HomeMy WebLinkAboutWindustry Community Wind Toolbox - Tax Incentives 2007Chapter 10:
Tax Incentives
In order to be financially competitive, most wind projects need to take advantage
of federal and, where available, state tax incentives. It is critical to understand the
role and mechanics of tax incentives while developing a commercial-scale
community wind project because these incentives can represent one-half to two-
thirds of the total revenue stream over the first 10 years of operation due to the
Federal Production Tax Credit (PTC) and Modified Accelerated Cost-Recovery
System (MACRS) or other type of depreciation that can be applied to wind energy
assets. You will need to consult a tax professional in the early stages of project
planning to ensure that your financial projections are valid and accurately take
into account the project’s tax burden and benefits.
Different tax incentives apply to different projects based on location, project size,
and other tax liability delimiters, so you will need to explore what is currently
available and applicable to your project.
This section of the Toolbox provides information on currently available (as of
spring 2007) tax incentives that have significantly contributed to wind energy
development. It also explains mechanisms for utilizing them to improve your
project’s bottom line. The application of many of these tax benefits is also
outlined in the Business Models, Financing, and Project Calculator sections of
the Community Wind Toolbox. The role of the tax consultant is covered in further
detail in the Project Management section.
Federal Tax Incentives
State Level Tax Incentives
Taxation of Wind Energy Property
Additional Resources for Taxes and other Incentives
This chapter is part of
Windustry's Community
Wind Toolbox which is
designed to guide you
through various aspects of
developing a commercial-
scale community wind
project. Each section gives
you background information
about particular steps in
project development and
provides you with resources
to help you to do more
in-depth research on your
own.
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Toolbox
Community Wind
TAX INCENTIVES 1
Key to Toolbox icons:
Best Practices Caution Links to more information Information that will affect your project’s bottom line Example
For more information on PTC utilization and its interaction
with other incentives see:
“Avoiding the Haircut: Potentia l Ways to Enhance the Value of
the USDA’s Section 9006 Program” written by Mark Bolinger
of Lawrence Berkeley National Laboratory:
http://eetd.lbl.gov/ea/ems/reports/61076.pdf.
“Publication 925: Passive Activity and At-Risk Rules” a
publication by the Department of Treasury – Internal
Revenue Service:
http://www.irs.gov/publications/p925/ar02.html
PTC & the “Flip”.Many locally owned, for-profit entities
are eligible for the PTC, but their modest tax appetites limit the
amount of the tax credit they can utilize. The “Minnesota Flip”
is a business model designed to help local wind project owners
with minimal tax credit appetite pair up with a larger entity
that has a more substantial tax burden. Because the tax credits
available to project owners are typically proportional to their
level of ownership in the project, the tax-motivated entity is the
majority owner in the first ten years of production and often
pays a “management fee” to the local owner in lieu of power
sales revenue. Once the tax incentive period ends after year 10,
the majority ownership of the project “flips” to the local owner,
and the tax-motivated investor takes a minority share in the
project. For more information, see the The Minnesota Flip
section of the Toolbox.
TAX INCENTIVES 2
WINDUSTRY’S Community WindToolbox
The Federal Production Tax Credit
The Federal Production Tax Credit (PTC) is a 1.9¢/kWh credit
(adjusted annually for inflation) that projects can earn during
the first ten years of production. This credit, found in section 45
of the IRS tax code, has been the single largest driver of wind
energy development in the United States to date, despite its
continual need for renewal by Congress. Currently, the PTC is
extended through the end of 2008, and advocates are pushing
for further extension.
In order to qualify, an individual taxpayer must own the wind
project and either materially participate 1 in the project or have
tax liability from passive income that the PTCs can be credited
against.2 For individuals who do not materially participate, they
must receive enough passive income (such as rental income or
income from businesses in which they participate only as an
investor) to produce a tax liability against which the credit can
be applied.
Fully utilizing the PTC is a difficult hurdle for most farmers.3 If a
farmer, rancher, or landowner does not materially participate in
a wind project, the credits cannot be applied against the farmer’s
income from active farming businesses, wage income, or interest
and dividend income. Even when a farmer materially participates,
the value of the tax credit usually exceeds an individual’s tax
liability from the wind project
plus any other sources.
Community wind developers
need to be aware that the
PTC amount for an individual
project may be reduced by
the use of other federal or
state funding, such as U.S.
Department of Agriculture
Farm Bill grants. For example:
if your community project
receives a 25% USDA grant to
help with project costs, the
project will be eligible for
only 75% of the PTC.
Wind energy is
where we need to go
– it’s good for the
environment and
builds American
energy independence
and American
industry.Our family-
ow ned business can
work profitably in
wind power.
Gary Stoks
CEO, SMI Hydraulics
Porter, MN
Federal Tax Incentives
1 See Internal Revenue Service Publication 925.
2 United States Government Accountability Office, Renewable Energy: Wind Power’s Contribution to Electric Power Generation and Impact on
Farms and Rural Communities, 42 (September 2004), available at: http://www.gao.gov/new.items/d04756.pdf.
3 GAO, 41.
AT -A-GLANCE
Passive Ta x Appetite
Income from certain types of investments, such as
rental activities or business and trade activities that
you do not materially participate in, qualifies as
passive income. Tax paid on this income is considered
passive tax. To take advantage of the Federal
Production Tax Credit (the PTC), you or a project
partner must be paying taxes that fit into this category
of tax liability if you are an investor in the project but
do not materially participate in its operation.
Clean Renewable Energy Bonds (CREBs)
Clean Renewable Energy Bonds are available to entities that are
not eligible for the PTC due to their non-taxable status,
including state and local governments, municipalities, rural
electric cooperatives, Native American tribal governments, and
public and private non-profit organizations to finance
renewable energy projects. After the bonds are issued, their
interest is paid by the federal government in the form of tax
credits, creating an interest-f ree source of financing. The IRS
received over $2 billion in applications for the initial $800
million available, which led to the expansion of the program to
an additional $400 million for 2007. With the popularity of the
program there are serious discussions about expanding the
program to include more allocations in the future for more
than one funding cycle at a time.
For more information on CREBs visit:
www.windustry.org/community/crebs.htm
Modified Accelerated Cost-Recovery
System (MACRS or Accelerated
Depreciation)
With accelerated depreciation, wind projects can write off the
value of their equipment on their financial balance sheets over
5 years rather than the typical 20-year projected lifetime of a
project. While accelerated depreciation is available to all wind
energy projects, the level at which a project can take advantage
of this program is, like the PTC, limited to the project owners’
applicable tax burden. Community wind project owners that
typically have a small tax burden may not be able to take
advantage of accelerated depreciation without taking on a
tax-motivated investor with a sufficient tax appetite to claim
the entire incentive.
Alternative Minimum Tax
The Alternative Minimum Tax (AMT) is confounding for
many Americans who find themselves suddenly beholden to
the IRS for taxes they thought they didn’t owe. AMT can be
thought of as a different tax system with different rules and
deductions; taxpayers must compute their taxes under both
the regular tax and AMT rules and then pay the greater of
the two.
The purpose of the AMT is to prevent those in the highest tax
bracket from getting by from year to year tax free. A
consequence is that many unsuspecting taxpayers who make
TAX INCENTIVES 3
WINDUSTRY’S Community WindToolbox
EXAMPLE
Modif ied Accelerated Cost
Recovery System
The depreciation of wind projects is based on a table which
calculates the depreciation of wind energy assets taken at
the midpoint of the calendar year. This causes the five year
accelerated depreciation to actually continue into year six.
For a $10 million wind energy investment, the balance
sheet loss due to depreciation in years one through six
becomes:
% Depreciation
Year-end of Initial
Year Depreci ation Value Assessed Value
1 $2,000,000 $8,000,000 20%
2 $3,200,000 $4,800,000 32%
3 $1,192,000 $2,880,000 19.2%
4 $1,152,000 $1,728,000 11.52%
5 $1,152,000 $576,000 11.52%
6 $576,000 $0 5.76%
This is a simplified example to give a flavor of the benefits
possible if you are able to structure it to efficiently capture
tax incentives. It should not be used to make financial
projections. Like any large investment, you should consult a
tax professional with experience in corporate tax law to
accurately develop your assumptions.
For more information, see:
http://www.dsireusa.org/documents/Incentives/US06F.htm
less than $100,000 a year with certain kinds of investments and
deductions end up having to pay AMT. Investing in certain
types of businesses can trigger the AMT.
The only way to determine if your investment in a wind project
will trigger the AMT is to work with a tax professional to fill out
IRS Form 6251. If it turns out that your AMT is higher than
what you would pay normally, then your investment in a wind
project will limit your ability to utilize the PTC and other tax
credits available to wind energy investors. Form 6251 can be
found on the IRS’s website by searching for the form by number:
www.irs.gov.
TAX INCENTIVES 4
Production Tax Credits
In 2005, the state of Iowa instituted both a corporate and
individual income tax credit for wind energy projects. Sections
476C (individual) and 476B (corporate) afford for a 1.5 cent/kWh
and a 1.0 cent/kWh production credit respectively for qualifying
projects with the idea that projects that were owned by Iowa
individuals and businesses could compete with wind projects
that could more easily capture the PTC. These sections of the
tax code authorized 90 MW (476C) and 450 MW (476B) of
wind projects to receive the payments.
To qualify fo r the personal tax credit the wind energy facility
must be at least 51% owned by qualifying Iowa entities as
defined in the statute.To qualify for the corporate tax credit the
project must only be approved by the Iowa Utility Board.
Two months afte r the credit was created the allocations were
completely filled up with waiting lists of projects.*
Sales Tax Exemption
Several states have exempted sales tax on equipment,
infrastructure, supplies and replacement parts for wind systems.
To see if your stat e has an exemption on sales tax on wind
energy systems visit the Database of State Incentives for
Renewable Energy:
www.dsireusa.org.
Taxation of wind energy property
Property Taxes and Payments-In-Lieu-of-Taxes
(PILOT).Several states and localities have exempted
renewable energy systems from property tax in order to
promote development. This has a favorable impact on the
economics of a project because the addition of a several million
dollar wind project to a parcel of land could send the assessed
property value through the roof, greatly increasing the tax
burden to the landowner or project developer.
Many communities in areas where wind development is prevalent
and renewable energy systems are exempt from property taxes
negotiate payments (PILOTs) between the local taxing authority
and the project. These payments compensate for excessive use
of infrastructure in the area while developing the project and
WINDUSTRY’S Community WindToolbox
allow the local community to benefit from wind energy
development. Property taxes and PILOTs contribute a great deal
to the tax revenue of many windy rural areas and aid in the
development of new schools, community centers, and other
local programs. Project developers opt to enter into PILOT
contracts in order to be good neighbors to the community, while
other areas may require these payments before local authorities
grant permission to build.
The New York State Energy Research & Development Authority
(NYSERDA) has developed detailed information on property
tax exemptions and payments-in-lieu-of-taxes as part of their
Wind Energy Tool Kit. Much of the information is specific to the
state of New York, but the descriptions of the different types of
payments may be transferable to other parts of the country.
For more information, see:
http://www.powernaturally.org/Programs/Wind/toolk-
it/19_propertytaxexemptions.pdf.
Taxation based on production.Some states tax energy
facilities based on the energy produced. Minnesota, for example,
has a tiered tax structure on energy production. The tax rate is
determined by the size of the project.
■Large-Scale Wind Energy Conversion Systems:Projects with
installed capacities of 12 MW or greater will make payments
of 0.12¢/kWh.
■Medium-Scale Wind Energy Conversion Systems:Projects with
installed capacities between 2 and 12 MW will make
payments of 0.036¢/kWh.
■Small-Scale Wind Energy Conversion Systems:Projects with
installed capacities between 250 kW and 2 MW will make
payments of 0.012¢/kWh.
■Systems with installed capacities less than 250 kW are exempt
from the production tax.
The tax structure was set up this way to level the tax playing
field between small projects and large projects, as well as to
promote smaller locally-owned projects by not placing undue
burden on them. It is important to consult with the local tax
authority to determine how the project will be taxed.
More information on taxation of wind energy facilities in
Minnesota:
http://www.windustry.org/resources/tax.htm
State Level Tax Incentives
*For more information about Iowa Renewable Energy Production Tax Credits visit the
Database of State Incentives for Renewable Energy’s page on Iowa Incentives for Renewables
and Efficiency: www.dsireusa.org
TAX INCENTIVES 5
WINDUSTRY’S Community WindToolbox
Additional Resources for Taxes and other Incentives
Database of State Incentives for Renewable Energy (DSIRE)
DSIRE is a comprehensive source of information on state, local, utility, and federal regulations and incentives that promote renewable energy
and energy efficiency.
www.dsireusa.org
National Renewable Energy Laboratory
“A voiding the Haircut: Potential Ways to Enhance the Value of the USDA's Section 9006 Program.” Prepared by Mark Bolinger of Lawrence
Berkley National Laboratory to address concerns regarding the interaction between the USDA Farm Bill and the federal Production
Tax Credits fo r wind energy projects.
http://eetd.lbl.gov/ea/ems/reports/61076.pdf
Energy Trust of Oregon
“A Com parative Analysis of Community Wind Power Development Options in Oregon,”by Mark Bolinger, Ryan Wiser, Tom Wind, Dan Juhl,
and Robert Grace, published August 2004. An examination of potential community wind project ownership structures in the
Northwest and the types of support needed to make them viable.
www.energytrust.org/RR/wind/OR_Community_Wind_Report.pdf
A version of this report was adapted for applicability beyond Oregon by Mark Bolinger for Lawrence Berkeley National Laboratory in
November 2004.
http://www-library.lbl.gov/docs/LBNL/567/03/PDF/LBNL-56703.pdf
Internal Revenue Service
Look up information on various tax codes, forms, and agencies to contact for tax advice:
www.irs.gov