“Green” Federal and State Tax Incentives
August 22, 2012
Christopher Bradburn, CPA
William Graff, JD, LL.M
Tim Conrad, JD
© 2012 KSM Business Services, Inc.
Christopher Bradburn, CPA
Director
Katz, Sapper & Miller
317.580.2140
[email protected]
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Timothy Conrad, JD
State and Local Tax
Katz, Sapper & Miller
317.452.1388
[email protected]
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William Graff, JD, LL.M
Tax Department
Katz, Sapper & Miller
317.580.2067
[email protected]
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Federal Tax Credits
William Graff, JD, LL.M
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Renewable Electricity Production Credit
(PTC)
▪ Under §45, taxpayers are allowed a credit for producing
and selling renewable electricity, refined coal, and Indian
coal
▫ It must be produced by the taxpayer from qualified energy
resources
▫ It must be produced by the taxpayer at a qualified facility
during the credit period
- Placed in service after Oct 22, 2004 but before Dec 31, 2013 +
nameplate capacity rating at least 150 kWh
▫ It must be sold in a qualified sale
- Generally an unrelated person
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Renewable Electricity (cont’d)
▪ 2.2¢ per kWh of electricity adjusted for inflation.
▪ Taxpayer may claim a credit during the 10 year period
commencing with the date it was placed into service.
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Renewable Electricity (cont’d)
▫ Wind facility (2009-2012) (§ 45(d)(1))
- Expires year end 2012
▫ Closed /open – loop biomass facility (§ 45(d)(2),(3)
- Expires year end 2013
▫ Geothermal energy facility (§ 45(d)(4))
- Expires year end 2013
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Renewable Electricity (cont’d)
▪ Municipal Solid Waste (§ 45(d)(6))
▫ Expires end of year 2013
▫ Facilities credit is reduced by half
▪ Qualified hydropower facility (§ 45(d)(8))
▫ Expires end of year 2013
▫ Facilities credit is reduced by half
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Business – Energy Credit (ITC)
§48
▪ Business energy credit that incentivizes business
equipment using energy sources other than oil or gas
▪ Energy credit for any tax year is the energy percentage of
the basis of each energy property placed in service during
the year.
▪ The energy percentage is 30% in the case of:
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Energy Credit (cont’d)
▪ Solar Energy Property Credit §48(a)(3)(A)(i)
▫ The Credit, worth 30% of the property's basis before 2017,
becomes worth 10% of the property's basis on January 1, 2017
▪ Small Wind Energy §48(a)(3)(A)(vi)
▫ The credit is equal to 30% of the basis of the property.
- Expires end of year 2016
▪ Fuel Cell Property
▫ The amount of the credit cannot exceed $1,500 for each 0.5 kw of
the capacity of the plant, but is otherwise equal to 30% of the
basis in the equipment at the time it is placed in service.
- Expires end of year 2016
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Energy Credit (cont’d)
▪ Some property like, Geothermal property and Microturbine
property only receive 10%
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PTC vs. ITC
▪ 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) instead of the
PTC.
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Non-Business Energy Credit
▪ Section 25C: windows, insulation, hot water heaters:
Expired Dec. 2010
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Residential Energy Efficient Property Credit
§25D
▪ Under §25D, individual taxpayers are allowed a residential
energy efficient property credit for qualified energy efficiency
property expenditures made during the taxable year.
▫ Generally 30% of qualified
-
Solar
Solar water heating
Fuel cell (limited to $500 per ½ kWh)
Small wind energy
Geothermal heat pump property
▫ The credit does not apply with respect to property placed in
service after December 31, 2016.
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Alternative Fuel Vehicle Credits
▪ Fuel Cell Vehicles: (§30B)
▫ Vehicles propelled by chemically combining oxygen with
hydrogen and creating electricity
▫ Fuel cell stack that converts hydrogen gas with oxygen from
the air into electricity to drive the electric motor.
▫ Honda FCX Clarity
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Alternative Fuel Vehicles
§30B
▪ Natural Gas: is a clean burning fossil fuel stored in a
gaseous state as Compressed Natural Gas (CNG) or in a
liquid state as Liquefied Natural Gas (LNG). Natural gas
capable vehicles are available as either dedicated natural
gas or bi-fuel natural gas and gasoline.
▪ LPG (Liquefied Petroleum Gas), often referred to as
propane, LPG is a clean burning fossil fuel that produces
fewer toxic and smog-forming air pollutants than gasoline.
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Why CNG?
▪ Ford F-250 Super Duty pickup
▪ GMC Sierra 2500 HD pickup
▪ Dodge Ram 2500 heavy duty pickup
▫ Has both a gasoline and CNG storage tanks.
▫ Engine switches automatically between the two
▪ Obama administration's 2013 budget would replace the
$7,500 electric vehicle credit with an advanced technology
credit worth up to $10,000.
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Plug-in Electric-Drive Motor Vehicle Credit
§30D
▪ A four-wheel vehicle propelled by a battery with at least 4
kilowatt-hours of electricity that can be charged from an
external source
▪ Base credit of $2,500 plus $417 for each kWh of additional
battery capacity in excess of 4 kWh
▪ Depending on vehicle weight, max allowable credit varies
between $7,500 (>10,000 lbs.) $15,000(<26,000 lbs.)
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Vehicles Certified
▪
▪
▪
▪
▪
▪
CODA sedan
Chevrolet Volt
Tesla Roadster
Nissan Leaf
Smart Fortwo
Think City EV
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Alternative Fuel Vehicle
Refueling Property Credit
▪ Under §30C, taxpayers may claim a credit for placing in
service qualified alternative-fuel vehicle refueling property.
▫ Taxpayer must reduce the basis of any property for which the
credit is allowed
▪ The §30C alternative-fuel vehicle refueling property credit
for a tax year equals 30% of the cost of the qualified
alternative-fuel vehicle refueling property placed in service
by the taxpayer during the tax year.
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Policy in the Future
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State and Local Green Energy Incentives
Tim Conrad, JD
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State and Local Incentives for Green
Energy
▪ State incentives
▫ Targeted incentives
▫ Traditional incentives
▫ Favorable tax policies
▪ Local incentives
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Targeted Incentives
▪ States may create incentives that are only accessible by
green projects
▪ Indiana examples
▫ Hoosier Alternative Fuel Vehicle Manufacturer Tax Credit
(I.C. § 6-3.1-31.9-1)
▫ Ethanol Production Tax Credit (I.C. § 6-3.1-28)
▫ Blended Biodiesel Tax Credit (I.C. § 6-3.1-27)
▫ Deduction for solar powered roof vents or fans (I.C. § 6-3-25.3)
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Traditional Incentives
▪ You can always put a green hat on a traditional incentive
program
▪ Indiana examples
▫
▫
▫
▫
▫
EDGE credit (jobs) (I.C. § 6-3.1-13)
HBI credit (capital investment) (I.C. § 6-3.1-13)
SEF training reimbursement (I.C. § 5-28-7)
VCI credit (venture capital) (I.C. § 6-3.1-24)
Research Credit (I.C. § 6-3.1-4)
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Favorable Tax Policies
▪ Can you acquire equipment exempt from sales tax?
▫ See Rev. Ruling 2009-06 ST
▪ Can you get a property tax deduction?
▫ See I.C. § 6-1.1-12
▪ Fuel tax
▫ Decal instead of road tax
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Local Incentives
▪ Typical local incentives include:
▫
▫
▫
▫
Waiver of fees
Granting variances
Loans
Reimbursements
▪ Indiana communities with green incentives
▫ Indianapolis
▫ Bloomington
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Application of Concepts/Case Studies
Christopher Bradburn, CPA
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Considerations for Advisors
▪ Understanding the technology
▪ Identifying applicable incentives
▪ Assessing client needs
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Renewable Portfolio Standards
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Broad Knowledge Base
▪ “Green” overlaps with various disciplines and skill sets
▫
▫
▫
▫
▫
▫
Science
Engineering
Tax
Construction
Finance
State and Local Tax
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Case Study:
Anaerobic Digester Technology
▪ §48 Investment tax credit or §45 production tax credit?
▪ Understanding the technology
▫ What does the technology produce?
▫ How does the technology produce?
▫ How will the product of the technology be used?
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Case Study:
Anaerobic Digester Technology
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Case Study:
Anaerobic Digester Technology
▪ §48 investment tax credit
▫ 30% credit
- Qualified fuel cell technology
- Certain solar technology generating electricity, heat, light or hot
water
- Qualified small wind energy property
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Case Study:
Anaerobic Digester Technology
▪ §48 investment tax credit
▫ 10% credit
- Geothermal technology to produce, distribute or use energy
from a geothermal deposit
- Combined heat and power systems
- Qualified microturbine property
- Geothermal heat sink technology
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Case Study:
Anaerobic Digester Technology
▪ §48(a)(5) election to treat qualified facilities as energy
property
▫ Property part of qualified investment credit facility treated as
30% energy property
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Case Study:
Anaerobic Digester Technology
▪ Qualified investment credit facility (§48(a)(5)(C)(ii)
▪ Landfill gas facility – a facility producing electricity from
gas derived from biodegradation of municipal solid waste
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Case Study:
Anaerobic Digester Technology
▪ The term “solid waste” means any garbage, refuse, sludge from
a waste treatment plant, water supply treatment plant, or air
pollution control facility and other discarded material, including
solid, liquid, semisolid, or contained gaseous material resulting
from industrial, commercial, mining, and agricultural operations,
and from community activities, but does not include solid or
dissolved material in domestic sewage, or solid or dissolved
materials in irrigation return flows or industrial discharges which
are point sources subject to permits under section 1342 of title
33, or source, special nuclear, or byproduct material as defined
by the Atomic Energy Act of 1954, as amended (68 Stat. 923)
[42 U.S.C. 2011 et seq.].
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Case Study:
Anaerobic Digester Technology
▪ Trash facility – a facility that uses municipal solid waste to
produce electricity (other than a landfill gas facility)
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Case Study:
Solar Panel Installation
▪ Capital investment analysis
▫ ROI not payback period
▫ Before-tax and after-tax returns
▫ Impact of incentives
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Case Study:
Solar Panel Installation
ABC Company, Inc.
Calculation of After Tax Return on Investment
Renewable Energy Solar Photovoltaic System
Assumptions
System Cost
$ 3,750,000
Federal Sec. 48 Energy Property Credit (30%) $ 1,125,000
Depreciable Basis
$ 3,187,500
Annual operating savings
$
kWh Production
18,478
1,312,494
IPL Feed In Tariff Rate ($/kWh)
Combined Federal and State Tax Rate
Inflation Rate
$
0.20
39.00%
3.00%
Bonus Depreciation
50.00%
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Case Study:
Solar Panel Installation
Today
Initial Outlay
Annual Operating Savings
Revenue - sale of kWh
Depreciation - Tax Reduction
Energy Property Credit
Net After Tax Cash Flow
$
Year 1
(3,750,000)
(3,750,000)
Annual after tax return on investment
Internal Rate of Return
$
11,272
160,124
745,875
1,125,000
2,042,271
54.46%
Year 2
$
Year 3
11,610
160,124
198,900
370,634
9.88%
$
Year 4
11,958
160,124
119,340
291,422
7.77%
$
Year 5
12,317
160,124
71,604
244,045
$
6.51%
Year 6
12,686
160,124
71,604
244,415
6.52%
$
Year 7
13,067
160,124
35,802
208,993
5.57%
$
Year 8
13,459
160,124
173,583
4.63%
$
Year 9
13,863
160,124
173,987
4.64%
$
Year 10
14,279
160,124
174,403
4.65%
$
Total
14,707
160,124
174,831
$
(3,750,000)
129,216
1,601,243
1,243,125
1,125,000
348,584
4.66%
2.94%
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Case Study:
Solar Panel Installation
ABC Company, Inc.
Calculation of After Tax Return on Investment (No Incentive)
Renewable Energy Solar Photovoltaic System
Assumptions
System Cost
$ 3,750,000
Federal Sec. 48 Energy Property Credit (30%) $
-
Depreciable Basis
$ 3,750,000
Annual operating savings
$
kWh Production
18,478
1,312,494
IPL Feed In Tariff Rate ($/kWh)
Combined Federal and State Tax Rate
$
39.00%
Inflation Rate
3.00%
Bonus Depreciation
0.00%
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Case Study:
Solar Panel Installation
Today
Initial Outlay
Annual Operating Savings
Revenue - sale of kWh
Tax Depreciation Expense
Energy Property Credit
Net After Tax Cash Flow
$
(3,750,000)
(3,750,000)
Annual After Tax Return on Investment
Internal Rate of Return
Year 1
$
Year 2
11,272
292,500
303,772
8.10%
$
11,610
468,000
479,610
12.79%
Year 3
$
Year 4
11,958
280,800
292,758
7.81%
$
Year 5
12,317
168,480
180,797
4.82%
$
Year 6
12,686
168,480
181,166
4.83%
$
Year 7
13,067
84,240
97,307
2.59%
$
Year 8
13,459
13,459
0.36%
$
Year 9
13,863
13,863
0.37%
$
Year 10
14,279
14,279
0.38%
$
Total
14,707
14,707
$
(3,750,000)
100,231
1,462,500
(2,187,269)
0.39%
-21.60%
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"Green" Federal & State Tax Incentives