Federal Tax Incentives
for Fixed Assets

The Investment Tax Credit, also known as the Section 48 Energy Credit, is a federal incentive designed to promote renewable energy technologies. The ITC is a cornerstone of U.S. renewable energy policy, particularly for solar power installations.

Features of the ITC

• The ITC offers a base credit of 30% of the cost of qualifying renewable energy systems.
• The credit applies to solar, wind, geothermal, and certain other renewable energy technologies.
• The Inflation Reduction Act of 2022 extended the ITC 30% for projects that begin construction before January 1, 2025.
• Energy storage, microgrid controllers, and dynamic glass are now eligible for the credit.

Bonus Credit Opportunities

The ITC offers additional credit amounts for projects meeting 3 criteria:

• Domestic Content: An extra 10% credit for using U.S.-manufactured products.
• Energy Communities: Another 10% for projects in areas associated with fossil fuel industries.
• Low-Income Communities: Up to 20% additional credit for projects benefiting low-income areas.

Wage and Apprenticeship Requirements

To qualify for the full 30% credit on larger projects, businesses must meet certain wage and apprenticeship requirements. Failure to meet these standards results in a base credit of only 6%.

Strategic Considerations

• Stacking Credits: Combine the ITC with other incentives like accelerated depreciation for enhanced savings.
• Documentation: Maintain thorough records of all project costs and certifications to support ITC claims.

Cost segregation is a strategic tax planning tool that allows companies to accelerate depreciation deductions and defer federal and state income taxes.

Benefits of Cost Segregation

• Improved Cash Flow: Accelerated depreciation leads to lower taxable income in early years.
• Retroactive Application: Can be applied to properties acquired or constructed in prior years.
• Flexibility: Useful for new construction, renovations, expansions, and acquired properties.

The 45L tax credit, also known as the Energy Efficient Home Credit, incentivizes the construction of energy-efficient residential properties.

Eligibility

• Credit Value: Up to $5,000 per dwelling unit for eligible contractors.
• Properties: Single-family homes, multi-family properties, and manufactured homes.
• Retroactive Availability: Projects placed in service from 2020 to 2022, and extended through 2032.
• Ownership: The eligible contractor must own and have basis in the qualified energy-efficient home during construction.
• Certification: An eligible certifier must verify the energy efficiency standards are met.
• Energy Savings: The dwelling unit must achieve specific energy consumption reduction targets compared to a reference home.

Application Process

1. Obtain certification from an eligible certifier accredited by RESNET or an equivalent rating network.
2. Prepare a certification package with a declaration of energy efficiency standards met.
3. The credit is claimed in the year the certified dwelling units are leased or sold.

The USDA Rural Energy for America Program (REAP) provides grants and loan guarantees to agricultural producers and rural small businesses for renewable energy systems and energy efficiency improvements.

Eligibility

• Up to 50% of total eligible project costs.
• $1 million per project.
• Agricultural producers and rural small businesses.
• Renewable energy systems (solar, wind, biomass, etc.)
• Energy efficiency improvements (HVAC, insulation, lighting, etc.)

Considerations

• The REAP grant can be combined with the ITC for solar projects, potentially offsetting 70-90% of system costs.
• Start the application process early, as it requires significant documentation and planning.
• Due to high demand, not all qualifying projects will receive funding. Focus on maximizing your application's score.

PAD allows taxpayers to claim a deduction on a portion of an asset that has been removed or replaced, while keeping the rest of the asset. This approach is particularly useful for buildings and their structural components. For example, if a property owner replaces an HVAC system, PAD lets them write off the remaining basis of the old system and take a tax loss in the current year, rather than depreciating both old and new systems.

How PAD Works

When a taxpayer disposes of a portion of an asset, they can:

1. Deduct the Costs associated with removing the disposed portion.
2. Write Off the Remaining Basis of the disposed portion.
3. Recognize a Gain or Loss on the disposed portion, depending on its value.

Key Benefits of PAD

• Immediate Tax Savings: By deducting the value of disposed asset portions, businesses reduce taxable income, gaining significant tax savings in the year of disposition.
• Improved Cash Flow: The tax savings from PAD can enhance cash flow, providing capital for reinvestment.
• Reduced Future Tax Liability: By removing the disposed asset's basis, the accumulated depreciation subject to recapture upon a sale is reduced, which can lead to favorable capital gains treatment.