The investment tax credit permits businesses to deduct a specified percentage of certain investment costs from their tax liability, becoming a powerful tool that subsidizes business investment, thereby promoting the market. Even though renewable energy is a more modern industry, the investment tax credit (ITC) is used to foster investments into renewable energy infrastructure and has done so for over 50 years in the United States. The longevity of the ITC stabilizes the market for the opportunity of long term investments, job growth, and reduced consumer prices.
First signed into law as a part of the Revenue Act of 1962, the Federal ITC was created to stimulate economic growth in the US by incentivizing businesses to purchase or modernize certain assets. Today, the fundamental goal of the Federal ITC remains then same, but the Federal ITC has specific intentions to stimulate private investments in renewable energy structure. Since its origin in 1962, the Federal ITC has been suspended, extended, terminated, minimized and expanded significantly due to the tax reform acts from various political climates.
In 2005, President George W. Bush signed the Energy Policy Act, stabilizing the Federal ITC to what it currently has been doing. This act increased the eligible cost for solar and fuel cell projects for the tax credit from 10% to 30%. The 30% increase was extended in 2006 through the Tax Relief and Healthcare Act, then extended once more in 2008 through the Emergency Economic Stabilization Act, following the housing bubble of 2008. This extension was set to expire by 2016 in anticipation of costs leveling off. It then would have been up to the states to apply the ITC to their tax plan.
The ITC was again extended in 2016, as extensions to the credit have become invaluable to the renewable energy market, because the promotion of this tax credit provides stability for long term investments. This ultimately yields market certainty for companies to develop long term investments without fear of sudden legislation changes that will eliminate their chance for tax relief. This drives up the competition, lowers costs for consumers, stabilizes long term investors, and stimulates job growth for one of America’s most rapidly growing industries.
Looking specifically at Massachusetts -- As part of the 2016 Massachusetts Department of Revenue tax changes, qualified corporations must be defined as manufacturing, research and development, or agriculture of commercial fishing. The corporations defined as such under-MA tax statutes may earn credit for “qualified tangible properties”, of which includes tangible personal property and other property encompassing buildings and structural components of buildings acquired by purchase. Any “qualified tangible property” must have been acquired, constructed, reconstructed, or erected under the statute. The investment tax credit may not reduce the corporate excise tax below $456, with the maximum amount of credits allowable to corporations not eligible to exceed 50% of excise. Any unused credit from this transaction may be carried forward 3 years following when the credit was first earned. There are, however, several factors influencing the impact of the ITC. The first being the use of Section 179 under MA law. This provision outlines the taxpayer’s ability to treat the costs of certain types of depreciable business property as an expense rather than a capital expenditure. This allows the taxpayer to deduct in the year the property is placed in service instead of depreciating over several years. Another factor affecting the impact of the ITC is the de-minimis safe harbor election provision. This allows for the expensing of any items $5,000 or less for corporations with audited financial statements, and $2,500 for others. By expensing those two items that may otherwise have been capitalized, corporations are not eligible for the ITC on those assets under this election. Due to these impacts the future could see the Community Investment Tax Credit flourishing, which generates millions of dollars for small business development, housing development, civic engagement, and job growth. The CITC offers a 50% state tax credit and up to a 35% standard federal tax deduction (dependent on personal tax bracket). For example, if one donates $10,000 they will receive a $5,000 credit from the state and a federal deduction on the full amount of the donation, saving as much as $3,500 on their federal tax return.
With any questions regarding the history or present of the Investment Tax Credit (federal or state) or the future of the Community Investment Tax Credit, please visit the Cherrytree-Group website or reach out to any of our qualified consultants.