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© 2012 KSM Business Services, Inc. “Green” Federal and State Tax Incentives August 22, 2012 Christopher Bradburn, CPA William Graff, JD, LL.M Tim Conrad,

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Presentation on theme: "© 2012 KSM Business Services, Inc. “Green” Federal and State Tax Incentives August 22, 2012 Christopher Bradburn, CPA William Graff, JD, LL.M Tim Conrad,"— Presentation transcript:

1 © 2012 KSM Business Services, Inc. “Green” Federal and State Tax Incentives August 22, 2012 Christopher Bradburn, CPA William Graff, JD, LL.M Tim Conrad, JD

2 ksmcpa.com2 Christopher Bradburn, CPA Director Katz, Sapper & Miller

3 ksmcpa.com3 Timothy Conrad, JD State and Local Tax Katz, Sapper & Miller

4 ksmcpa.com4 William Graff, JD, LL.M Tax Department Katz, Sapper & Miller

5 ksmcpa.com5 Federal Tax Credits William Graff, JD, LL.M

6 6ksmcpa.com ▪Under §45, taxpayers are allowed a credit for producing and selling renewable electricity, refined coal, and Indian coal ▫It must be produced by the taxpayer from qualified energy resources ▫It must be produced by the taxpayer at a qualified facility during the credit period -Placed in service after Oct 22, 2004 but before Dec 31, nameplate capacity rating at least 150 kWh ▫It must be sold in a qualified sale -Generally an unrelated person Renewable Electricity Production Credit (PTC)

7 7ksmcpa.com ▪2.2¢ per kWh of electricity adjusted for inflation. ▪Taxpayer may claim a credit during the 10 year period commencing with the date it was placed into service. Renewable Electricity (cont’d)

8 8ksmcpa.com ▫Wind facility ( ) (§ 45(d)(1)) -Expires year end 2012 ▫Closed /open – loop biomass facility (§ 45(d)(2),(3) -Expires year end 2013 ▫Geothermal energy facility (§ 45(d)(4)) -Expires year end 2013 Renewable Electricity (cont’d)

9 9ksmcpa.com ▪Municipal Solid Waste (§ 45(d)(6)) ▫Expires end of year 2013 ▫Facilities credit is reduced by half ▪Qualified hydropower facility (§ 45(d)(8)) ▫Expires end of year 2013 ▫Facilities credit is reduced by half Renewable Electricity (cont’d)

10 10ksmcpa.com ▪Business energy credit that incentivizes business equipment using energy sources other than oil or gas ▪Energy credit for any tax year is the energy percentage of the basis of each energy property placed in service during the year. ▪The energy percentage is 30% in the case of: Business – Energy Credit (ITC) §48

11 11ksmcpa.com ▪Solar Energy Property Credit §48(a)(3)(A)(i) ▫The Credit, worth 30% of the property's basis before 2017, becomes worth 10% of the property's basis on January 1, 2017 ▪Small Wind Energy §48(a)(3)(A)(vi) ▫The credit is equal to 30% of the basis of the property. -Expires end of year 2016 ▪Fuel Cell Property ▫The amount of the credit cannot exceed $1,500 for each 0.5 kw of the capacity of the plant, but is otherwise equal to 30% of the basis in the equipment at the time it is placed in service. -Expires end of year 2016 Energy Credit (cont’d)

12 12ksmcpa.com ▪Some property like, Geothermal property and Microturbine property only receive 10% Energy Credit (cont’d)

13 13ksmcpa.com ▪The American Recovery and Reinvestment Act of 2009 (H.R. 1) allows taxpayers eligible for the federal renewable electricity production tax credit (PTC) to take the federal business energy investment tax credit (ITC) instead of the PTC. PTC vs. ITC

14 14ksmcpa.com ▪Section 25C: windows, insulation, hot water heaters: Expired Dec Non-Business Energy Credit

15 15ksmcpa.com ▪Under §25D, individual taxpayers are allowed a residential energy efficient property credit for qualified energy efficiency property expenditures made during the taxable year. ▫Generally 30% of qualified -Solar -Solar water heating -Fuel cell (limited to $500 per ½ kWh) -Small wind energy -Geothermal heat pump property ▫The credit does not apply with respect to property placed in service after December 31, Residential Energy Efficient Property Credit §25D

16 16ksmcpa.com ▪Fuel Cell Vehicles: (§30B) ▫Vehicles propelled by chemically combining oxygen with hydrogen and creating electricity ▫Fuel cell stack that converts hydrogen gas with oxygen from the air into electricity to drive the electric motor. ▫Honda FCX Clarity Alternative Fuel Vehicle Credits

17 17ksmcpa.com ▪Natural Gas: is a clean burning fossil fuel stored in a gaseous state as Compressed Natural Gas (CNG) or in a liquid state as Liquefied Natural Gas (LNG). Natural gas capable vehicles are available as either dedicated natural gas or bi-fuel natural gas and gasoline. ▪LPG (Liquefied Petroleum Gas), often referred to as propane, LPG is a clean burning fossil fuel that produces fewer toxic and smog-forming air pollutants than gasoline. Alternative Fuel Vehicles §30B

18 18ksmcpa.com ▪Ford F-250 Super Duty pickup ▪GMC Sierra 2500 HD pickup ▪Dodge Ram 2500 heavy duty pickup ▫Has both a gasoline and CNG storage tanks. ▫Engine switches automatically between the two ▪Obama administration's 2013 budget would replace the $7,500 electric vehicle credit with an advanced technology credit worth up to $10,000. Why CNG?

19 19ksmcpa.com ▪A four-wheel vehicle propelled by a battery with at least 4 kilowatt-hours of electricity that can be charged from an external source ▪Base credit of $2,500 plus $417 for each kWh of additional battery capacity in excess of 4 kWh ▪Depending on vehicle weight, max allowable credit varies between $7,500 (>10,000 lbs.) $15,000(<26,000 lbs.) Plug-in Electric-Drive Motor Vehicle Credit §30D

20 20ksmcpa.com ▪CODA sedan ▪Chevrolet Volt ▪Tesla Roadster ▪Nissan Leaf ▪Smart Fortwo ▪Think City EV Vehicles Certified

21 21ksmcpa.com ▪Under §30C, taxpayers may claim a credit for placing in service qualified alternative-fuel vehicle refueling property. ▫Taxpayer must reduce the basis of any property for which the credit is allowed ▪The §30C alternative-fuel vehicle refueling property credit for a tax year equals 30% of the cost of the qualified alternative-fuel vehicle refueling property placed in service by the taxpayer during the tax year. Alternative Fuel Vehicle Refueling Property Credit

22 22ksmcpa.com Policy in the Future

23 ksmcpa.com23 State and Local Green Energy Incentives Tim Conrad, JD

24 24ksmcpa.com ▪State incentives ▫Targeted incentives ▫Traditional incentives ▫Favorable tax policies ▪Local incentives State and Local Incentives for Green Energy

25 25ksmcpa.com ▪States may create incentives that are only accessible by green projects ▪Indiana examples ▫Hoosier Alternative Fuel Vehicle Manufacturer Tax Credit (I.C. § ) ▫Ethanol Production Tax Credit (I.C. § ) ▫Blended Biodiesel Tax Credit (I.C. § ) ▫Deduction for solar powered roof vents or fans (I.C. § ) Targeted Incentives

26 26ksmcpa.com ▪You can always put a green hat on a traditional incentive program ▪Indiana examples ▫EDGE credit (jobs) (I.C. § ) ▫HBI credit (capital investment) (I.C. § ) ▫SEF training reimbursement (I.C. § ) ▫VCI credit (venture capital) (I.C. § ) ▫Research Credit (I.C. § ) Traditional Incentives

27 27ksmcpa.com ▪Can you acquire equipment exempt from sales tax? ▫See Rev. Ruling ST ▪Can you get a property tax deduction? ▫See I.C. § ▪Fuel tax ▫Decal instead of road tax Favorable Tax Policies

28 28ksmcpa.com ▪Typical local incentives include: ▫Waiver of fees ▫Granting variances ▫Loans ▫Reimbursements ▪Indiana communities with green incentives ▫Indianapolis ▫Bloomington Local Incentives

29 ksmcpa.com29 Application of Concepts/Case Studies Christopher Bradburn, CPA

30 30ksmcpa.com ▪Understanding the technology ▪Identifying applicable incentives ▪Assessing client needs Considerations for Advisors

31 31ksmcpa.com Renewable Portfolio Standards

32 32ksmcpa.com ▪“Green” overlaps with various disciplines and skill sets ▫Science ▫Engineering ▫Tax ▫Construction ▫Finance ▫State and Local Tax Broad Knowledge Base

33 33ksmcpa.com ▪§48 Investment tax credit or §45 production tax credit? ▪Understanding the technology ▫What does the technology produce? ▫How does the technology produce? ▫How will the product of the technology be used? Case Study: Anaerobic Digester Technology

34 34ksmcpa.com Case Study: Anaerobic Digester Technology

35 35ksmcpa.com ▪§48 investment tax credit ▫30% credit -Qualified fuel cell technology -Certain solar technology generating electricity, heat, light or hot water -Qualified small wind energy property Case Study: Anaerobic Digester Technology

36 36ksmcpa.com ▪§48 investment tax credit ▫10% credit -Geothermal technology to produce, distribute or use energy from a geothermal deposit -Combined heat and power systems -Qualified microturbine property -Geothermal heat sink technology Case Study: Anaerobic Digester Technology

37 37ksmcpa.com ▪§48(a)(5) election to treat qualified facilities as energy property ▫Property part of qualified investment credit facility treated as 30% energy property Case Study: Anaerobic Digester Technology

38 38ksmcpa.com ▪Qualified investment credit facility (§48(a)(5)(C)(ii) ▪Landfill gas facility – a facility producing electricity from gas derived from biodegradation of municipal solid waste Case Study: Anaerobic Digester Technology

39 39ksmcpa.com ▪The term “solid waste” means any garbage, refuse, sludge from a waste treatment plant, water supply treatment plant, or air pollution control facility and other discarded material, including solid, liquid, semisolid, or contained gaseous material resulting from industrial, commercial, mining, and agricultural operations, and from community activities, but does not include solid or dissolved material in domestic sewage, or solid or dissolved materials in irrigation return flows or industrial discharges which are point sources subject to permits under section 1342 of title 33, or source, special nuclear, or byproduct material as defined by the Atomic Energy Act of 1954, as amended (68 Stat. 923) [42 U.S.C et seq.] Stat Case Study: Anaerobic Digester Technology

40 40ksmcpa.com ▪Trash facility – a facility that uses municipal solid waste to produce electricity (other than a landfill gas facility) Case Study: Anaerobic Digester Technology

41 41ksmcpa.com ▪Capital investment analysis ▫ROI not payback period ▫Before-tax and after-tax returns ▫Impact of incentives Case Study: Solar Panel Installation

42 42ksmcpa.com Case Study: Solar Panel Installation ABC Company, Inc. Calculation of After Tax Return on Investment Renewable Energy Solar Photovoltaic System Assumptions System Cost $ 3,750,000 Federal Sec. 48 Energy Property Credit (30%) $ 1,125,000 Depreciable Basis $ 3,187,500 Annual operating savings $ 18,478 kWh Production1,312,494 IPL Feed In Tariff Rate ($/kWh) $ 0.20 Combined Federal and State Tax Rate39.00% Inflation Rate3.00% Bonus Depreciation 50.00%

43 43ksmcpa.com Case Study: Solar Panel Installation TodayYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Total Initial Outlay $ (3,750,000) $ - $ (3,750,000) Annual Operating Savings - 11,272 11,610 11,958 12,317 12,686 13,067 13,459 13,863 14,279 14, ,216 Revenue - sale of kWh - 160,124 1,601,243 Depreciation - Tax Reduction - 745, , ,340 71,604 35, ,243,125 Energy Property Credit - 1,125, Net After Tax Cash Flow (3,750,000) 2,042, , , , , , , , , , ,584 Annual after tax return on investment54.46%9.88%7.77%6.51%6.52%5.57%4.63%4.64%4.65%4.66% Internal Rate of Return2.94%

44 44ksmcpa.com Case Study: Solar Panel Installation ABC Company, Inc. Calculation of After Tax Return on Investment (No Incentive) Renewable Energy Solar Photovoltaic System Assumptions System Cost $ 3,750,000 Federal Sec. 48 Energy Property Credit (30%) $ - Depreciable Basis $ 3,750,000 Annual operating savings $ 18,478 kWh Production1,312,494 IPL Feed In Tariff Rate ($/kWh) $ - Combined Federal and State Tax Rate39.00% Inflation Rate3.00% Bonus Depreciation 0.00%

45 45ksmcpa.com Case Study: Solar Panel Installation TodayYear 1Year 2Year 3Year 4Year 5Year 6Year 7Year 8Year 9Year 10Total Initial Outlay $ (3,750,000) $ - $ (3,750,000) Annual Operating Savings - 11,272 11,610 11,958 12,317 12,686 13,067 13,459 13,863 14,279 14, ,231 Revenue - sale of kWh Tax Depreciation Expense - 292, , , ,480 84, ,462,500 Energy Property Credit Net After Tax Cash Flow (3,750,000) 303, , , , ,166 97,307 13,459 13,863 14,279 14,707 (2,187,269) Annual After Tax Return on Investment8.10%12.79%7.81%4.82%4.83%2.59%0.36%0.37%0.38%0.39% Internal Rate of Return-21.60%


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