The current economic climate has spurred unprecedented interest and investment in "green" or renewable energy systems. While renewable energy is not a new concept, its recent popularity stems from its potential to produce jobs and spur economic growth. Passed in February 2009, the American Recovery and Reinvestment Act (see www.recovery.gov/?q=content/act) included significant renewable energy provisions. Since then, the nation's unemployment rate has continued to rise; it is currently at 9.6%, with states such as Michigan and Rhode Island reaching peaks as high as 14.9% and 13.4%, respectively, according to the U.S. Department of Labor Bureau of Labor Statistics. As the misfortune has spread, pundits have been calling for government intervention. The Obama administration has responded with talk of further environmental regulations, such as a "cap and trade" program and taxes on carbon emissions.
With the green bandwagon continuing to gain momentum, the incentive to pursue renewable energy projects has never been greater. Corporations such as Google and Wal-Mart have even jumped on board. Google completed a solar installation at its corporate headquarters in California, and California's Solar Initiative Program estimates that Google recouped about 34% of the cost of the system from the state of California alone. Google was also able to take advantage of federal tax incentives. Wal-Mart, the world's largest retailer, intends to install solai' panels on the roofs of 22 stores in California and Hawaii. Other large retailers, such as Target and Kohl's, have also announced similar plans to undertake renewable energy projects at its stores (Sandra Upson, "The Greening of Google," IEEE Spectrum, October 2007).
Energy Tax Incentives
While the incentives to pursue renewable energy projects have never been greater, recent changes in legislation have modified existing incentives as well as created new ones. The incentives come in a variety of forms, such as tax deductions, tax credits, tax exemptions, loans, and grants. As awareness of these renewable energy systems and the potential tax benefits grows, taxpayers are likely to ask professional preparers about the topic. In order to best serve their clients, tax professionals will need to be aware of the possible benefits for these systems. The tax advantages for renewable energy systems could determine a project's feasibility, and tax professionals could be called upon to help make that determination. The following is a summary of the tax incentives available for green projects and guidance for maximizing the available tax benefits. Because tax incentives vary in each state, they are excluded from this analysis, but remain important to consider because these may reduce a project's cost and impact its acceptance or rejection.
There are eight different tax incentives discussed below, five of which apply to businesses, one that applies to both businesses and individuals, and two that apply only to individuals. The tax incentives that pertain to businesses include: the investment tax credit for renewable energy (IRC section 48), a deduction for energy efficient commercial buildings (IRC section 179[d]), the renewable electricity production credit (IRC section 45 [a]), the energyefficient appliance credit (IRC section 45M[a]), and the energy-efficient home credit (IRC section 45L[a]). Of the tax incentives available to businesses, three of these - section 45(a), 45M(a), and section 45L(a) - are part of the IRC section 38 general business credit. After the business incentives are covered, individual incentives will be reviewed. The discussion will begin with the tax incentives that have the greatest reach and then move to ones that are more specific in scope. Finally, tax advisors must also consider the limitations of incentives based on the amount of tax liability and the interaction of the tax credits and the alternative minimum tax.
Business Tax Credits, Deductions, and Exclusions
Investment tax credit for renewable energy (IRC section 48). …