Clean energy has been—and continues to be—a hot topic.
With all the debate surrounding climate change and its effect on severe weather (recent hurricanes Harvey, Irma and Maria, for example), and an increasing concern about clean air and water, there is a general consensus that we need to reduce our consumption of fossil fuels. Clean energy—solar, wind, hydroelectric, geothermal and bioenergy—is key to accomplishing this.
With a concerted effort to increase clean energy options in this country, businesses and individuals alike need to be aware of forthcoming changes and how best to manage those changes, specifically as it pertains to tax opportunities. Whether a CPA practicing in public or industry, you should be aware of how this affects you and your respective interests.
The Energy Landscape
Minnesota has long been at the forefront of clean energy. A recent survey from Clean Jobs Midwest reports that there are more than 57,000 clean energy jobs in this state alone, and clean energy jobs are growing 3.8 times faster than in other sectors. Minnesota has a "25 by 25" renewable energy standard, where it seeks to get 25 percent of its energy from renewable sources by the year 2025 (large, investor-owned utilities, such as Xcel Energy, have an even higher standard to meet). Right now, we exceed 22 percent, and legislation has been proposed to increase the standard to 50 percent by 2030.
Both Minnesota and the federal government have used their power of taxation to promote clean energy. Through tax credits, exemptions and deductions, government has supported the adoption of clean-energy technologies.
Minnesota has sales tax exemptions for purchases of solar and wind energy equipment. Minnesota also exempts the value of wind and solar property from its property taxes, imposing instead an electricity production tax, from which certain small systems are exempt.
Minnesota also has a "Made in Minnesota" solar energy incentive that offers a 10-year payment stream (the opposite of a tax!) for participants (individuals and businesses, chosen by lottery) who install solar equipment that is certified as Minnesota-made.
On the federal side, one of the more popular clean energy incentives is the plug-in electric vehicle credit found in Code Sec. 30D. This is an income tax credit of up to $7,500, which can help offset the cost of a plug-in electric vehicle. The Environmental Protection Agency estimates that 27 percent of greenhouse gas emissions come from transportation. The popularity of plug-in cars, such as the Tesla, the Chevy Volt and the Nissan Leaf, is driven in part by the public’s concern over automobile emissions and the desire to do something to reduce them. The Sec. 30D tax credit supports this effort by taking dollars off a buyer’s tax bill.
The status of federal clean energy incentives is in flux, as recent federal legislation has rolled back some of the incentives and set phase-out schedules for others. Renewing or extending these provisions is frequently the subject of debate in Washington.
Here are three of the most significant federal tax credits promoting clean energy and their current status:
Electricity Produced from Certain Renewable Resources — I.R.C. § 45
Known as the Renewable Energy Production Tax Credit (PTC), this credit currently equals 2.4 cents per kilowatt hour (for 2017) produced at a qualifying facility and sold to an unrelated party from resources including wind, closed-loop biomass, geothermal energy and solar energy. For municipal solid waste, qualified hydropower, marine and hydrokinetic energy, small irrigation power, and open-loop biomass facilities, the credit is 1.2 cents per kilowatt hour. The credit is reduced for facilities receiving government grants, tax-free or otherwise subsidized financing, or claiming other tax credits.
The credit is available for a 10-year period, beginning on the date the facility is placed in service. The PATH Act of 2015 extended the PTC to facilities other than wind for which construction began before Jan. 1, 2017. For wind facilities, the Consolidated Appropriations Act of 2016 extended the availability of the PTC through 2019, but it begins to phase out for facilities that started construction after 2016. For wind facilities that begin construction in 2017, the PTC is reduced 20 percent; if construction begins in 2018, the credit is reduced 40 percent; and if construction begins in 2019, the PTC is reduced 60 percent.
Energy Credit — I.R.C. § 48
Sometimes referred to as the Renewable Energy Investment Tax Credit (ITC), this business credit equals 30 percent of the cost of qualifying small wind, solar and fuel cell property placed in service, and 10 percent of the cost of other energy property, such as geothermal heat pumps, stationary microturbines, and combined heat and power systems. The depreciable tax basis of the qualifying property is reduced by 50 percent of the amount of the credit.
Facilities eligible for the PTC could elect the 30 percent ITC in lieu of claiming the PTC under I.R.C. §45. This credit applies for electing facilities other than wind, and for qualifying small wind energy, fuel cell, geothermal heat pump, combined heat and power systems, and microturbine property where construction started before Jan. 1, 2017. For qualifying wind facilities, the ITC (and the election to claim it in lieu of the PTC) is available through 2019, though the credit phases down by 20 percent in 2017, 40 percent in 2018 and 60 percent in 2019. For qualifying solar property, the credit remains 30 percent through 2019, then drops to 26 percent for projects that begin construction in 2020 and 22 percent for projects beginning in 2021. The ITC for solar property is scheduled to drop to 10 percent for projects that begin construction after 2021 (and for projects that begin before 2022, but are not placed in service before 2024).
Residential Energy Efficient Property — I.R.C. § 25D
Known also as the Residential Alternative Energy Credit, this credit equals 30 percent of the cost of qualifying small wind, solar water heating, solar electric, geothermal heat pump and fuel cell property placed in service in a U.S. dwelling used as a residence by the taxpayer. The credit applies to qualifying non-solar property placed in service before Jan. 1, 2017. The residence does not need to be the taxpayer’s primary residence. Expenditures that are allocable to swimming pools and hot tubs are not eligible for the credit. The PATH Act extended this credit for qualifying solar property placed in service before 2022, but it phases out over the last two years. The credit remains 30 percent through 2019. For qualifying solar property placed in service in 2020, the credit is 26 percent and, for 2021, the credit is 22 percent.
With all the current discussion about tax reform in Washington, D.C., it is hard to predict what the winds of change will bring to the federal clean energy tax incentives that we currently have. But clean energy is here to stay, and it will only become a bigger part of our energy picture as technology advances. CPAs should be aware of opportunities to shine a light on clean energy tax benefits for their businesses or clients. It’s a situation where doing good for the environment can also do good for your pocketbook.
Contact us at learnmore@BoulayGroup.com or 952.893.9320 if you have any questions.
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