A STUDY OF ECO-FRIENDLY TAX CREDITS IN THE U.S.A.
A STUDY OF ECO-FRIENDLY TAX CREDITS IN THE U.S.A.
“Recycle”, “reuse”, “repurpose” are words often spoken as the world grapples with the ever increasing burden daily life is placing on the environment. Everything - from the cars we drive, to the electricity used to power appliances and other conveniences, to the clothes we wear and the foods we consume – affects the environment around us. Natural resources are being depleted and the purity of the air we breathe and the water we drink is being compromised – a result of creativity and progress in an effort to improve our lives. Throughout the past several years, the government has offered tax credits to promote implementation of products aimed at reducing environmental impacts.
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One key factor in tax credits was the American Recovery and Reinvestment Act of 2009 (ARRA). Established to stimulate a down economy, ARRA included tax incentives aimed at encouraging development and use of renewable energy resources such as wind, solar, geothermal, and biomass. In some cases, these incentives expanded upon already existing credits.
With the enticing tax credits, research into alternative energy sources grew resulting in job creation. Also, more energy-saving products became available for business owners and individuals. The various energy related tax credits which have been available to corporations and individuals are the focus of this document.
Business Tax Credits
As companies seek to remain competitive in the global economy, they continue to search for ways to improve their bottom line. One key component to consider is the tax burden imposed on the business. Cost effective tax credits are one way to reduce operating costs while benefitting from a decrease in the taxes owed.
Electric power generated from various renewable energy resources qualified for a production tax credit. For qualifying facilities and energy types, the tax credit was available within the first ten years of operation only on facilities placed in service prior to January 1, 2010 for wind and January 1, 2011 for biomass, geothermal, landfill gas, waste-to-energy, hydropower, and marine. The tax credit value was based on the kilowatt-hours produced.
Another available credit for businesses is an investment tax credit offered to the entity building a renewable energy facility finished before the end of 2016. Details of the qualifying energy projects and their respective tax credit are as follows:
- Solar – Eligible projects are those that utilize the sun’s energy to produce electricity, heat or cool a building, provide hot water, furnish process heat (except swimming pools) , or supply interior lighting with a fiber-optic distribution system. These projects are rewarded with a tax credit equal to 30% of the system’s installed value with no limit.
- Geothermal – This tax credit applies to systems which use geothermal energy (thermal energy produced and stored within the Earth) to generate electricity and includes generation and distribution equipment. Systems which use ground or groundwater to heat or cool a building are also permitted to take this credit. The allowable tax credit is 10% of the system value, again with no maximum restriction.
- Fuel Cells – This process uses a chemical reaction with oxygen or some other oxidizing agent to convert chemical energy of the fuel into electricity. To qualify for a tax credit, fuel cell power plants must produce a minimum of 500 watts with a generating efficiency which exceeds 30%. Qualified systems receive a tax credit of 30% of the system cost, limited to $1,500.00 per each 500 watts of generating capacity.
- Combined Heat and Power – These systems employ the same energy source, such as steam, to produce electric power, mechanical power, and heat. In order to qualify for a tax credit, the process must produce a minimum of 20% of its useful energy to produce electric or mechanical power and at least 20% of its useful energy as thermal energy not used electrically or mechanically. In addition, system capacity must not exceed 50 megawatts and the process must demonstrate an energy efficiency in excess of 60%. A combined heat and power system meeting all of these requirements, qualifies for a tax credit valued at 10% of the related cost with no limit.
- Wind Turbines – Wind turbines must generate less than 100 kilowatts to qualify for a tax credit worth 30% of costs associated with the system and no maximum limit.
- Micro turbines – These power plants combine a turbine engine, combustor, and a regenerator, to turn an alternator which then creates electricity. Requirements for the tax credit include a generating capacity of less than 2 megawatts combined with a generation efficiency greater than 26%. The available tax credit for qualified units is 10% of the system value, however the value of the tax credit must not be greater than $200.00 per kilowatt of installed capacity.
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However, if the renewable energy facility was constructed with assistance from federal subsidies or tax-exempt financing, the tax credit may be reduced.
The ARRA was responsible for extending the time frame by three years for property tax credits on qualifying properties. In addition, the ARRA placed some restrictions on the use of property and investment tax credits. For example, wind energy plants which begin operation between January 1, 2009 and January 1, 2013 must make a one-time determination as to which credit will be applied. Investment tax credits are not permitted if property tax credits have already been used. Conversely if investment tax credits are used, the property tax credit is not allowed on the same property.
IRC Section 179(D) describes the deduction for energy-efficient commercial buildings and is used to counteract the expense of installing and operating an energy-efficient building equipment. The qualifying equipment includes depreciable items such as lighting, heating, cooling, ventilation, and hot water systems which decrease the total energy consumed by 50% or more as compared to a similar building. In addition, the building must be certified in compliance by an IRS recognized individual deemed qualified to determine compliance. The IRS allowable credit is $1.80 per square foot of certified building space. The credit is available only to the one who paid for the equipment.
The energy-efficient appliance credit has been available for companies which produce high-efficiency appliances such as dishwashers, washers and refrigerators for home use. In general, this credit applies only to the number of those appliances made in the US during the tax year, which exceeds the average number produced in the previous two years. There is a maximum total of $75 million for this credit. In addition, each appliance type has energy saving requirements which determine the specific allowed credit for that appliance.
Another industry specific tax credit is the energy-efficient home credit offered to builders of new energy-efficient homes. This tax credit applies to both homes erected on site as well as manufactured homes and is capped at $2,000.00. To be eligible for the credit, the following criteria must be met:
- Home must be purchased from the builder by an individual for use as a primary residence.
- Home must be located in the US.
- Traditionally built homes must have annual heating and cooling usage at 50% less than that of an equivalent home with 1/5 resulting from the insulation between the outside and inside. In addition, the home must satisfy requirements of the Department of Energy’s National Appliance Energy Conservation Act of 1987. If all conditions are met, the full credit of $2,000.00 is offered.
- Manufactured homes must meet all requirements of the federal Manufactured Home Construction and Safety Standards to receive the full $2,000.00 credit. Those which do not meet these requirements can receive a $1,000.00 credit by lowering energy consumptions for heating and cooling by 30% or satisfying the requirements of the EPA’s Energy Star-labeled homes program.
Individual Tax Credits
Throughout the past several years, there have been many available tax credits for the individual offering a two-fold benefit. The qualifying items not only save the consumer in regular operating costs such as utilities or automobile fuel, but also offer the individual valuable tax credits on the annual returns.
The “Energy Star” rating standards is often used to define qualifying home improvement projects. This program, run by the US Environmental Protection Agency, helps to identify products with outstanding energy efficiency.
For example in 2013, the federal government offered the following energy tax credits for the individual consumer who completes certain home improvement projects:
- Windows, doors and skylights – For new or replacement products which meet “Energy Star” requirements, the credit is 10% of the cost with a maximum set at $200.00 on windows and $ 500.00 on doors and skylights.
- Roofs – Metal roofs with specific colored coatings and asphalt roofs with cooling granules that are “Energy Star” rated, offer a credit of 10% of the cost, capped at $500.00.
- Insulation – A tax credit of 10% of the cost, up to $500.00, is allowed for bulk insulation such as rolls, expanding spray or blown-in fibers and for products designed to reduce drafts like weather stripping, canned spray foam or caulking.
- Heating Products – On natural gas, propane, or oil furnaces and gas, propane or oil hot-water boilers, the government permits a $150.00 tax credit only for units with a minimum annual fuel utilization efficiency rating of 95.
- Gas, oil, or propane water heaters – A $300.00 credit is allowed for water heaters with an energy factor of at least 0.82 or a minimum thermal efficiency of 90%.
- Electric heat pump water heater – For units with an energy factor of at least 2.0, a tax credit of $300.00 is allowed.
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For those fortunate homeowners with a swimming pool or hot tub, if solar power is used for heating, the government offers a tax credit of 30% of the cost of the solar power equipment with a $2,000.00 maximum credit.
Recognizing the country’s love for cars, the government enticed purchasers of new vehicles to consider more energy efficient purchases with potentially large tax credits. Purchasing a hybrid car which operates on alternative power or one with a diesel engine can provide a tax credit in the range of $250.00 to $3,400.00 depending on the gas savings and total vehicle weight. Furthermore, if two hybrids are bought, two tax credits can be claimed.
One of the more common tax credits claimed relates to charitable donations. While it may seem strange to discuss this in a study of eco-friendly tax credits it does involve reuse or a form of recycling. For many years, taxpayers have been donating old clothing, household goods, furniture and sporting equipment to their local non-profit thrift store. If not for these stores, unused items would be disposed of in the trash where it would most likely makes its way to a landfill.
Instead, these donations reap a double benefit for all involved. The individual donor receives a tax benefit on their annual tax filing and the thrift store is able to serve their client base by offering slightly worn or used goods at an affordable price. Guidelines for determining the value of donated goods is often available through various charities.
One of the more recent developments in the area of charitable donations involves recycling of unwanted or outdated electronics such as cell phones, laptops or video game consoles. The tax benefit for this type of donation applies to taxpayers who deal directly with a nonprofit organization or a company that acts as the middleman to the nonprofit entity. Once again, the donor determines the fair market value based on research such as EBay sales or a TurboTax tool called Its Deductible which will provide a value based on the actual donation.
For charitable donations valued at less than $500.00, no special forms are required. However, if the value is $500.00 or more, Form 8283 must be included with the annual tax return.
The Influence of Tax Credits
The impetus behind the tax credits appears to be two-fold. As taxpayers work to improve energy efficiency, decreasing usage, and lessening the environmental impact of their daily activities, they may receive financial rewards based on their actions.
The offer of tax credits is an attempt to achieve a certain behavior from the consumer. However, two important things must take place before the consumer takes action. First, the consumer must be aware that a tax credit is available. Sales are highly publicized, but publicity relating to tax credits is limited. Once the consumer is made aware of a tax credit, they must view the tax credit as a reduction in price, but a tax credit is much more complicated with several caveats.
Environmental tax credits offered by various levels of government are extremely popular with both the governing bodies and those who benefit from the credits. Government is seen as taking a positive step not only towards improving the environment, but reducing the United States’ dependency on fuel from other countries which in turn allows for greater security. Tax credits allow the individual or business to decide how to spend their money and the financial benefit of a particular behavior. The financial benefit may be in the form of reduced operating costs or taxes.
However a closer look at eco-friendly tax credits for the individual consumer points to a class discrepancy. These tax credits require an initial and sometimes hefty initial investment on the part of the consumer. Lower income individuals most likely will not have sufficient financial resources to make such an investment. Therefore, those who would benefit most from tax credits are less likely to be able to take advantage of such energy saving tax credits. In contrast, the wealthy would have the needed funds to implement and are granted tax credits. The poor, who would benefit significantly from a tax credit, are left out.
While eco-friendly tax credits are an admirable attempt to stimulate interest in alternative energy sources, perhaps a look at other alternatives would be worthwhile. In the past, these tax credits have generated interest in development of renewable energy sources. The vast majority of people want eco-friendly energy sources to thrive. However, these sources represent only a small part of the whole energy picture. For example in 2009, barely 3% of the electricity generated, excluding hydro power plants, came from renewable energy sources.
In addition, interest in research, development and construction of such facilities fades as various tax credits expire. Evidence of this trend was seen in 2013 and 2014 when the tax credit for renewable energy was nearing expiration. After a record year for wind energy projects, the industry slowed significantly in anticipation of the tax credit running out before an extension in the final hours. The slowdown and time required to ramp up again, resulted in a 92% drop in wind energy installations. Similar patterns could occur in all types of green energy technologies if the volatility of tax credits continues.
Taking this into account, some opponents of tax credits suggest the better solution would be to provide up-front funds for developers allowing them to realize immediate benefit from their commitment. In this case, no tax credits would be allowed.
Stimulus could be considered as the key motive in offering eco-friendly tax credits. Businesses and individuals are encouraged to explore alternative energy sources and ways to improve energy efficiency to meet their specific needs. If they are willing and able to implement the required behavior for a particular tax credit, the user will be rewarded with a reduction in their annual tax which in turn makes more money available for the US economy. Additionally, environmental impact is reduced and job growth results from the additional research and development into new technologies.
All of the above is proven by the results demonstrated by ARRA which served to jump-start “green” energy within America. Through ARRA’s enactment, tremendous investments were made in wind, solar, geothermal and other renewable electricity sources. In addition, advancements occurred in befouls and electric-powered cars. Wind energy production rose 145% since ARRA enactment while the number of solar energy systems increased over 1,200%.
With such an impact, governments should continue to explore the use of incentives as a way to not only stimulate the economy, but also stimulate the public to take action in improving our world. These incentives could include tax credits but methods of advanced funding may be a way to offer the benefit to more US tax payers.
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