Business energy credit

By | March 5, 2015

Taxpayers should be aware of a federal income tax benefit (the business energy credit) that is substantial and that applies to the acquisition of a wide variety of alternative energy property. The credit is intended primarily for business users of energy. There may be other energy credits apply to taxpayers that use alternative energy in their homes and to taxpayers that produce energy for sale.)


Calculating the Business Energy Credit

The business energy credit equals 30% of the cost of the following types of property placed in service before calendar year 2017:

(1) equipment that uses solar energy to generate electricity for heating and cooling structures, for hot water, or for heat used in industrial or commercial processes.
(2) equipment using solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight.
(3) certain fuel-cell property.
(4) certain small wind energy property.

For property placed in service after calendar year 2016, the credit is available for only 10% of the cost for property listed at (1) above, and isn’t available at all for property listed at (2), (3) or (4) above.


What Costs Covered by Business Energy Credit?

The credit equals 10% of the cost of the following types of property:

(1) certain equipment used to produce, distribute, or use energy derived from a geothermal deposit.
(2) certain cogeneration property.
(3) certain microturbine property.
(4) certain equipment that uses the ground or ground water to heat or cool a structure.

The credit isn’t available for property listed at (2), (3) or (4) above that is placed in service after calendar year 2016.

In addition to the credit opportunities discussed above, the credit is available, on an elective basis, for certain other property placed in service before calendar year 2015.


Other Information About Business Energy Credits

However, there are several restrictions on the credit. For example, the credit isn’t available for property acquired with certain types of non-recourse financing. Additionally, for property for which the credit is allowable, the “basis” (that is, the “tax cost” for computing depreciation deductions and gain or loss on disposition) is reduced by 50% of the allowable credit. On the other hand, a favorable aspect of the credit is the possibility that, for the same property, the credit can sometimes be used in combination with other subsidies—for example, federal income tax expensing, state tax credits or utility rebates.


Alternative Energy Credits

There are business considerations, unrelated to the availability of tax and non-tax subsidies, that can influence your decision whether to use alternative energy. For example, you will want to be satisfied that you have a plan for managing the costs, in time and money, of maintenance and operation of the alternative property.

Also, I’m aware that even if you choose to use alternative energy, you might choose to do so without owning the equipment, even though that would mean forgoing the business energy credit. For example, some contractors provide installation of solar equipment for free, keep ownership of the equipment and charge you for energy use in an arrangement that might work better for you than an acquisition subsidized by the tax credit (and, possibly, other benefits).