Unless you happen to earn your living in the financial planning field, you maybe be only slightly aware of the monumental nature of the changes to the IRS’s tax reform passed by Congress in 2017.
After purchasing our own historic building at 287 Auburn Street, Newton, Massachusetts in late September of 2017, we were anxious to begin rehabilitation of the building and move into our new home.
The most common form of wealth stems from active income, money earned from performing a service. This is capital made from but is not exclusive to jobs providing salaries, tips, or commission. But many times, the public hears of enigmatic stories about immense financial growth through various means of passive income.
These are exciting times in the tax credit world! In addition to tax cuts, the 2017 Tax Reform brought about other significant changes, including “Opportunity Zones”, which are a new concept that can potentially link tax credit projects and capital gain deferrals in a single deal.
During the recession, President Obama passed legislation that increased the Investment Tax Credit (ITC) on certain technologies, such as solar photovoltaic systems, from 10% to 30%. However, the eligible ITC on such technologies will revert back to 10% on of December 31, 2016. As this 2016 sunset date draws closer, the renewable energy industry is beginning to plan for the impending change. The general thinking behind this sunset date is that by 2016 the renewable energy industry will be established enough that it can continue to function without the current level of government assistance.
Have you ever thought about investing in federal tax credits but weren’t sure how it works?
The fact that you even are familiar with tax credits and know that they can be an investment opportunity puts you ahead of the curve. Perhaps the biggest barrier to entry with regards to investing in federal tax credits is lack of industry knowledge about tax credits and how strong an investment they can be.
To get started, let’s go over the tax credit basics.
A tax credit is a dollar for dollar credit against taxes owed to the federal government. As a tax credit can be used to offset (or pay) your federal taxes, as if you had written a check to the federal government, a tax credit has a value of $1.00 per tax credit.
Without Congessional action, on December 31, 2016, the Investment Tax Credit (ITC) for renewable energy installations is set to revert back to 10% from its current 30% level.
The ITC has been at 30% since 2008 when recession related legislation kicked in and increased the tax credit to its current level. The 30% tax credit, together with the MACRS rules allowing depreciation of the equipment in full over a 5-year period have stimulated the industry and led to an enormous increase in the installation and generation of renewable energy.
Renewable energy as a source of energy remains a small piece of the overall supply of energy, due to the relative infancy of the industry and the production cost of renewable energy as compared to other sources of power generation.
Infrastructure and equipment costs, such as photovoltaic panels in solar arrays have come down drastically in price, which has narrowed the gap in production costs, but there is still a ways to go. The industry is not at the point yet where it can survive without subsidies, and, therefore, a 30% ITC, as well as more market certainty that the 30% ITC would be around for at least 5-8 years is necessary.
The Federal ITC was first signed into law as a part of the Revenue Act of 1962, and was created with the intention to stimulate economic growth in the United States by providing incentives for businesses to purchase or modernize certain assets. Today this fundamental goal of the Federal ITC remains the same, though the ITC now has a focus of stimulating private investment in renewable energy infrastructure. Since its original enactment, the Federal ITC has gone through several changes. It has been suspended, extended, and terminated several times, and the size of the federal tax credit has fluctuated significantly due to tax reform acts from various political climates.
State, Federal Offsets Help Recover Costs In Tight Times
Many developers tend to think “traditional” when it comes to commercial real estate financing sources, resulting in a scramble to obtain the funds necessary to finance a project. Without knowledge of how to secure available federal and state tax credits specific to projects, developers unwittingly “leave money on the table.”
Tax credits allow a dollar-for-dollar offset against taxes due. As such, they act as a form of tax payment. Tax credits are not to be confused with a tax deduction, which reduces adjusted gross income and can lessen the tax due. Tax credit recipients can use the credit to offset taxes, or can sell the credit in order to gain income. Restrictions, limitations, recapture risk, compliance obligations and transferability of the tax credit are dependent on the type of tax credit issued.
A variety of tax credits exist, including those for historical remediation, low-income housing, renewable energy and brownfields projects.
Historic rehabilitation tax credits promote the rehabilitation of historic buildings by the private sector. This is one of the nations’ most successful and cost-effective community revitalization programs, as historic renovations – which are extremely expensive – may not otherwise be undertaken without this tax credit.
State and federal historical rehabilitation tax credits together can offset as much as 40 percent of a construction project’s budget and they can make or break the feasibility of resurrecting a building with significant community value. With these credits, preservation efforts are more economically appealing than replacement costs. Likewise, being designated as a historic place may increase property values, thereby enhancing the property’s economic bottom line.
The market for tax credits allows for the completion of often essential projects that might not otherwise see the light of day due to the difficulty of financing through traditional funding avenues.
It is important to note that the process of applying for, securing and monetizing tax credit awards is an information and document sensitive process which is enhanced by using a consultant, a broker or a syndicator, and at times a lawyer to complete the paperwork.
Energy Credit Revenue
There are two significant tax credits for renewable energy projects – investment tax credits (ITC) from capital investments in the technology and/or the facility that creates renewable energy; and renewable energy credits (RECs) that are generated as a result of the production of renewable energy.
ITCs amount to 30 percent of the project capital costs, whereas the REC formula is organic – for each megawatt hour of electricity a renewable energy project generates, the owner receives one REC. These RECs can then be sold, allowing the producer of the renewable energy to reap revenue from the credit.
RECs can be purchased from companies that supply power, natural gas, biomass, and energy products, or from any producer of renewable energy. This source of revenue subsidizes the operating costs of a renewable energy facility, which is necessary to allow said facilities to remain financially feasible. A REC is retired once it is sold, ensuring that the credit is used but once.
Increasingly, businesses are investing in RECs as a means to implement more eco-conscious practices. Purchasing RECs allows a company to support renewable energy development, even when it does not produce renewable energy and is not directly utilizing renewable energy for its consumption needs. RECs are designed to encourage the development and distribution of renewable energy technology and the production of renewable energy.
Recovering Cleanup Costs
Finally, mention needs to be made of the Massachusetts Brownfields Tax Credit. Although some commercial property owners will go out of their way to avoid brownfields sites, others recognize the benefits inherent in the brownfields tax credit, which is intended to encourage the reclamation of polluted property as well as to enhance economic growth by fostering the rehabilitation of abandoned properties.
If the property qualifies for the credit, costs related directly to the environmental clean-up – such as outlays to determine, contain or remove contamination – will apply toward the issuance of credit. By monetizing the credit, often a brownfields property owner that cannot or does not desire to use the tax credit can recover up to 50 percent of the eligible costs of cleaning up the site.
The tax credits outlined above illustrate a sound approach to attracting new investment and financial activity during a challenging economic climate.