The last post on federal incentives for renewable energy (RE) and energy efficiency (EE) projects covered factors that are typically involved to award production and investment tax credits (PTCs and ITCs) to taxable business entities. In this post, we will discuss grants that are awarded in lieu of tax credits, EE Building Deductions, and Accelerated Depreciation of Onsite RE Equipment.

1603 Grant

For nearly all technologies and project types that qualify under either the PTC or the ITC, section 1603 of the American Recovery and Reinvestment Act of 2009 (ARRA) reimburses applicants for a portion (either 10% or 30%) of the cost of eligible property under the Code. If awarded the 1603 Grant, recipients may not claim the PTC or the ITC on the same property.

Applicants must apply for the 1603 Grant before October 1, 2011. In addition, to qualify for this, the energy property must be placed in service by the end of 2010, or the project must begin construction by December 31, 2010. The U.S. Treasury is committed to issuing funds within 60 days of whichever occurs later—the submission date of a complete application or the date the system is placed in service.

Under federal tax law, if a developer of renewable energy (RE) equipment leases the equipment to a governmental entity or a tax-exempt organization (considered “ineligible entities”), the developer may not claim the ITC because the property is considered “tax-exempt use property.” However, under the 1603 Grant program, if an energy property owner is otherwise eligible, leasing the property to an ineligible entity will not impact the owner’s eligibility for the ITC as long as the lease is a “true lease” under IRS guidelines (the IRS has issued a list of factors to consider in that evaluation).

Energy Efficiency Commercial Building Deduction

A commercial income tax deduction is available for new or renovated buildings when improvements in lighting systems, in the building envelope, and in heating, cooling, and water heating equipment reduce energy costs by at least 50%.

A unique feature of this deduction is that it may be passed along to a system “designer” who is designated by the building owner if the building is publicly owned. This enables public entities to partner with private taxpayer “designers” to lower the net costs of implementing EE investments.

To qualify, the completed project must meet ASHRAE 90.1-2001 standards and must be placed in service by December 31, 2013. The project must also be certified as meeting the energy cost savings goal, using approved modeling software. 

Accelerated Depreciation for Onsite Generation Equipment

Under the Federal Modified Accelerated Cost-Recovery System (MACRS), businesses may recover certain energy investments to property through accelerated depreciation deductions.

MACRS establishes “class lives” for various types of property, and a number of RE systems are classed as 5-year properties. These include solar-electric and solar thermal property, wind property, geothermal property, combined heat and power equipment, fuel cells, and micro-turbines. However, if the property is leased to an ineligible entity,  it may be subject to a longer depreciation schedule.

For more specific questions on federal tax issues related to EE and RE projects, please provide a comment to this post or contact a technical expert for assistance.

Content for this Blog post courtesy of Ballard Spahr