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Energy Tax Credits – Don’t Let Them Get Away

The days are getting shorter, the boys of summer are heading to the playoffs once again, and thousands of parents are looking online for that perfect costume for their little trick-or-treaters. Fall is in the air and instead of looking for that perfect costume maybe you should be doing a little pre-halloween trick-or-treating for yourself or your business. There is a tax credit out there that, like a jack-o-lantern that sits out too long on your porch, will eventually turn to mush and will slowly fade away.

The tax credit I’m talking about is the tax credit for purchasing energy efficient property, most notably solar panels. There are actually two credits, one for individuals called the Residential Tax Credit and one for businesses called the Energy Tax Credit. They were both started in 2005 as part of the Energy Policy Act of 2005. They’ve been extended several times, but now it appears as though they are both coming to an end and are set to expire or be greatly reduced by 2022.

While many of us think of solar panels when we think about this credit, it’s really a lot more. It also includes, wind, geothermal, and fuel cell property. See the list below:

Solar electric property Uses solar energy to generate electricity for use in home. No costs relating to a solar panel or other property installed as a roof (or portion thereof) will fail to qualify solely because the property constitutes a structural component of the structure on which it is installed.
Solar water heating property Used to heat water for use in home if at least half of energy used by solar water heating property is derived from sun.
Small wind energy property Uses wind turbine to generate electricity.
Geothermal heat pump Any equipment that uses ground or ground water as thermal energy source to heat or cool home. Must meet energy start program requirements.
Fuel cell property Qualified fuel cell property is an integrated system comprised of a fuel cell stack assembly and associated balance of plant components that converts a fuel into electricity using electrochemical means. To qualify for the credit, the fuel cell property must have a nameplate capacity of at least one-half kilowatt of electricity using an electrochemical process and an electricity-only generation efficiency greater than 30%.

 

Both credits for 2019 are equal to 30% of cost of the eligible property, which if construction began in the current tax year, will give you a credit. This means that you don’t have to have the construction finished in 2019, only started. What does started in 2019 mean? Well you must meet one of the following two tests:

  1. Physical Work Test: Must begin physical work of a significant nature (i.e. nature of work performed, not cost).
  2. Five Percent Safe Harbor Test: Taxpayer pays or incurs at least five percent of total cost of energy property and makes continuous efforts to advance towards completion.

But even if you can’t get it started by 2019, don’t worry. The credit is still pretty good for the next two years, reducing to 26% in 2020 and then 21% in 2021. The biggest change in the upcoming years is in 2022 when the credit drops to 10% for commercial users and 0% for Individuals. See the chart below:

Commercial Users Individual Users
2019 30% 30%
2020 26% 26%
2021 22% 22%
2022 and Beyond 10% 0%

 

Besides the tax credits, there are other benefits as well. Individuals and companies can reduce their utility bills, and if you are generating more electricity than you are using, you can sell it back to the electric company. Commercial users can also depreciate the energy efficient property as well. Thanks to the Tax Cuts and Job’s Act, they can take 100% bonus depreciation in year one allowing for even more tax savings.

This is just an overview of the tax benefits that are out there for energy efficient property. They are very expensive to purchase and need to be carefully considered before buying them. However, if you have been thinking about it, now is the time to strike. If you wait too long, you could end up with the miniature size candy bar when everyone else ended up with the king size ones.

If you have questions on the Residential Tax Credit or the Energy Tax Credit, please do not hesitate to reach out to Charles Eisenhart, Senior Manager Tax, with McKonly & Asbury at ceisenhart@macpas.com.

 

About the Author

Mark Heath

Mark is a Partner with McKonly & Asbury. Serving as Director of Tax Services, he brings a wealth of experience in federal, state, and international income as well as franchise tax issues for both publicly and privately held corporatio… Read more

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