Business energy credit

Business energy credit

You may be exploring whether alternative energy technologies can help you in managing the cost of the energy used in your business.

If so, you 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 alternative energy (other energy credits apply to taxpayers that use alternative energy in their homes and to taxpayers that produce energy for sale).

The business energy credit equals 30% of the basis of the following types of property:

        (1) equipment, the construction of which begins before calendar year 2022, that uses solar energy to generate electricity for heating and cooling structures, for hot water, or for heat used in industrial or commercial processes (except for heating swimming pools). If construction begins in calendar year 2020 the credit rate is 26%, further reduced to 22% for construction beginning in calendar year 2021; and, unless the property is placed in service before calendar year 2024, the credit rate is 10%.

        (2) equipment, the construction of which begins before calendar year 2022, using solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight. If construction begins in calendar year 2020 the credit rate is 26%, further reduced to 22% for construction beginning in calendar year 2021; and, unless the property is placed in service before calendar year 2024, the credit rate is 0%.

        (3) certain fuel-cell property the construction of which begins before calendar year 2022. If construction begins in calendar year 2020 the credit rate is 26%, further reduced to 22% for construction beginning in calendar year 2021; and, unless the property is placed in service before calendar year 2024, the credit rate is 0%.

        (4) certain small wind energy property the construction of which begins before calendar year 2022. If construction begins in calendar year 2020 the credit rate is 26%, further reduced to 22% for construction beginning in calendar year 2021; and, unless the property is placed in service before calendar year 2024, the credit rate is 0%.

The credit equals 10% of the basis 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 the construction of which begins before calendar year 2022.

        (3) certain microturbine property the construction of which begins before calendar year 2022.

        (4) certain equipment, the construction of which begins before calendar year 2022, that uses the ground or ground water to heat or cool a structure.

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.

Be aware that there are business considerations, unrelated to the availability of tax and non-tax subsidies, which 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, be 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).

There are many issues, both tax and non-tax, to consider in deciding whether to use alternative energy and the terms on which you might choose to use it. Please contactus to assist you in making such decisions.