation Subsidy Exclusion (Corporate)


State: Federal
Incentive Type: Corporate Exemption
Eligible Efficiency Technologies: Yes; specific technologies not identified
Eligible Renewable/Other Technologies: Solar Water Heat, Solar Space Heat, Photovoltaics
Applicable Sectors: Residential, Multi-Family Residential
Amount: 100% of the subsidy
Web Site: http://www.irs.gov/publications/p525/index.html
Authority 1:
Date Enacted:
1992
Summary:
According to Section 136 of the U.S. Code, energy conservation subsidies provided by public utilities,* either directly or indirectly, are nontaxable: “Gross income shall not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.” (This exclusion does not apply to electricity-generating systems registered as “qualifying facilities” under the Public Utility Regulatory Policy Act of 1978.)

The term “energy conservation measure” includes installations or modifications primarily designed to reduce consumption of electricity or natural gas, or improve the management of energy demand. Eligible dwelling units include houses, apartments, condominiums, mobile homes, boats and similar properties. If a building or structure contains both dwelling and other units, any subsidy must be properly allocated.

Given the definition of “energy conservation measure,” there is strong evidence that utility rebates for residential solar-thermal projects and solar-electric systems may be nontaxable. However, the IRS has not ruled definitively on this issue. For taxpayers considering using this provision for renewable energy systems, consultation with a tax professional is advised.

Other types of utility subsidies that may come in the form of credits or reduced rates may also be nontaxable, according to IRS Publication 525:

“Utility rebates. If you are a customer of an electric utility company and you participate in the utility’s energy conservation program, you may receive on your monthly electric bill either: a reduction in the purchase price of electricity furnished to you (rate reduction), or a nonrefundable credit against the purchase price of the electricity. The amount of the rate reduction or nonrefundable credit is not included in your income.”

* The term “public utility” is defined as an entity “engaged in the sale of electricity or natural gas to residential, commercial, or industrial customers for use by such customers.” The term includes federal, state and local government entities.


Contact:

Public Information – IRS
U.S. Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Phone: (800) 829-1040
Web Site: http://www.irs.gov

Business Energy Investment Tax Credit (ITC)


Summary:

Note: The American Recovery and Reinvestment Act of 2009 (H.R. 1) allows taxpayers eligible for the federal renewable electricity production tax credit (PTC)** to take the federal business energy investment tax credit (ITC) or to receive a grant from the U.S. Treasury Department instead of taking the PTC for new installations. The new law also allows taxpayers eligible for the business ITC to receive a grant from the U.S. Treasury Department instead of taking the business ITC for new installations. The Treasury Department issued Notice 2009-52 in June 2009, giving limited guidance on how to take the federal business energy investment tax credit instead of the federal renewable electricity production tax credit. The Treasury Department will issue more extensive guidance at a later time.

The federal business energy investment tax credit available under 26 USC § 48 was expanded significantly by the Energy Improvement and Extension Act of 2008 (H.R. 1424), enacted in October 2008. This law extended the duration — by eight years — of the existing credits for solar energy, fuel cells and microturbines; increased the credit amount for fuel cells; established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems; extended eligibility for the credits to utilities; and allowed taxpayers to take the credit against the alternative minimum tax (AMT), subject to certain limitations. The credit was further expanded by The American Recovery and Reinvestment Act of 2009, enacted in February 2009.

In general, credits are available for eligible systems placed in service on or before December 31, 2016:*

  • Solar. The credit is equal to 30% of expenditures, with no maximum credit. 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. Hybrid solar lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are eligible. Passive solar systems and solar pool-heating systems are not eligible. (Note that the Solar Energy Industries Association has published a three-page document that provides answers to frequently asked questions regarding the federal tax credits for solar energy.)
  • Fuel Cells. The credit is equal to 30% of expenditures, with no maximum credit. However, the credit for fuel cells is capped at $1,500 per 0.5 kilowatt (kW) of capacity. Eligible property includes fuel cells with a minimum capacity of 0.5 kW that have 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 0.5 kW.)
  • Small Wind Turbines.** The credit is equal to 30% of expenditures, with no maximum credit for small wind turbines placed in service after December 31, 2008. Eligible small wind property includes wind turbines up to 100 kW 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 limit for small wind turbines.)
  • Geothermal Systems.** 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.
  • Microturbines. The credit is equal to 10% of expenditures, with no maximum credit limit stated (explicitly). The credit for microturbines 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.
  • 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 50 MW 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 be operational in the year in which the credit is first taken.

Significantly, The American Recovery and Reinvestment Act of 2009 repealed a previous limitation on the use of the credit for eligible projects also supported by “subsidized energy financing.” For projects placed in service after December 31, 2008, this limitation no longer applies. Businesses that receive other incentives are advised to consult with a tax professional regarding how to calculate this federal tax credit.

History
The federal Energy Policy Act of 2005 (EPAct 2005) expanded the existing federal business energy tax credit for solar and geothermal energy property to include fuel cells, microturbines and hybrid solar lighting systems installed on or after January 1, 2006, and raised the credit for solar to 30%. Prior to the provisions of EPAct 2005, a 10% credit was available to businesses that invested in or purchased solar or geothermal energy property.

* Note that 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 February 2009 legislation (H.R. 1) which allows facilities that qualify for the PTC to also qualify for the 30% ITC has implications for some technologies that were already potentially eligible for either incentive in some form. Certain geothermal and open- or closed- loop biomass systems (including biomass CHP projects) now qualify for a 30% tax credit through through December 31, 2013, the in-service deadline for these technologies under the PTC. Wind energy systems of all sizes — not only systems of 100 kW or less — also now qualify for the 30% ITC through the wind energy PTC in-service deadline of December 31, 2012. Applicants should refer to the eligibility definitions of PTC to see if and how their project might qualify for this treatment.


Contact:

Public Information – IRS
U.S. Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Phone: (800) 829-1040
Web Site: http://www.irs.gov

U.S. Department of Treasury – Renewable Energy Grants


State: Federal
Incentive Type: Federal Grant Program
Eligible Renewable/Other Technologies: Solar Water Heat, Solar Space Heat, Solar Thermal Electric, Solar Thermal Process Heat, Photovoltaics, Landfill Gas, Wind, Biomass, Hydroelectric, Geothermal Electric, Fuel Cells, Geothermal Heat Pumps, Municipal Solid Waste, CHP/Cogeneration, Solar Hybrid Lighting, Hydrokinetic, Anaerobic Digestion, Tidal Energy, Wave Energy, Ocean Thermal, Microturbines
Applicable Sectors: Commercial, Industrial, Agricultural
Amount: 30% of property that is part of a qualified facility, qualified fuel cell property, solar property, or qualified small wind property
10% of all other property
Maximum Incentive: $1,500 per 0.5 kW for qualified fuel cell property
$200 per kW for qualified microturbine property
50 MW for CHP property, with limitations for large systems
Web Site: http://www.treas.gov/recovery/1603.shtml
Date Enacted:
2/17/2009
Date Effective:
1/1/2009
Date Enacted:
07/09/2009
Summary:

Note: The American Recovery and Reinvestment Act of 2009 (H.R. 1) allows taxpayers eligible for the federal business energy investment tax credit (ITC) to take this credit or to receive a grant from the U.S. Treasury Department instead of taking the business ITC for new installations. The new law also allows taxpayers eligible for the renewable electricity production tax credit (PTC) to receive a grant from the U.S. Treasury Department instead of taking the PTC for new installations. (It does not allow taxpayers eligible for the residential renewable energy tax credit to receive a grant instead of taking this credit.) Taxpayers may not use more than one of these incentives. Tax credits allowed under the ITC with respect to progress expenditures on eligible energy property will be recaptured if the project receives a grant. The grant is not included in the gross income of the taxpayer.

The American Recovery and Reinvestment Act of 2009 (H.R. 1), enacted in February 2009, created a renewable energy grant program that will be administered by the U.S. Department of Treasury. This cash grant may be taken in lieu of the federal business energy investment tax credit (ITC). In July 2009 the Department of Treasury issued documents detailing guidelines for the grants, terms and conditions and a sample application. There is an online application process, and applications are currently being accepted. See the program web site for more information, including answers to frequently asked questions.

Grants are available to eligible property* placed in service in 2009 or 2010, or placed in service by the specified credit termination date,** if construction began in 2009 or 2010. The guidelines include a “safe harbor” provision that sets the beginning of construction at the point where the applicant has incurred or paid at least 5% of the total cost of the property, excluding land and certain preliminary planning activities. Below is a list of important program details as they apply to each different eligible technology.

  • Solar. The grant is equal to 30% of the basis of the property for solar energy. 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. Hybrid solar-lighting systems, which use solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, are eligible.
  • Fuel Cells. The grant is equal to 30% of the basis of the property for fuel cells. The grant for fuel cells is capped at $1,500 per 0.5 kilowatt (kW) in capacity. Eligible property includes fuel cells with a minimum capacity of 0.5 kW that have an electricity-only generation efficiency of 30% or higher.
  • Small Wind Turbines. The grant is equal to 30% of the basis of the property for small wind turbines. Eligible small wind property includes wind turbines up to 100 kW in capacity.
  • Qualified Facilities. The grant is equal to 30% of the basis of the property for qualified facilities that produce electricity. Qualified facilities include wind energy facilities, closed-loop biomass facilities, open-loop biomass facilities, geothermal energy facilities, landfill gas facilities, trash facilities, qualified hydropower facilities, and marine and hydrokinetic renewable energy facilities.
  • Geothermal Heat Pumps. The grant is equal to 10% of the basis of the property for geothermal heat pumps.
  • Microturbines. The grant is equal to 10% of the basis of the property for microturbines. The grant for microturbines 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.
  • Combined Heat and Power (CHP). The grant is equal to 10% of the basis of the property for CHP. Eligible CHP property generally includes systems up to 50 MW 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 grant may be reduced for less-efficient systems.

It is important to note that only tax-paying entities are eligible for this grant. Federal, state and local government bodies, non-profits, qualified energy tax credit bond lenders, and cooperative electric companies are not eligible to receive this grant. Partnerships or pass-thru entities for the organizations described above are also not eligible to receive this grant, except in cases where the ineligible party only owns an indirect interest in the applicant through a taxable C corporation. Grant applications must be submitted by October 1, 2011. The U.S. Treasury Department will make payment of the grant within 60 days of the grant application date or the date the property is placed in service, whichever is later.

* Definitions of eligible property types and renewable technologies can be found in the U.S. Code, Title 26, § 45 and § 48.

** Credit termination date of January 1, 2013, for wind; January 1, 2014, for closed-loop biomass, open-loop biomass, landfill gas, trash, qualified hydropower, marine and hydrokinetic; January 1, 2017, for fuel cells, small wind, solar, geothermal, microturbines, CHP and geothermal heat pumps.


Contact:

Grant Information
U.S. Department of Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Phone: (202) 622-2000
Fax: (202) 622-6415
E-Mail: 1603Questions@do.treas.gov
Web Site: http://www.treasury.gov