From a Legal
Perspective
Tax Incentives:
How public institutions can
reap benefits
Elizabeth Teuwen, Attorney, Jennings Strouss & Salmon PLC; and Nancy Pohl,
Attorney, Jennings Strouss & Salmon PLC
Editor's Note: “From a Legal Perspective” is
a new column for District Energy magazine.
It will appear in each edition to address
legal issues of current importance to the
district energy industry. It is intended for
educational purposes only and does not
constitute legal advice.
Managing greenhouse gas emis- sions is an inescapable reality in today’s world. Whether mandated by law or voluntarily committed, many
public institutions served by district energy
systems are looking for ways to reduce
their carbon footprint. For example, a
number of IDEA’s university members have
signed onto the American College &
University Presidents’ Climate Commitment,
requiring them to take immediate steps
towards becoming carbon-neutral. On a
regional level, hospitals, local governments
and other nonprofit entities are making
similar commitments.
Unfortunately, the recent economic
downturn has meant budget cuts and limited financing opportunities, making it
harder to meet these capital-intensive climate change goals. Tax incentives have
been used since the 1960s to promote
energy conservation and encourage investment in alternative energy resources.
Recent legislation has expanded the application of these tax incentives to combined
heat and power systems and a number of
renewable energy technologies. For many
businesses, these tax credits make investments in green projects possible. But what
about tax-exempt organizations? Local
governments, universities, hospitals and
other nonprofit organizations may not
have the tax liabilities against which to
claim these credits.
The ability to monetize tax incentives
through partnership with private developers may provide tax-exempt IDEA members an alternative means of funding
investments in energy efficiency and
renewable energy projects. This column
will provide a brief overview of the tax
incentives available and business structures that have been used to pass those
incentives on to tax-exempt organizations.
Monetizing tax incentives
through partnership with
private developers may help
tax-exempt IDEA members
fund energy efficiency and
renewable energy investments.
Energy Investment
Tax Credits
Investment tax credits are available
for business investment in “energy prop-
erty,” which include CHP systems and
equipment that uses solar energy to generate electricity, heat or cool buildings, or
provide heat for industrial processes.
These credits also apply to geothermal,
wind, fuel cell and other renewable technologies. Under the American Recovery
and Reinvestment Act of 2009 (ARRA),
Congress increased the credit to 30 percent of the equipment cost (up from 10
percent) for projects installed before Jan.
1, 2017. The credit vests at a rate of 20
percent per year; if a taxpayer disposes of
the property within five years of utilizing
the credit, the IRS will recapture the
unvested portion of the credit.
The ARRA also provides grants in lieu
of the tax credit described above. Instead
of the tax credit, businesses receive an
upfront cash payment from the U.S. Treasury.
However, any entity partnering with a
local government or tax-exempt organization is not eligible to receive this grant.
Additionally, as with the investment tax
credit, the grant is subject to recapture if
the property is sold within five years of
the grant.
Another tax benefit applicable to certain renewable energy projects is the ability
to accelerate depreciation. CHP facilities
and some renewable technologies are
deemed to be five-year properties, meaning the applicable recovery period for
depreciation purposes is only five years.
Energy Efficiency
Tax Deductions
Building owners are also able to claim
a federal tax deduction of $1.80 per square
foot for reducing a commercial building’s
energy consumption by 50 percent or
more. The deduction is available for modifications to heating, cooling, ventilation
and hot water systems, as well as other
improvements to the building envelope
and interior lighting. For publicly owned
buildings, these tax deductions can be
passed on to the person “primarily responsible for designing the property.”
State Incentives
A number of individual states have
also enacted tax incentives for both
renewable energy projects and energy
efficiency initiatives. The Database of State
Incentives for Renewables and Efficiency
contains a comprehensive list of the tax
