US and Texas Tax Incentives For Renewable Energy

I. Federal Level

1. Renewable Electricity Production Tax Credit (PTC)

The renewable electricity PTC is a per kWh credit for electricity generated using qualified energy resources.To qualify for the credit, the electricity must be sold by the taxpayer to an unrelated person. The credit can be claimed for a 10-year period once a qualifying facility is placed in service. The maximum credit amount for 2019 is 2.5 cents per kWh.2 The maximum credit rate, set at 1.5 cents per kWh in statute, is adjusted annually for inflation. Wind (before applying the 2017-2020 phaseout rates), closed-loop biomass, and geothermal energy technologies qualify for the maximum credit amount. Other technologies, including open-loop biomass, small irrigation power, municipal solid waste, qualified hydropower, and marine and hydrokinetic energy facilities, qualify for a reduced credit amount, where the amount of the credit is reduced by one-half.

2. Investment Tax Credit (ITC)

The investment tax credit (ITC), also known as the federal solar tax credit, allows you to deduct 26 percent of the cost of installing a solar energy system from your federal taxes. The ITC applies to both residential and commercial systems, and there is no cap on its value. The average Energy Sage Solar Marketplace shopper saves nearly $9,000 on the cost of going solar as a result of the ITC.

3. Residential Energy Credit (REC)

The residential energy efficient property credit allows for a credit equal to the applicable percent of the cost of qualified property. Qualifying properties are solar electric property, solar water heaters, geothermal heat pumps, small wind turbines and fuel cell property. Only fuel cell property is subject to a limitation, which is $500 with respect to each half kilowatt of capacity of the qualified fuel cell property. Generally, this credit for alternative energy equipment terminates for property placed in service after December 31, 2021. The applicable percentages are:

1. In the case of property placed in service after December 31, 2016, and before January 1, 2020, 30 percent.
2. In the case of property placed in service after December 31, 2019, and before January 1, 2021, 26 percent.
3. In the case of property placed in service after December 31, 2020, and before January 1, 2022, 22 percent.

4. Modified Accelerated Cost-Recovery System (MACRS).

Section 168 of the internal revenue code contains a Modified Accelerated Cost Recovery System (MACRS) by which businesses can recover investments in solar, wind, and geothermal property through depreciation deductions. The MACRS establishes the time over which various types of property may be depreciated (3-50 years). The allowance for bonus depreciation has since been extended and modified several times since the original enactment, most recently in December 2015 by the Consolidated Appropriations Act Of 2015. Equipment placed in service before January 1, 2018 can qualify for 50% bonus depreciation. Equipment placed in service during 2018 can qualify for 40% bonus depreciation. And equipment placed in service during 2019 can qualify for 30% bonus depreciation.

5. Energy-Efficient Commercial Buildings Tax Deduction

The Energy-Efficient Commercial Buildings Tax Deduction, commonly referred to as 179D, offers building owners a deduction of up to $1.80 per square foot for next-level energy-efficient improvements made to heating, ventilation and air conditioning (HVAC) systems; the building envelope, including windows; and lighting upgrades that exceed ASHRAE Standard 90.1 (currently version 2007) by 50 percent. Buildings must be independently certified to receive this deduction. The tax deduction helps real estate owners who might not otherwise have the necessary capital make the decision to design, retrofit and operate energy-efficient structures. Despite sweeping changes to the tax code in 2017, 179D remains the only federal incentive for commercial buildings to become energy efficient.

6. Energy-Efficient New Homes Tax Credit for Home Builders

Home builders are eligible for a $2,000 tax credit for a new energy efficient home that achieves 50% energy savings for heating and cooling over the 2006 International Energy Conservation Code (IECC) and supplements. At least 1/5 of the energy savings has to come from building envelope improvements. This credit also applies to contractors of manufactured homes conforming to Federal Manufactured Home Construction and Safety Standards and meeting the same energy efficiency requirements.

There is also a $1,000 tax credit to the producer of a new manufactured home conforming to Federal Manufactured Home Construction and Safety Standards and achieving 30% energy savings for heating and cooling over the 2006 IECC and supplements (at least 1/3 of the savings had to come from building envelope improvements).

II. State Level (Texas)

1. Renewable Energy Systems Property Tax Exemption

The Texas property tax code allows an exemption of the amount of 100% of the appraised property value increase arising from the installation or construction of a solar or wind-powered energy device that is primarily for the production and distribution of thermal, mechanical, or electrical energy for on-site use and devices used to store that energy. Solar energy devices installed or constructed on or after January 1, 2014, used for a commercial purpose are subject to the cost method of appraisal, and the depreciated value must be calculated using a useful life of 10 years or less (H.B. 2500).

2. ENERGY STAR Sales Tax Holiday for Energy-Efficient Products

ENERGY STAR is an energy saving program run by the Environmental Protection Agency. During the ENERGY STAR Sales Tax Holiday, certain energy-efficient products displaying the ENERGY STAR logo can be purchased tax free, including air conditioners priced at $6,000 or less, refrigerators priced at $2,000 or less, ceiling fans, fluorescent light bulbs, dishwashers, dehumidifiers and clothes washing machines.

3. Solar and Wind Energy Business Franchise Tax Exemption and Deductions

Tax Code Section 171.056 extends a franchise tax exemption to manufacturers, sellers, or installers of solar energy devices. The state also permits a corporate deduction from the state’s franchise tax for renewable energy sources. Business owners may deduct the cost of the system from the company’s taxable capital or deduct 10 percent from the company’s income. Wind energy qualifies under the term “solar energy” for the exemption and deduction under Sections 171.056 and 171.107

4. Solar and Wind Energy Device Franchise Tax Deduction:

Residents of Texas can take advantage of this property tax exemption by filling out a form: 50-123. Eligibility for this tax credit depends on the value of the resident’s property that is used for the distribution and production of electrical, thermal or mechanical energy. This applies whether or not the energy is used on site, or for equipment that is used to store the energy. Applying for this tax exemption means that the resident is only taxed on the original value of the property prior to the installation of solar panels and a solar power system. So, if the initial value of the business or home was $200,000 and the owner installed a solar power system for $20,000, they will only be taxed on the initial property value amount. This tax exemption is applicable to residential, commercial and industrial sectors.

5. Solar Energy Devices Business Franchise Tax Exemption

This tax exemption applies to commercial and industrial sectors in Texas. Companies that manufacture, install or sell solar power equipment and/or particular parts of the equipment might be eligible to receive a tax exemption. The key to this particular exemption is that all of the company’s business must be dedicated to the manufacturing, installation or sales of solar power equipment — even if that business is conducted outside the state of Texas.

6. City of Houston – Property Tax Abatement for Green Commercial Buildings

If the owner of a new or refurbished commercial facility has registered with the U.S. Green Building Council seeking LEED Certification, then the Economic Development Division may recommend approval by the City Council of a partial tax abatement for the incremental investment associated with obtaining such certification. The agreement shall be effective up to 10 years, at a percentage based upon the level of certification actually obtained after completion of construction or refurbishment:

• Basic “Certified” Level: 1.0%
• Silver Level: 2.5%
• Gold Level: 5.0%
• Platinum Level: 10%”

The LEED building tax abatement can be a stand-alone abatement or part of a standard economic development tax abatement. If used as a stand-alone tax abatement, the minimum investment requirement to be eligible for the partial tax abatement is:

• $1 million for an investment in a commercial structure that achieves Platinum LEED Certification,
• $2 million for an investment in a commercial structure that achieves Gold LEED Certification,
• $4 million for an investment in a commercial structure that achieves Silver LEED Certification, and
• $10 million for an investment in a commercial structure that achieves basic LEED Certification.

7. Harris County – Property Tax Abatement for Green Commercial Buildings

In 2008, the Harris County Commissioners Court adopted guidelines for partial tax abatements for new construction of U.S. Green Building Council (USGBC) Leadership in Energy and Environmental Design (LEED)-certified commercial buildings. To be eligible for the tax abatement, projects must be registered with the USGBC before submitting an application to Harris County Community Services Department and must be submitted to the County before construction of the project commences. Tax abatement agreements are effective for up to 10 years and are based are based on a percentage of the incremental investment associated with obtaining LEED certification.

This type of tax abatement may be sought by an applicant of the County’s standard economic development tax abatement, or as a stand-alone tax abatement. When an applicant seeks only a LEED Certification Tax Abatement, no job creation target or competitive siting is required in order to qualify. The investment requirement is at least $1,000,000 for a commercial structure with Platinum LEED Certification, and at least $10,000,000 for a commercial with the Basic Certification. There is a non-refundable application fee of $1,000.

The value of the tax abatement is calculated on the appraised value after LEED Certification is obtained. The value of the tax abatement may be increased by up to $1,000 in the final year of the Agreement, at the County’s discretion.

 

Contributing Advisors