Simply stated, a tax credit is a dollar-for-dollar offset against taxes that are due to either the state or federal government. Taxpayers can utilize their tax credits to offset taxes, or transfer their tax credits to other taxpayers. Certain taxpayers, such as those holding newly acquired and rehabilitated real estate, or newly formed single asset entities, may not have generated sufficient income to be able to utilize their tax credits. For such taxpayers, transferring their tax credits for a sum certain is a better alternative than anticipating the future usability of their tax credits. Conversely, for the tax credit transferees, who usually receive the tax credits at a discount, such a transaction results in substantial tax savings.
There are two tax credits associated with renewable energy use and production, those being investment tax credits (ITC) and renewable energy credits (REC). ITCs are capital investment credits generated from investments in the installation of renewable energy. These tax credits are earned by taxpayers that put renewable energy sources into service and amount to a reimbursement of approximately thirty percent (30%) of the infrastructure, equipment, and construction costs. RECs differ from ITCs in that they are generated solely from the production of renewable energy. Through RECs, a business can support the production of renewable energy sources without actually utilizing them itself.
Brownfields tax credits (BTC) pertain to Brownfields sites, or polluted and/or abandoned properties that require environmental clean-ups. The issuance of this credit correlates to the costs of the clean-up, and owners of the property can regain up to fifty percent (50%) of the eligible remediation costs.
Historic tax credits (HTC) apply to the rehabilitation of historic buildings by the private sector. Both federal and state governments issue this credit, and the combination of these tax credits can be used to offset as much as forty percent (40%) of a project’s budget.
Low-income housing tax credits (LIHTC) are awarded to developers of affordable housing projects and, when syndicated allow for a much lower equity contribution by the developer, and, therefore, more ability on their part to achieve positive cash flow with lower rents. This tax credit offsets federal taxes for ten (10) years and allow rents to stay affordable for at least fifteen (15) years.
Tax credits often allow developers to engage projects that would not be financially possible otherwise, and by utilizing tax credits, businesses can enjoy a surplus in their budgets, while funding societally beneficial endeavors, such as environmental remediation, the creation of renewable energy, or affordable housing.