What GCs Need To Know About Federal and State Renewable Energy Tax Credits

By Cameron Kinvig | LexisNexis Practical Guidance

The global demand for renewable energy is expected to continue booming for the next two decades. The U.S. Energy Information Administration projects a nearly 50% increase in world energy usage by 2050, led by growth in Asia, with renewables poised to be the fastest-growing energy source to support this demand.

The growth trajectory is even more astounding here in the U.S. “On our current trajectory, about 42% of electricity in the United States will come from renewable sources” between now and 2040, according to a November 2021 report in the New York Times.

Corporate executives and investors in the U.S. energy industry have increasingly embraced this transition to clean energy. Nearly three in four executives across the energy industry say that their organizations are either “very prepared” or “moderately prepared” to achieve more than a 50% reduction in carbon emissions by 2030, according to Womble Bond Dickinson’s 2022 Energy Transition Outlook Survey Report. In fact, the survey found that 70% of executives and 78% of investors view the Biden Administration’s more aggressive goals for renewable energy as favorable to their businesses and business opportunities.

In-house counsel need to stay apprised of a wide range of legal implications for their organizations when it comes to the transition to renewable energy. One of the areas that should be near the top of this list is how federal and state tax laws intersect with their organizations’ production, consumption or sale of renewable energy tax credits.

Federal Tax Credits

The federal government provides a number of tax incentives to encourage the production and use of renewable and clean energy. Many tax benefits were extended or expanded by the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009.

The three main tax credit programs at the federal level are the energy production tax credit, the investment tax credit/energy credit, and a tax credit for the capture and sequestration of carbon dioxide. For detailed descriptions of these various tax credits, review the domestic tax incentives section of “Clean Energy Financing,” a practice note from LexisNexis contributors David J. Muchow and William A. Mogel.

One key business-related federal tax credit that GCs need to know about is a credit available for the production of electricity from renewable sources. If the owner of a facility is not the one producing the electricity, the tax credit may be claimed by the lessee.

For example, the rate of the credit is 30% for solar energy property (the construction of which begins before January 1, 2024), qualified fuel cell property, fiber-optic solar energy property, qualified small wind energy property, and waste energy recovery property. The rate of the credit is 10% for geothermal property, qualified micro turbine property, combined heat and power system property, and geothermal heat pump property. The energy percentage does not apply to the portion of a property’s basis that is attributable to qualified rehabilitation expenses.

The production, sale and use of biodiesel and renewable diesel fuel also entitle a corporate taxpayer to federal tax credits based on the number of gallons of fuel. And additional clean energy production credits are available from the federal government, including those for production by advanced nuclear power facilities and from non-conventional energy sources.

State Tax Credits

In addition to federal tax benefits for the use of renewable and clean energy, most states have enacted laws that provide incentives on the state level. These incentives include deductions, credits, exemptions, abatements and rebates relating to income taxes, property taxes and sales taxes. These state-level tax credits are often less publicized and therefore overlooked by in-house counsel.

“There are many . . . state and local tax incentives that encourage consumers, businesses and utilities to move toward renewable energy use,” according to a LexisNexis practice note that provides in-house counsel with a background introduction into renewable energy finance. “These include property tax incentives, sales and use tax incentives, vehicle purchase incentives, commercial building energy efficiency initiatives, ‘smart grid’ incentives and manufacturing incentives.”

 The most common state business tax credits apply to the production of solar and wind energy, the use of solar and wind energy, or both. Corporate taxpayers may not receive a tax credit or exemption for the entire amount expended on an alternative energy system or alternative energy production, but most states will allow a percentage to be deducted, credited, exempted or abated. Generally, the property or production must occur within the state in which the taxpayer is claiming the tax benefit.

Frequently, these statutes will contain a set duration or only allow incentives for particular tax years. Some states also authorize or direct local entities to provide additional tax incentives for those using or producing renewable and clean energy. LexisNexis has published a comprehensive 50-state survey of renewable and clean energy tax incentives that provides important insights for in-house counsel.

A Helpful Resource

The LexisNexis Practical Guidance team has made available a client alert digest that summarizes IRS guidance on how renewable energy projects can qualify for the investment tax credit under Internal Revenue Code Section 48. Click here to download a free PDF of this document.