Tax Credits: What’s Out There

In the last few months, the city government has been awfully busy on the energy front. It implemented a new energy code that will result in significant energy efficiency in new and substantially rehabilitated buildings. It also pushed through a package of local laws to require energy audits, as well as requiring “benchmarking” and “commissioning” of larger buildings. The city issued technical guidance for wind turbines mounted on buildings and is funding the installation of several vertical axis turbines as part of its “Urban Wind Demonstration.”

With respect to solar energy, the city received a $1 million federal grant to create an online “solar map” that will enable New Yorkers to evaluate the potential for solar power production on buildings. The government will also appoint a “solar ombudsman” to assist in streamlining the permit process and overcoming obstacles related to interconnection of solar power to the electricity grid. And finally, Con Edison is working to reduce the average permitting time for interconnection from one year to roughly three months.

While many of these regulatory actions and government-assistance programs are helpful, the critical issue is always the difficulty in financing energy efficiency improvements and renewable energy projects. That’s where new federal tax credits come in: they provide the best incentives for these projects. What does it all mean? We asked E. Gail Suchman, special counsel in the Environmental and Energy Practice Group, and Micah W. Bloomfield, partner in the Tax Practice Group at the law firm of Stroock & Stroock & Lavan to help decipher these credits.

On February 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009, a $787 billion stimulus package. The act contained almost $90 billion in new direct spending and tax breaks from the federal government and funding for state and local programs to promote energy efficiency, renewable energy development, and new transmission infrastructure. Of the $90 billion, some $20 billion was set aside in tax breaks – spread out over over ten years – to further the development of wind, solar, geothermal, and other renewable power sources, as well as more energy-efficient distributed-generation from fuel cells and cogeneration.

These tax credits may be utilized not only by large commercial and industrial facilities but also by residential buildings, particularly cooperative and condominium buildings. What are the tax credits available to co-op and condo buildings and complexes?

Business Energy Investment Tax Credits for Co-ops

The stimulus package law amended Section 48 of the Internal Revenue Code, providing for a 30-percent energy investment tax credit for renewable energy facilities, including solar, wind, and geothermal energy installations. Generally, facilities qualifying for this credit must be placed in service before January 1, 2014, and, in the case of wind facilities, before January 1, 2013. Certain solar and small wind facilities have a longer in-service deadline of January 1, 2017. Non-renewable but energy-efficient generation from fuel cells, micro-turbines, and combined heat-and-power systems may take advantage of smaller, yet still significant investment tax credits through 2016. Since Section 48 applies to business entities with property that depreciates, this tax credit may only be available to co-op buildings with sufficient tax liability to take advantage of the credit. There is no provision for passing on this tax credit to individual shareholders.

In order to speed up the financing of on-site renewable energy projects, co-ops could partner with tax equity investors or energy service companies (ESCo) that, in essence, buy the right to the tax credits in exchange for upfront investment in a project. An ESCo is a company that will finance and install an energy system and, as part of the payment for the project, will receive the tax benefits. These partnership structures, in which the tax credits are used by the tax equity investor or the ESCo investing in the project, are helpful to co-ops that wish to benefit from the energy savings but cannot adequately finance the energy saving project. Ownership of the energy projects often remains with the investors until the investment is paid off.

Because of the economic downturn, the tax equity and debt markets became severely limited, and, Congress added, as an alternative to the tax credit, a grant program to allow building owners and companies to own the renewable energy systems – as long as construction had been started by December 31, 2010. The grant (much like a refundable tax credit) equals the amount of the applicable investment tax credit. It provides up to 30 percent of the cost of the development as upfront cash at the beginning of construction. The U.S. Department of the Treasury has issued guidance on how to determine whether a facility will be considered to have started construction by the deadline for the grant. Typically, construction under the guidelines is begun when “physical work of a significant nature” has been undertaken; i.e., when more than five percent of the total cost of the energy installation has been incurred. (As of early December, it is unclear whether the grant program will be extended past its December 31, 2010, expiration date.)

Residential Energy Efficiency and Renewable Energy Tax Credits for

Co-ops and Condos

Also expiring at the end of 2010 are tax credits to individuals equal to 30 percent of the amount paid during the taxable year for qualified and manufacturer-certified energy efficiency improvements, including insulation, exterior windows and doors, new heating and ventilation systems, and other improvements. The credit is capped at $1,500 per household. Hopefully, this tax credit will be extended along with the energy investment tax credits discussed earlier. If extended, this tax incentive also may provide a significant opportunity for co-op and condo associations to achieve needed energy efficiency improvements because, under tax rules, the 30 percent tax credit may be taken by an individual shareholder/owner for his/her proportionate share of the cost of such improvements up to the $1,500 maximum.

Finally, the act also allows for a personal tax credit for the purchase of qualified solar equipment, solar water heaters, geothermal heat pumps, small-wind energy systems, and fuel cells for residential use. These items do not have to be depreciable; in other words they can be taken by individuals and condo owners who are not in business.

Like the investment tax credit, this one runs to generally 30 percent of the cost of purchasing and installing the renewable energy equipment, with limitations for fuel cells, and extends through 2016. The treasury grant provisions do not apply to this tax credit but the credit may be carried forward to the extend unused. Again, shareholders/owners in co-op or condo buildings may take this tax credit based on their proportionate share of the cost of such equipment. If a co-op is not able to take advantage of the upfront treasury grant in lieu of the investment tax credit, then this credit may be the next most advantageous for shareholders.