Tax Incentives for Energy That are Clean, Green, & Renewable

NATIONAL REPORT—The Tax Code has long been used to help achieve various societal goals, one of which is the more efficient use of energy by individuals and businesses. It’s also long been used to promote energy production, to help achieve energy independence, and in more recent years to promote renewable and clean energy production. These tax provisions change frequently to try to keep up with the latest technologies and encourage individuals and businesses to make their homes, vehicles, and businesses more energy efficient while also encouraging the energy industry to address various specific aspects of energy production. The current Administration is also proposing to move the Tax Code toward being more focused on the promotion of clean, renewable energy.

With the large number of energy-related tax provisions in the Tax Code, the very technical nature of some of the requirements to qualify for the various energy-related tax breaks, and the constant changes to the Tax Code with new, modified, and expiring energy-related tax provisions, it is important for taxpayers and their tax advisors to keep up to date on these changes.

Individual Taxpayer Energy Provisions

• Nonbusiness Energy Property Tax Credit. A $500 lifetime credit for 10 percent of the cost of energy-efficient improvements to principal residence building envelope components and for 100 percent of the cost of qualified residential energy property, currently expiring at the end of 2021.
• Residential Energy Efficient Property Credit. A 26 percent credit for 2021 and 2022 for the cost of certain installations in a residence, including solar water heaters, solar electric systems, small wind energy property, geothermal heat pumps, and biofuel property, phasing down to 22 percent in 2023, and then expiring.
• Fuel Cell Motor Vehicle Credit. Available for vehicles for both personal and business use, currently expiring after 2021.
• Plug-In Electric Drive Motor Vehicle Credit. A maximum credit of $7,500 for personal or business vehicles, currently already phased out for Tesla and GM vehicles; a credit of up to $2,500 also available for two-wheeled plug-in vehicles.
• Alternative Fuel Vehicle Refueling Property Credit. A 30 percent credit up to a maximum of $1,000 for personal use property or $30,000 for depreciable property, currently expiring at the end of 2021.

Business Taxpayer Energy Provisions

• Energy Credit. A 10 percent credit for heat and power systems, microturbines, geothermal heat pumps, and other geothermal equipment; 26 percent credit in 2021 and 2022 for fuel cells, solar energy with fiberoptics, solar electric energy, small wind energy, and waste energy recovery.
• Research Credit. A 20 percent credit for energy research consortium expenses; with the current Administration considering an increase.
• Fossil fuel credits. Some current credits related to fossil fuels, such as the Enhanced Oil Recovery Credit and the Credit for Producing Oil from Marginal Wells, as well as the deduction for intangible drilling and development costs for oil and gas wells and certain coal-related provisions; may be dropped under current Administration’s proposals.
• Advanced Energy Project Credit. A 30 percent credit for manufacturing facilities to produce energy-efficient technologies.
• Carbon Oxide Sequestration Credit. Expanded from Carbon Dioxide beginning in 2018; may be further expanded under current Administration’s proposals to make it a direct payment rather than a credit.
• Other business tax credits. Some other tax credits also focus on types of energy, such as biodiesel, biofuels, nuclear power, energy efficient homes, and renewable electricity.

Tax expert Mark Luscombe, JD, LL.M, CPA, is Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting.