What is the Investment Tax Credit?
The Investment Tax Credit (ITC) is a government incentive aimed at stimulating investment in renewable energy projects. The IRS provides the ITC to individual taxpayers and corporations who invest in specific large-scale projects involving renewable energy. The primary goal of the ITC is to encourage businesses to invest in green technologies, create new jobs, and keep work in the United States.
How much can someone claim?
The amount of tax credit that qualifying entities can claim is up to 30% of the capital costs of their projects, with a five-year period for vesting. However, in the event that a project is sold within the five-year period, recapture shall be made upon the unvested portion of the ITC. The amount of ITC that can be availed mainly depends on the type of technology used in the project and the construction period.
The law has certain criteria for availing the ITC for solar projects:
The percentage of capital costs that can be claimed as ITC depends on the type of technology and the construction period.
- Taxpayers can claim 26% of the ITC for eligible solar projects if they start construction during 2020 and 2021.
- For eligible solar projects that commence construction between 2022-2032, taxpayers can claim 30% of the ITC.
- If construction on eligible solar projects begins in 2033, taxpayers can claim 26% of the ITC.
- Taxpayers can claim 22% of the ITC for eligible solar projects if they start construction in 2034.
Who qualifies for the credit?
Renewable energy projects that qualify for the ITC include: solar, biogas, geothermal, and fuel cell energy. The ITC requires that these companies use domestically-sourced technology. Firms that invest in these projects can benefit from significant tax savings, which can offset the total costs of their projects.
What are the benefits?
There are two primary aspects to the benefits provided by the Investment Tax Credit: economic and environmental. On the economic side, the ITC not only stimulates the economy, but also provides significant annual tax savings for firms, helps enhance the infrastructure required to support renewable energy, and generates additional revenue through taxes paid by entities involved in these projects. Environmentally, renewable energy projects combat the negative effects of climate change, encourage the use of environmentally-friendly technologies, and motivate other companies to invest in renewable energy.
- Stimulates the economy by making more money available for other businesses to invest in their projects through the tax credits they earn.
- Firms save significantly on their annual tax bill by investing in large-scale renewable energy projects using this credit.
- Improves the infrastructure needed to support renewable energy, resulting in lower prices for consumers.
- Increases revenue through taxes paid out by individuals and companies engaging in these projects.
- Reduces greenhouse gas emissions caused by burning fossil fuels such as coal or petroleum, combating the negative effects of climate change.
- Encourages the use of environmentally-friendly technologies and more use of renewable energy, creating more job opportunities.
- The ITC's success in stimulating investment in renewable energy can serve as a model for other companies, highlighting the profitability and potential financial benefits of similar projects.
What is required to qualify for the credit?
Entities that wish to make use of the Investment Tax Credit are not required to hold a certification or license, but they should ensure that they invest in domestically-sourced technologies. Renewable energy projects must have a positive net present value and produce energy utilizing sustainable sources, not emit any air pollutants, use technologies available to the general public, and be expected to remain in operation for a long period of time.
In summary, the Investment Tax Credit (ITC) is a government incentive for large-scale renewable energy projects that offers up to 30% of capital costs for qualifying entities, depending on the technology and construction period used. Solar, biogas, geothermal, and fuel cell energy projects are eligible for the ITC, provided they use domestically-sourced technology and meet specific criteria. The ITC benefits both the economy and the environment, stimulating the economy, reducing greenhouse gas emissions, encouraging sustainable technologies, and motivating companies to invest in renewable energy.
*ETS does not specifically assist clients with ITC claims since this tax credit is straightforward based on capital costs, however many real estate projects who have added qualified ITC equipment can also claim energy efficient building incentives such as 179D and 45L credits that may further the benefit and reduce capital costs. If you are interested in learning more about those, then please contact your ETS representative or visit those respective service pages.