This is an update to the first Bottom Line on Renewable Energy Tax Credits, published April 2008, which answers basic questions about different types of tax credits, their purpose, and qualification requirements. This document has been updated to reflect legislative changes that have occurred since then and is up-to-date as of September 12, 2010.
What are the Production Tax Credit (PTC ) and the Investment Tax Credit (ITC )?
The Production Tax Credit (PTC ) reduces the federal income taxes of qualified tax-paying owners of renewable energy projects based on the electrical output (measured in kilowatt-hours, or kWh) of grid-connected renewable energy facilities. The Investment Tax Credit (ITC ) reduces federal income taxes for qualified tax-paying owners based on capital investment in renewable energy projects (measured in dollars). The ITC is earned when the equipment is placed into service.
What is the Treasury cash grant?
The cash grant is an option for ITC -eligible projects to receive the value of the ITC as a direct grant instead of as a tax credit. Eligible technologies can receive a cash grant covering up to 30% of the capital investment. Since the American Recovery and Reinvestment Act (ARRA) allowed PTC -eligible projects to elect the ITC instead, those projects can also elect to receive the cash grant.
What is the Advanced Energy Manufacturing Tax Credit (MTC )?
The Advanced Energy Manufacturing Tax Credit (MTC ) awards tax credits to new, expanded, or re-equipped domestic manufacturing facilities that support clean energy development. The Department of Energy (DOE) and the Internal Revenue Service (IRS) allocated MTC credits in April 2010 to projects based on their commercial viability, job creation, GHG reductions and other factors. Since more applications were received than anticipated, the Obama administration requested that the MTC be extended.
Who qualifies for the PTC ?
Depending on the complexity of the ownership structure, it may be appropriate to get a letter of opinion from the IRS for specific projects. Below is some high-level guidance on claiming the PTC :
- A tax-paying entity must own
the generating asset and sell the electricity to an unrelated third party.
- Entities that do not pay taxes, such as publicly owned electric utilities, rural electric cooperatives and government bodies, may not take advantage of the PTC. Investor-owned utilities do qualify for the PTC .
- Generating assets must be located in the United States and placed in service between December 31, 1992 and January 1, 2013 (for wind) or January 1, 2014 (all others).
Who qualifies for the ITC ?
The following are basic guidelines for claiming the ITC :
- System owner must be a tax-paying entity.
- Equipment must be new, though used equipment can potentially be treated as new depending on the amount of upgrades after the purchase.
- System must be placed in service between December 31, 2005 and December 31, 2016.
- PTC -eligible projects can elect to receive the ITC instead of the PTC .
- While the original ITC excluded publicly owned electric utilities, those can now benefit from the ITC as of 2008. Investor owned utilities remain eligible.
What are the other tax incentives granted to renewable energy projects? What are MACRS and Bonus Depreciation?
Modified Accelerated Capital-Recovery System (MACRs ) is a system of rules and schedules for accelerated depreciation. A five year depreciation schedule is allowed for all ITC -eligible technologies as well as large wind projects. For some biomass property, the schedule is over 7 years. Bonus Depreciation allowed taxpayers to deduct 50% of the value of eligible systems in the first year but has not been renewed for 2010.
What are the upper limits or maximum value that can be awarded in tax credits?
The ITC does not limit the total credit value granted to a project, but does limit the credit value granted per kW of capacity of certain technologies. For small wind projects placed in service starting in 2009, the ITC dollar cap was removed by the ARRA. The maximum incentive for fuel cells is $3,000 per kW and for microturbines is $200 per kW.