Guide to Tax Incentives for Sustainable Energy

Key Details:

In the last few years, the United States and several other countries have started to emphasize renewable energy sources. As the world continues to turn towards sustainable energy solutions such as solar, wind, biomass, and geothermal power, understanding the financial incentives available for renewable energy investments has never been more pivotal.

Tax incentives are essential to make renewable energy options more accessible and cost- effective for individuals and businesses. Lowering cost barriers contributes to a sustainable future by encouraging the widespread use of affordable clean energy solutions.

To benefit from leveraging these incentives, taxpayers can follow our guide in understanding the tax terminology, determining eligibility for the available incentives (state and federal), and subsequently setting an action plan with their personal and/or business filings.

Background

Tax incentives are financial benefits governments provide to encourage specific economic activities or behaviors that help achieve policy objectives. The specifics of how these

benefits get written into the tax code at federal, state, and local levels can be best understood through defining tax credits and rebates.

Tax Credits are amounts that can be deducted from the taxes you owe, and they work dollar for dollar against any tax burden you accumulate during a tax filing period. They can even increase your tax refund depending on whether the prospective credit is refundable or nonrefundable. Refundable credits can provide a refund even if you do not owe any taxes, while nonrefundable credits are limited to reaching net zero liability.

Rebates vary from tax credits because they can be issued at any point in the calendar year, independent of when taxes are filed. Targeted rebates entice consumers to make distinct purchases knowing they will receive a return of their money shortly after making said distinct and qualified purchases.

Regarding environmental protection objectives, the current tax credits and rebates are more financially attractive than ever since the Inflation Reduction Act of 2022 which has notably improved and added to the offerings available to taxpayers.

What Renewable Energy Tax Credits are Available to Individuals?

Individuals are encouraged to speak with a trusted tax advisor to develop a personalized tax plan. With aggressive marketing and sales tactics, retailers and contractors may be overextending promises to consumers and misleading them to pay for products or services which will not result in eligible use of tax credits.

Understanding what is available to you within the promoted ‘green market’ is an imperative first step. Homeowners have some of the most advantageous credits available to them within the Residential Clean Energy Credit. Investing in energy sources from solar, wind, geothermal, and fuel cells or battery storage technology entitles homeowners to nonrefundable credits for 30% of the costs incurred. Note that the credit is nonrefundable, so the amount you receive can only match up to the amount you owe in taxes within the year of installation. If there is a limit on the usefulness of the credit due to exceeding total tax liability, the limitation can result in a carryover to the subsequent year.

Homeowners can also claim Energy Efficient Home Improvement Credit on improvements to the home when installing new, qualified clean energy property put into use anytime from 2022 to 2034. Qualified property includes energy-producing resources and energy- insulating materials or structural systems. Check with us if you have made, or plan to make, improvements or replacements to your home’s exterior doors, windows, skylights, central air conditioners, water heaters, boilers, furnaces, panelboards, subpanel boards, and branch circuits or feeders. Credits for improvements follow a nonrefundable 30% credit for

costs, but ceiling out at $3,200. Unlike the residential clean energy credit, these amounts do not allow for a carryover from year to year.

These credit rates are currently locked in at 30% until 2032, when they begin to gradually get phased out, dropping to 26% if installed by 2033, and 22% by 2034. See the applicable requirements or speak to a trusted tax advisor to learn more. Ryan & Wetmore tax professionals can help taxpayers file Form 5695 for Residential Energy Credits with their tax return to calculate the appropriate credit which must consider any subsidies, rebates, or other financial incentives deemed as purchase price adjustments.

What Rebates are Available in my State?

In addition to the federal credits mentioned, some states and localities offer rebates for installing renewable energy systems. Remember that rebates, unlike tax credits, can be issued at any point in the calendar year, independent of when taxes are filed. Rebates in qualifying state and local jurisdictions offer up to hundreds and sometimes thousands of dollars towards purchasing alternative energy technologies. Solar, electric vehicles, and hybrid vehicles are currently the most commonplace, but there are a wide range of alternatives available for rebate. Solar rebates that are taken concurrently with tax credits must be acknowledged in final cost calculations, as mentioned earlier. For more information on your specific state/county, we can help give more detailed guidance. here are some resources:

• Database of State Incentives for Renewables & Efficiency (DSIRE) is the best resource for identifying renewable energy and energy efficiency incentives. Its searchable database allows you to find specific programs based on your location and the type of renewable technology you More details can be found on the DSIRE website here.
• Department of Energy (DOE) Home Energy Rebates Programs: On August 16, 2022, President Biden signed the Inflation Reduction Act, which provides nearly $400 billion to support clean energy; this includes $8.8 billion (about $27 per person in the S.) for home energy rebates. These programs are often administered through state energy offices, including rebates for energy-efficient appliances, home weatherization, and more. The DOE's website regularly updates information about these programs and how to apply.

Allow a tax professional at Ryan & Wetmore to research and qualify your available rebate options.

What other Benefits are there for Clean Energy?

Depreciation is an additional way to indirectly benefit from clean energy purchases.

Businesses and individuals which operate a sole proprietorship or own rental/ royalty property can recognize energy sources and energy improvements as depreciable assets. Under depreciation systems businesses can recover investments in specific properties through depreciation deductions. For cost recovery, these facilities or properties will be treated with a lifespan depending on the classification of the asset, leaving them with deductions against their taxable income for the business activity. Strategic planning on depreciation, including potential for special bonus depreciation, is further reason to work with tax professionals here at Ryan & Wetmore so that you can ensure you are depreciating the right assets properly and begin benefiting during the early years of clean energy investment.

Business Energy Tax Credits

Businesses, non-profits, and certain government entities in comparison to individuals have specific credits available to them, including the Business Energy Investment Tax Credit (ITC) and Renewable Energy Production Tax Credit (PTC). These allow businesses to deduct a percentage of the cost of renewable energy systems from their federal taxes. Projects can be eligible for the Investment Tax Credit or Renewable Energy Production Tax, but not both.

See Publication 5817-G to determine what IRA (Inflation Reduction Act) specific tax credits are eligible within categories of fuels, manufacturing, vehicles, energy generation & carbon capture.

Businesses can deduct a significant percentage of their energy investments, such as solar, fuel cell, geothermal, small wind, energy storage, biogas, microgrid controllers, and combined heat and power properties, from their federal tax obligations. The credit amount is 6% of qualified investment (basis) and up to 30% if PWA (Prevailing Wage and Apprenticeship) requirements are met.

Beginning January 1, 2025, the PTC will be replaced by the Clean Electricity Production Tax Credit per the Inflation Reduction Act. Traditional ITC will also be replaced with the Clean Electricity Investment Tax Credit. These tax credits are functionally equivalent to the ITC/PTC but are not restricted to specific technologies. They apply to all production facilities (including energy storage systems under the ITC) that are expected to have zero greenhouse gas emissions.

According to the IRS (Internal Revenue Service), "Manufacturers and other entities that invest in qualifying advanced energy projects may apply for a tax credit through the U.S. Department of Energy (DOE). $10 billion has been allocated for the credits under the Inflation Reduction Act, with $4 billion set aside for projects in certain energy communities throughout the program. See the Advanced Energy Project Credit Information here.

Additional Resources

For a comprehensive understanding and assistance in navigating the tax incentives for renewable energy investments, check out these essential resources:

IRS Form 5695, Residential Energy Credits: This form claims the residential energy tax credits.

IRS Website Search “Renewable energy”: Utilizing the search engine on the IRS website is an excellent way to stay current on the latest changes in these tax incentives.

DSIRE Homepage: The main page where you can search for renewable energy incentives by state.

DOE Energy Saver: Tips and advice on saving energy, including details on energy-efficient appliances and renewable energy installations.

DOE Home Energy Rebates: Information about the Home Energy Rebates as part of the Inflation Reduction Act.

These resources provide a mix of detailed instruction, governmental regulations, and practical advice to help you understand, apply for, and benefit from renewable energy tax incentives. Whether you are a homeowner looking to make energy-efficient upgrades or a business aiming to invest in clean energy technology, these tools and professional services can help simplify the complex landscape of tax incentives.

Consult a Professional

Contact a Ryan & Wetmore tax professional today to discuss your tax plan and for personalized advice to ensure all potential incentives are correctly applied and maximized.

Step by Step Guide to Sustainable Tax Incentives

• Step 1: Determine Eligibility for Federal Tax Incentives
  • Begin by understanding the federal tax incentives available, such as the Residential Clean Energy Tax Credit and the Energy Efficient Home Improvement Tax Credit.
    
    
• Step 2: Research and Determine Eligibility for State and Local Incentives
  • Use the Database of State Incentives for Renewables & Efficiency (DSIRE) website to find incentives offered in your Keep up with state and local incentives because new incentives are regularly updated.
  • Use the Department of Energy’s website to stay updated on incentives in your state and local Also, keep current as states continue to apply and receive more benefits.
  • Some local governments and utilities offer additional incentives that can be combined with federal and state incentives.
    
    
• Step 3: Calculate the Potential Savings
  • Keep all documentation and receipts related to purchasing and installing renewable energy systems and sustainable home improvements. This documentation will be necessary for tax filing.
    
    
• Step 4: Consult a Ryan and Wetmore Tax Professional
  • Discuss your findings and plans with a tax professional to ensure all potential incentives are identified and correctly applied.
  • Since tax regulations can be complex and change frequently, a professional can provide up-to-date advice tailored to your situation.
    
    
• Step 5: Apply for Incentives
  • Fill out necessary forms
  • Apply for state and local incentives as directed by the programs discovered in Step 2. This often involves submitting applications and providing proof of

• Step 6: Follow Up
  • Keep thorough records of each communication and document you submit concerning your incentive applications.
  • If applications or refunds are delayed, contact the appropriate organizations or ask a tax expert for help.
    
    
• Step 7: Claim Your Incentives
  • Claim your federal tax credits when filing your annual tax Be sure all necessary forms and documents are prepared and submitted.

Conclusion

As we have seen, many options are available in the renewable energy incentive space for people and companies who want to lower their energy expenses and support a sustainable future. These subsidies, which include local rebates, tax credits at the federal and state levels, and depreciation advantages, not only lower the cost of renewable energy technologies but also encourage early adoption of more environmentally friendly options.

• Making the Most of Incentives

Although these programs' specifics can be complicated, the financial gains make the work worthwhile. Renewable technologies such as solar, wind, and biomass are encouraged to be adopted because they offer long-term savings and lower upfront costs. Recall that every dollar you save benefits both the environment and your wallet.

• Consulting with Professionals

Navigating the maze of available tax breaks can be difficult. As such, working with a tax professional at Ryan and Wetmore is critical. They can provide tailored advice that considers the most recent tax laws and ensures you get the most out of your benefits.

• Action Plan

Begin by determining which incentives apply to your situation, gathering all necessary documentation, and consulting with a professional to ensure everything is in order. Do not forget to keep track of deadlines and appropriate applications. Finally, claim these benefits when filing your taxes, and keep detailed records to help with future claims.

By actively seeking out and utilizing these incentives, you help the environment and improve your financial stability by saving money on energy. Remember that every step you take benefits you today and future generations by making the world cleaner and more sustainable.

For more information and expertise, contact Ryan & Wetmore today.

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About Brandon Geddes
Staff Accountant

Brandon Geddes is a Staff Accountant at Ryan & Wetmore. He focuses on individual and corporate tax services. Brandon graduated from Washington and Jefferson with a Bachelor of Business Administration and Psychology.