Everything You Need To Know About Investment Tax Credits
Key Takeaways:
Tax credits are a dollar-for-dollar reduction of your tax bill
Your asset may be eligible for dozens of tax incentives if pursuing energy-efficiency based projects
What is an Investment Tax Credit (ITC)?
An investment tax credit is a federal tax incentive aimed at inducing business investment in sectors that serve the national interest. They let businesses deduct a certain percentage of the total investment from their taxes in addition to normal allowances for depreciation, resulting in savings on federal taxes that help pencil out the upfront cost of green projects like solar, geothermal, and wind power.
First introduced in 1962, today ITCs come in all shapes and sizes at federal and state levels. The monumental task of upgrading building stock to address the challenges of climate change will take years, perhaps decades, requiring owners and operators to leverage every credit at their disposal. Let’s break down a few of the most relevant ITCs for building owners and operators.
“The monumental task of upgrading building stock to address the challenges of climate change will take years, perhaps decades, requiring owners and operators to leverage every credit at their disposal.”
Energy Efficient Buildings Tax Deduction
While not technically a tax credit, the recently expanded provisions for the 179D Energy Efficient Buildings Tax Deduction impact the tax bill for buildings undergoing retrofits tremendously. Starting in 2023, the maximum allowable tax benefit will be upped from $1.88 per square foot to $5.00 per SF for any building over 250K square feet making energy-efficient improvements. The tiered systems enable greater tax savings the more energy is reduced. With the potential to more than triple possible deductions, the move changes the math for practically any energy-related project.
Energy-Related Tax Credits
This is where tax credits are most broad, aimed at energy efficiency rather than renewable source generation. Each state has dozens of tax credits, including corporate tax credits, rebate programs, green building incentives, grant programs, loan programs, feed-in tariffs, and more. The credits are reflective of state-wide priorities, varying from state to state. Our best recommendation is to visit the Database of State Incentives for Renewables & Efficiency, type in your zip code and see what state and federal energy-related credits your asset may qualify for.
Solar Investment Tax Credit
The credit can be claimed on federal corporate income taxes for 30% of the cost of solar photovoltaic (PV) systems placed in service during the tax year. Originally set to be phased out through 2025, the recently passed Inflation Reduction Act extended the full 30% credit another 10 years. The IRA now allows claimants to pick between claiming the ITC or a Production Tax Credit (PTC) based on the among of renewable energy produced. Allowing for accelerated depreciation further reduces the overall cost of a PV installation because depreciation is considered an expense, so having a larger amount to depreciate during the tax year results in a smaller overall tax liability. The ITC is one of the most successful to date, helping the U.S. solar industry grow by more than 10,000% since it was first enacted.
Wind Investment Tax Credit
Wind energy is far more complicated to install and generate on-site than solar, limiting its applications in commercial settings. Wind generation projects benefit from the same 30% credit as solar. Smaller versions of wind turbines are now available, known as micro wind turbines. Like with solar, new laws have extended tax credits and now allow claimants to pick between claiming an ITC or a PTC.
Geothermal Investment Tax Credit
Geothermal projects only benefit from a 10% tax credit but have no claim limit. Eligible geothermal energy projects include geothermal heat pumps and equipment used to produce, distribute or use energy derived from a geothermal deposit. Unlike some other types of ITCs, there is no expiration date for geothermal ITCs.
Fuel Cell Investment Tax Cred
Fuel cells that use chemical energy are also eligible for tax credits but are capped at $1,500 per 0.5 kilowatt (kW) of capacity. Fuels cells at eligible properties must have a minimum capacity of 0.5 kW with an electricity-only generation efficiency of 30% or higher.
Combined Heat and Power (CHP) Investment Tax Credit
The credit only covers 10% of expenditures but has no maximum. To qualify, properties must have a CHP system with up to 50 MW of capacity exceeding 60% energy efficiency, subject to limitations and reductions in large systems. Any CHP using biomass as the system’s energy source is not subject to efficiency requirements.
Historic Tax Credits
Owners of historic buildings may qualify for special Historic Tax Credits (HTC) covering up to 20% of the costs of rehabilitation and restoration of certified historic properties through Public Law No. 115-97. Administered by the National Park Service in tandem with the Internal Revenue Service (IRS) and in partnership with State Historic Preservation Offices (SHPO), properties must have a state or federal historic designation to qualify. Buildings must be in service, go through ‘substantial’ rehabilitation and any work done must be consistent with the historic character of the property. More information can be found here.
Other incentives used in real estate like New Market Tax Credits and Opportunity Zones don’t quite target building retrofits but can be useful. Keeping ahead of proliferating building performance standards and staying competitive in a tight leasing market both require budgets to be extended. Better buildings must use every tool and policy at their disposal to evolve.
