What are Energy Investment Tax Credits (EITCs)

What are Energy Investment Tax Credits (EITCs)? 

U.S. Code § 45, 48

In the pursuit for innovative investment opportunities, Energy Investment Tax Credits have emerged as a powerful tool for investors. These Investment Tax Credits are designed to encourage investment in renewable energy projects, shaping a sustainable future, while offering significant tax benefits. Often confused when discussing Energy and tax credits is the Residential Energy Tax Credits, under IRC Section 25D. This blog will focus on the use of Tax Credits, under Renewable Energy Tax Credits (IRS Section 45), and the strategic ways in which they can be utilized to enhance wealth with a keen focus on their tax benefits.

 

The $3 Trillion Clean Energy Investment Gap:

Global investment in the clean energy transition grew by 17% in 2023, showing resilience despite geopolitical tensions, high interest rates, and inflation.1.

Source: https://decarbonization.visualcapitalist.com/the-3-trillion-clean-energy-investment-gap-visualized/

Understanding Energy Investment Tax Credits:

Energy Investment Tax Credits are a form of government incentive aimed at promoting investments in renewable energy sources.

The ITC is given to entities that engage in renewable energy projects such as:

  • solar energy
  • biogas energy
  • microgrids
  • geothermal energy
  • fuel cell energy

These credits allow investors to deduct a portion of the expenses in a renewable energy project from their federal tax liabilities. These tax credits are not valued at a set dollar amount; rather, an eligible percentage of what is invested in the project. These credits are a dollar-for-dollar offset.  For example, claiming a $1,000 federal tax credit reduces your federal income taxes due by $1,000. Under the Inflation Reduction Act, the amount of credits a project is eligible for will vary depending on prevailing wage, domestic content used in the project and location.

Investment Tax Credit and Production Tax Credit:

The Investment Tax Credit (ITC) and Production Tax Credit (PTC) allow taxpayers to deduct a percentage of the cost of renewable energy systems from their federal taxes. These credits are available to taxable businesses entities and certain tax-exempt entities eligible for direct payment of tax credits (see Tax Credit Monetization below). 2.

Investment Tax Credit and Production Tax Credit

Solar Investment Tax Credit 101:

The Solar Investment Tax Credit (ITC) is a federal policy that has significantly encouraged the expansion of solar energy in the United States. Established in 2006, the ITC has helped the U.S. solar sector expand by over 200 times, generating hundreds of thousands of jobs and channeling billions of dollars into the U.S. economy.

Solar energy systems that were installed in 2020 and 2021 are eligible for a 26% tax credit. Even further, in August 2022, Congress passed an extension of the Investment Tax Credit (ITC), raising it to 30% for the installation, which was between 2022-2032. (Systems installed on or before December 31, 2019 were also eligible for a 30% tax credit.) It will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. The tax credit expires starting in 2035 unless Congress renews it. There is no maximum amount that can be claimed. 3.

The Strategic Benefits of EITCs:

  • Potential Reduction in Tax Liability: The most immediate benefit of EITCs is the reduction in federal income taxes. Unlike deductions, which reduce the amount of income subject to tax, credits reduce the tax itself, dollar-for-dollar. This can result in potential savings, particularly for higher-income individuals or entities facing significant tax burdens.
  • Increased Return on Investment (ROI): By reducing the total cost of project implementation, EITCs effectively increase the ROI from energy projects. This can make renewable energy investments comparably more attractive than other investment opportunities with similar risk profiles but without tax credits.
  • Encouragement of Sustainable Investments: Investing in renewable energy aligns with global trends towards sustainability and environmental responsibility. By investing in projects that qualify for EITCs, investors not only gain financial benefits but also contribute to the broader societal move towards clean energy.
  • Enhanced Public Image: Companies utilizing EITCs can boost their public image by demonstrating a commitment to sustainable practices. This can be particularly beneficial in attracting customers and investors who prioritize environmental responsibility in their purchasing and investment decisions.
  • Potential for Additional Incentives: In many cases, local or state governments offer additional incentives for renewable energy investments, which can stack with federal EITCs. These might include further tax reductions, grants, or other financial benefits, thereby enhancing the attractiveness of these investments.

Implementing Tax-Advantaged Wealth Strategies with EITCs: 

Investors looking to leverage the benefits of EITCs should consider several strategic approaches:

  • Careful Project Selection: Not all renewable energy projects are created equal in terms of profitability and risk. Selection should be based on thorough due diligence, considering factors such as location, energy needs, regulatory environment, and potential for future growth.
  • Structuring Investments for Maximum Benefit: To fully capitalize on EITCs, investors should structure their investments in a manner that aligns with the best practices for capturing tax credits. This involves close collaboration with financial professionals.
  • Timing of Investments: The timing of investment and construction start dates can be crucial in maximizing tax credits, as these can vary with legislative changes. Speaking with a financial advisor at Asset Strategy can help you stay up to date with the current legislation. A financial advisor can help with anticipated changes, to capture the most favorable terms.
  • Leveraging Partnerships: Sometimes, pooling resources through partnerships or special purpose entities can be an effective way to undertake larger projects that might be too capital-intensive for individual investors. These partnerships can also allow investors to share the risks and benefits, including the distribution of tax credits.
  • Continuous Monitoring and Management: Once an investment is made, ongoing management and monitoring are crucial to ensuring that the project remains eligible for EITCs and meets the projected financial and operational goals.’

Bonus Credit Program: 4. 

The two stackable credits: 

The four credits within the Low-Income Communities Bonus Credit Program:

Conclusion:

The IRA is overflowing with ambitious climate investments that stand to reshape the American economy. EITCs stand out among them.

Energy Investment Tax Credits offer a compelling avenue for investors seeking tax-advantaged wealth strategies. By reducing tax liabilities, enhancing returns, and promoting sustainable investment practices, EITCs represent a symbiotic nexus between fiscal prudence and environmental stewardship.

As the world increasingly shifts towards renewable energy sources, the strategic utilization of EITCs will likely become a cornerstone in the portfolios of savvy investors aiming to potentially maximize their impact and returns.

 


Want to talk about it?

If you have any questions on Investment Tax Credits or other Tax-Advantaged Wealth Strategies, call us at 781-235-4426 or visit www.assetstrategy.com/contact. 

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Because investor situations and objectives vary this information is not intended to indicate suitability for any individual investor. 

This is for informational purposes only, does not represent legal or tax advice does not indicate suitability for any particular investor, and does not constitute an offer to purchase or sell investments. Please consult the appropriate professional regarding your individual circumstance. 

Advisory services are offered through Asset Strategy Advisors, LLC (ASA). Securities are offered through representatives licensed with either Concorde Investment Services, LLC (CIS), member FINRA/SIPC. Insurance is offered through Asset Strategy Financial Group, Inc. (ASFG). ASFG and ASA are independent of CIS. 

 

This blog was written from the sources:

  1. https://decarbonization.visualcapitalist.com/the-3-trillion-clean-energy-investment-gap-visualized/ 
  2. https://www.epa.gov/green-power-markets/summary-inflation-reduction-act-provisions-related-renewable-energy 
  3. https://www.energy.gov/eere/solar/homeowners-guide-federal-tax-credit-solar-photovoltaics
  4. https://www.cleanegroup.org/publication/investment-tax-credit-fact-sheets-bonus-credit-program/

 

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