Mar 27, 2014
From the KPMG TaxWatch
Katherine Breaks, Tax Managing Director of KPMG LLP’s Energy Sustainability Tax practice, discusses tax incentives available to companies making alternative energy and energy efficient investments.
Many companies are making efforts to reduce their carbon footprint and many of those are making substantial capital investments to do so. What many companies do not realize is that there may be tax incentives available for these investments.
By factoring in available tax incentives, companies can make a more accurate assessment of the true costs and benefits of such investments.
For instance, a company can save money by investing in a rooftop or ground-mounted solar energy system. This is because the taxpayer is purchasing less power from the local utility each year.
What a company may not realize is that, under current law, the owner of a solar energy system is also entitled to a 30% investment tax credit for the cost of the system, and such systems are eligible for a rapid, 5-year write-off. On an after-tax basis, the company may get its entire capital investment back in the form of financial and tax incentives in less than three years.
Another example of how tax benefits can complement the value of energy savings involves office space. A company can save money on its electricity bill by building or purchasing office space that is LEED certified, or highly energy efficient. But beyond saving money on the cost of electricity, there may be additional federal income tax deductions available for a portion of the costs of energy efficient lighting, HVAC, and building envelope expenditures. Further, companies may consider installing cogeneration facilities, geothermal heat pumps, microturbines or fuel cell powerplants in their office buildings as an alternative to buying power from the grid. These investments may be eligible for a 10% investment tax credit.
Another area where the cost of reducing a company’s carbon footprint may be less expensive than originally believed is the area of alternative fuel vehicles. Vehicles that run on electricity are generally more expensive than those that run on traditional fossil fuels such as gasoline. However, there are tax credits available for the purchase of such vehicles, and the after-tax cost of such vehicles may be comparable to traditional ones once the tax benefits are factored in.
Note that with all the incentives discussed additional conditions and limitations may apply.
Further, companies that want to make “green energy” investments and are looking to reduce their effective tax rate, may consider making a so-called tax equity investment in a renewable energy project. Renewable energy projects are eligible for either a 30% investment tax credit or a production tax credit equal to up to 2.3 cents per kilowatt hour for each kilowatt hour of renewable energy produced and sold. Renewable energy project developers may not be able to use these tax incentives on a current basis, so they find a so-called tax equity investor and monetize the tax benefits using structures that have been accepted by the IRS. Companies that wish to reduce their effective tax rate and want to make investments that offset the carbon intensive nature of their core manufacturing or production activities could be interested in being a tax equity investor.
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