Understanding Form 3468
‘Going Green’ Investment-tax Credits Have Many Benefits
Kristi Reale
Customers like to see that their products were made in a green environment, prospective employees see energy-efficient and environmentally sustainable workplaces as being preferable to the traditional workplace, and, more than anything, companies are choosing to do business in an environmentally sustainable way — a triple bottom line. And as the trend to go green becomes more and more prevalent in our economy, there is a lot of information suggesting that the fiscal and tax benefits of investing in green energy and equipment are significant. However, these benefits are not always clearly outlined in black and white. It’s important to understand how the credits work and, more importantly, how they apply to you and the investment that you’re planning to make.
Income-tax credits are direct reductions of a taxpayer’s income-tax liability. Generally, the investment-tax credit permits a reduction in tax liability based upon the taxpayer’s qualified investment in certain kinds of property placed in service during the taxable year. Thus, the investment credit is an incentive device, intended to stimulate the purchase or modernization of certain kinds of productive assets. This intent is achieved by permitting the purchaser or constructor of qualified property to reduce their federal income-tax liability by a percentage of the amount they spend for the assets. To this extent, it departs from the concept of a tax imposed on net income.
Form 3468 is used to claim the investment-tax credit. Investment-credit property is any depreciable or amortizable property that qualifies for the rehabilitation credit, energy credit, qualifying advanced coal project credit, qualifying gasification project credit, or qualifying advanced energy project credit. The energy credits are detailed below.
You cannot claim the credit for property that is:
• Used mainly outside the U.S.;
• Used by a governmental unit or foreign person or entity;
• Used by a tax-exempt organization unless the property is mainly used in an unrelated trade or business;
• Used for lodging or in the furnishing of lodging; or
• Property that has been expensed under section 179 accelerated depreciation.
Energy Credits
The business energy credit is either 10% or 30% of the basis of energy property placed in service during the tax year. To qualify as energy property, the property must meet the performance and quality standards that have been prescribed by regulations in effect at the time the property is acquired; be depreciable or amortizable property; be constructed, reconstructed, or erected by the taxpayer; or acquired for original use by the taxpayer.
Energy property that qualifies for the 30% credit is listed at Internal Revenue Code §48(a)(2)(A)(i), such as:
• Solar: the credit is equal to 30% of expenditures with no maximum credit and includes equipment that uses solar energy to generate electricity or heat and cool a structure.
• Fuel cells: the credit is equal to 30% of expenditures with no maximum credit; however, the credit is capped at $1,500 per 0.5 kilowatt of capacity.
• Small wind turbines: the credit is equal to 30% of expenditures with no maximum credit for small wind turbines placed in service after Dec. 31, 2008.
Other energy property qualifies for the 10% credit, such as:
• Geothermal systems: the credit is equal to 10% of expenditures with no maximum credit and includes geothermal equipment and heat pumps used to produce, distribute, or use energy derived from a geothermal deposit.
• Microturbines: the credit is equal to 10% of expenditures with no maximum credit; however, the credit is capped at $200 per kilowatt of capacity.
• Combined heat and power: the credit is equal to 10% of expenditures with no maximum credit, and applies to property placed in service after Oct. 3, 2008.
The basis of the energy property must be reduced by 50% of the energy credit determined. The business energy credit is not allowed for any portion of a property that also qualifies for the rehabilitation credit. Energy property that qualifies for a grant under §1603 of the American Recovery and Reinvestment Act of 2009 is not eligible for the energy credit for the tax year the grant is made or any subsequent tax year.
Renewable-energy Facilities
On Feb. 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009. The purpose of the act was to preserve and create jobs, promote economic recovery, and invest in infrastructure that will provide long-term economic benefits. Provisions in the recovery act allow for irrevocably electing an investment-tax credit under §48 rather than a production tax credit under §45 for specified renewable energy facilities.
These provisions allow the taxpayer to make an election to receive an income-tax credit calculated at 30% of the cost of the qualifying property in the year it is placed in service, as opposed to the production-tax credit claimed over a 10-year period based on the electricity produced.
To qualify, this property must be tangible personal property (not including a building or structural components); constructed, reconstructed, or acquired by a taxpayer; depreciable; and for original use. The taxpayer must make a separate, irrevocable election for each qualified investment-credit facility.
Credit Recapture
Recapture of either all or a portion of the credit applies if, in the first five years, the investment-tax-credit property is disposed of, the use of the property changes so it no longer qualifies, the business use of the property decreases so it no longer qualifies, leased property is returned to the lessor, or the taxpayer receives §1603 grant money for the property.
Some exceptions to the recapture are death of the taxpayer, transfer between spouses in a divorce under §1041, and a mere change in the form of business in which the property is retained as investment-credit property, and the taxpayer retains a substantial interest in the business.
In summary, these credits appear extremely favorable. However, there are limits that apply, such as passive-activity limitations for certain pass-thru entities, basis limitations, and the effect of alternative minimum taxes.
Before embarking on projects based solely on the benefits of credits, you should consult your tax advisor. n
Kristi A. Reale, CPA, CVA is a senior manager with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3533; [email protected]
