Energy and R&D Tax Credits
for Businesses
By : Phil Drudy
May 19, 2011
Overview
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R&D Credits
Energy Credits
179D deduction- LEEDS Buildings
The increasing role of engineers in tax
planning.
Federal R&D Tax Credit Basics
• Enacted in 1981.
• Intended to encourage investment in engineering and the
physical, biological, and computer sciences in the U.S.
• Expired 14 times and extended 13 times, most recently
expired EOY 2009.
• Net benefit equals as much as about 9.1% of qualified costs.
• The subject of, and influenced by, a myriad for statutory,
regulatory, judicial, and administrative developments.
• Taxpayers (amongst others) hold a range of misconceptions.
Federal R&D Tax Credit Basics
• Eligible Expenditures:
• Qualified Research Expenses (“QREs”)
– Wages for performing or directly supporting or supervising qualified
research.
– Contract research expenses (65%, 75%, or 100%) .
– Cost of supplies.
– Computer rents/leases.
• Basic Research Payments to Qualified Organizations.
• Certain Amounts Paid to Energy Consortia for Energy
Research.
Federal R&D Tax Credit Basics
Credit Calculations Differ Over Time, By Company
Credit Options
Rate* Max. Benefit**
Base Amount (“BA”)
Regular Credit
20%
6.50%
• “Start-Up”
• Not “Start-Up”
Alternative Simplified (“ASC”)
for 2007 and 2008
for tax years ending after 2008
12%
14%
About 7.8%
About 9.1%
50% of average annual
QREs for prior 3 tax
years
• For regular credit, BA equals “fixed-base percentage” times “average annual gross
receipts” for four prior tax years, but the minimum BA is 50% of credit year QREs.
*Because of the incremental nature of the credit, the option with the highest rate won’t
deliver the largest credit.
** Maximum benefit reflects §280C(c) requirement to reduce R&D deduction by the
amount of the credit. Alternatively, a taxpayer may elect a reduced credit. This
“§280C election” must be made on a timely-filed, original return.
necessarily
Significant Developments
General Business Credits of Eligible Small Businesses
•
On September 27, 2010, the President signed the Small Business Jobs Act
of2010, Pub. L. No. 111-240 (“Act”).
• The Act amends Internal Revenue Code (“IRC”) Section 38(c)(5)(A), which
provides that an “eligible small business” can offset both regular and
alternative minimum tax liabilities with “eligible small business credits” for
taxable years beginning in 2010.
• In addition, the Act amends IRC Section 39(a) to extend the carryback
period for unused eligible small business credits from one year to five
years for the first tax year beginning in 2010.
R&D Tax Credits and Incentives for Investments
In and Outside the U.S.
Eligible Activities Include:
Benefits:
Process Engineering
Federal:
Design Engineering
Up to as much as almost 9% of qualified spending
Manufacturing Engineering
States:
Activities depending on engineering or the physical, chemical,
biological, or computer sciences to develop/improve:
• Majority of states provide benefits
• Up to 40% of qualified spending
• Refundable credits offered in some states, i.e.,
credits payable whether taxes are due or not
Products, Manufacturing Processes, Software
Updates to Green Incentives
• Eligible for either the Section 48 ITC, Section 45 PTC, or Section 1603 grant
• Must pay federal income taxes to qualify for ITC or PTC (expires 12/31/2016)
• Do not need to pay federal income taxes to qualify for 1603 grant (expires
12/31/2011)
• May not take more than one of the incentives
• Can make an irrevocable election for certain qualified property to take the
Section 48 Investment Tax Credit in lieu of the Section 45 (see IRB 2009-25)
• ITC credit is 30% of expenditures with no maximum credit for property placed in
service in years beginning on or after January 1, 2009
• No requirement for third party sales
• No reduction of credit for subsidized or tax-exempt financing
• Basis of property must be reduced by 50% of the amount of the credit
• Remaining basis in property still eligible for bonus depreciation.
Business Energy Investment Tax Credit – Section 48
Did the taxpayer invest in
alternative energy
property to generate power
for its own use?
No additional benefit
available
NO
Y
E
S
N
O
Is the property:
1. Qualified fuel cell?
2. Qualified small wind turbines?
3. Solar used to generate electricity for heating or
cooling or to provide solar process heat?
4. Solar property used to illuminate a building using
fiber optic distributed sunlight?
NO
Is the property:
1. Equipment for producing or distributing geothermal
energy?
2. Equipment that uses the ground or ground water to
heat or cool a structure?
3. Qualified micro-turbines (small combustion)?
4. Combined heat and power systems?
NO
Y
E
S
Y
E
S
Was the property placed in service before
2016?
Y
E
S
Y
E
S
10% credit
Y
E
S
30% credit
(10% for solar after 2016)
Note that the credit for geothermal property, with the exception of
geothermal heat pumps, has no stated expiration date.
Treasury Grant – Application for Section 1603
Payment
Section 1 – Applicant Eligibility
Section 2 – Property Information
Section 3 – Applicant Information
•Type of applicant
•Applicant’s Interest in the property
•Depreciation and use of property
•Identification of property
•Placed in service date
•Construction began
•Narrative description of beginning of
construction
•Name of the applicant
•Address
•EIN
•DUNS number (Call1.866.705.5711 to request)
•Contact person
•Previous applications
Section 4 – Property Description
Section 5 – Cost Basis and Request for
Payment
Section 6 – Documentation
•Type of energy property
•Narrative description of property
•How energy will be used
•Installed nameplate capacity
•Estimated annual production
•Job creation/retention
•Qualified cost basis
•Applicable percentage
•Payment assigned
•Design plans
•Certain facility specific eligibility documentation (see 4A
of application)
•Cost Certification
•Audit report ($1mm or more)
•Agreed upon procedures (>$500 but < $1mm)
Section 6 – Documentation (continued)
Section 6 – Documentation (continued)
•Placed in Service/Under Construction but
not yet Placed in Service
•Leased Property
•Commissioning report
•Interconnection agreement (if applicable)
•Financial documentation demonstrating
construction has begun
•Eligible Property
•Pass-through election/waiver agreement
Section 7 – Signature of Applicant
Energy –179 D Deduction
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DEDUCTION FOR ENERGY EFFICIENT
COMMERCIAL BUILDINGS
– Sets forth procedurally and administratively the
requirements for § 179D(c) and (d)
– Clarification of partial deduction
• Reference Building
• Certification
• Qualified Person
• Qualified Software for Energy Modeling
• Definitions
NOT A CREDIT - IT IS A DEDUCTION
• Subtitle C—Conservation and Energy
Efficiency Provisions “SEC. 179D. ENERGY
EFFICIENTCOMMERCIAL BUILDINGS
DEDUCTION
• “(a) IN GENERAL.—There shall be allowed as
a deduction an amount equal to the cost of
energy efficient commercial building property
placed in service during the taxable year
Energy-Efficient Commercial Building Deduction Section 179D
Did the taxpayer design a
building for a government
entity?
Y
OR
E
S
Did the taxpayer build a new
facility or renovate an existing
facility?
No Section 179D benefit
available
NO
NO
Y
E
S
N
O
Did the new facility or renovation include
installation of interior lighting, HVAC or hot
water systems, and building envelope that
reduces power use 50% or more? (compared to
reference building)
Y
E
S
NO
If 50% reduction is NOT met, is energy reduced
by 20% for lighting,
20% for HVAC, or
10% for building envelope?
Y
E
S
NO
Was the project certified?
Y
E
S
Potential
$1.80 per square foot
deduction
(whole building)
YES
NO
Y
E
S
Was the property placed in
service before 2014?
N
O
N
O
No Section 179D benefit
available
YES
Certification may be
completed by FTC&H
Potential
$0.60 per square foot
deduction
(lighting, HVAC, or envelope)
LEED BUILDINGS
• LEADERSHIP IN ENERGY & ENVIRONMENTAL DESIGN
• LEED Rating System:
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NC = New Construction
EB = Existing Buildings
CI = Commercial Interiors
CS = Core & Shell
H = Homes
ND = Neighborhood Development
• LEED Categories:
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CERTIFIED = 26 – 32 points
SILVER = 33 – 38 points
GOLD = 39 - 51 points
PLATINUM = 52 – 69 points
PROJECT TOTALS = 69 POSSIBLE POINTS
SUMMARY OF TAX DEDUCTIONS
Engineers Role with Accountants
• It started with
– R&D Studies
– Cost Segregation Studies
• It Continues with
– Energy Credits
– Alternative Fuel
Emerging Technology
• Accountants are depending more on Engineers For
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Assistance in qualifying for Grants and Credits
Preparing the filing documents
Support for the tax positions
Documenting that technical requirements are meet
Phil Drudy, CPA, ESQ.
Phil is a member of both the American Institute of Certified Public
Accountants and the Partnership Taxation Committee. He is a past
Chairman of the Partnership Committee of the NYSSCPA and is on
the advisory board for the Executive’s Tax & Management Report
newsletter, published by CACHE Publications.
Phil has worked for national, Big Four firms, as well as regional
firms in the New York Metropolitan area. This broad range of
experience has helped him build substantial expertise in many
aspects tax, including representation in front of the IRS, complex
corporate compliance and structuring, and succession planning.
Phil is a frequent speaker at seminars and conferences across the
country on tax, estate planning, and business life‐cycle issues. He is
often called upon by the national and local media for contribution
on current topics in these areas, including The Tax Adviser and NJ
Monthly. He has been quoted in The Wall Street Journal, The New
York Times and several Bloomberg financial publications and has
also been published in manuals and newsletters. Phil is a graduate
of Brooklyn College with a B.S. in Science and a graduate of
Brooklyn Law School with a Juris Doctor degree.