Energy and R&D Tax Credits for Businesses

By : Phil DrudyMay 19, 2011

Overview

• R&D Credits• Energy Credits• 179D deduction- LEEDS Buildings• The increasing role of engineers in tax

planning.

Federal R&D Tax Credit Basics

• Enacted in 1981.• Intended to encourage investment in engineering and the

physical, biological, and computer sciences in the U.S.• Expired 14 times and extended 13 times, most recently

expired EOY 2009.• Net benefit equals as much as about 9.1% of qualified costs.• The subject of, and influenced by, a myriad for statutory,

regulatory, judicial, and administrative developments.• Taxpayers (amongst others) hold a range of misconceptions.

Federal R&D Tax Credit Basics• Eligible Expenditures:• Qualified Research Expenses (“QREs”)

– Wages for performing or directly supporting or supervising qualified research.

– Contract research expenses (65%, 75%, or 100%) .– Cost of supplies.– Computer rents/leases.

• Basic Research Payments to Qualified Organizations.• Certain Amounts Paid to Energy Consortia for Energy

Research.

Federal R&D Tax Credit BasicsCredit Calculations Differ Over Time, By Company

Credit Options Rate* Max. Benefit** Base Amount (“BA”)

Regular Credit 20% 6.50% • “Start-Up”• Not “Start-Up”

Alternative Simplified (“ASC”)for 2007 and 2008for tax years ending after 2008

12%14%

About 7.8%About 9.1%

50% of average annualQREs for prior 3 taxyears

• For regular credit, BA equals “fixed-base percentage” times “average annual grossreceipts” for four prior tax years, but the minimum BA is 50% of credit year QREs.*Because of the incremental nature of the credit, the option with the highest rate won’t necessarily deliver the largest credit.** Maximum benefit reflects §280C(c) requirement to reduce R&D deduction by theamount of the credit. Alternatively, a taxpayer may elect a reduced credit. This“§280C election” must be made on a timely-filed, original return.

Significant Developments

General Business Credits of Eligible Small Businesses

• On September 27, 2010, the President signed the Small Business Jobs Act of2010, Pub. L. No. 111-240 (“Act”).

• The Act amends Internal Revenue Code (“IRC”) Section 38(c)(5)(A), which provides that an “eligible small business” can offset both regular and alternative minimum tax liabilities with “eligible small business credits” for taxable years beginning in 2010.

• In addition, the Act amends IRC Section 39(a) to extend the carryback period for unused eligible small business credits from one year to five years for the first tax year beginning in 2010.

R&D Tax Credits and Incentives for Investments In and Outside the U.S.

Eligible Activities Include:Process Engineering

Design Engineering

Manufacturing Engineering

Activities depending on engineering or the physical, chemical, biological, or computer sciences to develop/improve:

Benefits:Federal:

Up to as much as almost 9% of qualified spending

States:

• Majority of states provide benefits• Up to 40% of qualified spending• Refundable credits offered in some states, i.e., credits

payable whether taxes are due or notProducts, Manufacturing Processes, Software

Updates to Green Incentives

• Eligible for either the Section 48 ITC, Section 45 PTC, or Section 1603 grant• Must pay federal income taxes to qualify for ITC or PTC (expires 12/31/2016)• Do not need to pay federal income taxes to qualify for 1603 grant (expires

12/31/2011)• May not take more than one of the incentives• Can make an irrevocable election for certain qualified property to take the

Section 48 Investment Tax Credit in lieu of the Section 45 (see IRB 2009-25)• ITC credit is 30% of expenditures with no maximum credit for property placed in

service in years beginning on or after January 1, 2009• No requirement for third party sales• No reduction of credit for subsidized or tax-exempt financing• Basis of property must be reduced by 50% of the amount of the credit

• Remaining basis in property still eligible for bonus depreciation.

Business Energy Investment Tax Credit – Section 48

Is the property:1. Qualified fuel cell?2. Qualified small wind turbines?3. Solar used to generate electricity for heating or

cooling or to provide solar process heat?4. Solar property used to illuminate a building using

fiber optic distributed sunlight?

Did the taxpayer invest in alternative energy

property to generate power for its own use?

Was the property placed in service before 2016?

30% credit (10% for solar after 2016)

10% credit

Is the property:1. Equipment for producing or distributing geothermal

energy?2. Equipment that uses the ground or ground water to

heat or cool a structure?3. Qualified micro-turbines (small combustion)?4. Combined heat and power systems?

NO

YES

No additional benefit available

NO

NO

Note that the credit for geothermal property, with the exception of geothermal heat pumps, has no stated expiration date.

YES

YES

YES

YES

NO

YES

Treasury Grant – Application for Section 1603 Payment

Section 1 – Applicant Eligibility•Type of applicant•Applicant’s Interest in the property

Section 2 – Property Information•Depreciation and use of property• Identification of property•Placed in service date•Construction began•Narrative description of beginning of construction

Section 3 – Applicant Information•Name of the applicant•Address•EIN•DUNS number (Call1.866.705.5711 to request)•Contact person•Previous applications

Section 4 – Property Description•Type of energy property•Narrative description of property•How energy will be used• Installed nameplate capacity•Estimated annual production• Job creation/retention

Section 5 – Cost Basis and Request for Payment•Qualified cost basis•Applicable percentage•Payment assigned

Section 6 – Documentation•Eligible Property• Design plans• Certain facility specific eligibility documentation (see 4A

of application)•Cost Certification• Audit report ($1mm or more)• Agreed upon procedures (>$500 but < $1mm)

Section 6 – Documentation (continued)•Placed in Service/Under Construction but not yet Placed in Service•Commissioning report• Interconnection agreement (if applicable)• Financial documentation demonstrating

construction has begun

Section 6 – Documentation (continued)•Leased Property•Pass-through election/waiver agreement

Section 7 – Signature of Applicant

Energy –179 D Deduction

• DEDUCTION FOR ENERGY EFFICIENT• COMMERCIAL BUILDINGS• – Sets forth procedurally and administratively the• requirements for § 179D(c) and (d)• – Clarification of partial deduction• • Reference Building• • Certification• • Qualified Person• • Qualified Software for Energy Modeling• • Definitions

NOT A CREDIT - IT IS A DEDUCTION

• Subtitle C—Conservation and Energy Efficiency Provisions “SEC. 179D. ENERGY EFFICIENTCOMMERCIAL BUILDINGS DEDUCTION

• “(a) IN GENERAL.—There shall be allowed as a deduction an amount equal to the cost of energy efficient commercial building property placed in service during the taxable year

Energy-Efficient Commercial Building Deduction -Section 179D

Potential$0.60 per square foot

deduction(lighting, HVAC, or envelope)

Did the new facility or renovation include installation of interior lighting, HVAC or hot water

systems, and building envelope that reduces power use 50% or more? (compared to reference

building)

Did the taxpayer build a new facility or renovate an existing

facility?

Was the project certified?

Was the property placed in service before 2014?

Potential$1.80 per square foot

deduction (whole building)

YES

YES

If 50% reduction is NOT met, is energy reduced by 20% for lighting, 20% for HVAC, or

10% for building envelope?

NO

YES

YES

No Section 179D benefit available

NO

NO

No Section 179D benefit available

NO

NO

Certification may be completed by FTC&HNO

NO

Did the taxpayer design a building for a government

entity?YES

ORNO

YES

YES

YES

LEED BUILDINGS• LEADERSHIP IN ENERGY & ENVIRONMENTAL DESIGN• LEED Rating System:

– NC = New Construction– EB = Existing Buildings– CI = Commercial Interiors– CS = Core & Shell– H = Homes– ND = Neighborhood Development

• LEED Categories:– CERTIFIED = 26 – 32 points– SILVER = 33 – 38 points– GOLD = 39 - 51 points– PLATINUM = 52 – 69 points– PROJECT TOTALS = 69 POSSIBLE POINTS

SUMMARY OF TAX DEDUCTIONS

Engineers Role with Accountants

• It started with – R&D Studies– Cost Segregation Studies

• It Continues with– Energy Credits– Alternative Fuel

Emerging Technology

• Accountants are depending more on Engineers For– Assistance in qualifying for Grants and Credits– Preparing the filing documents– Support for the tax positions– Documenting that technical requirements are meet

Phil Drudy, CPA, ESQ.

Phil is a member of both the American Institute of Certified Public Accountants and the Partnership Taxation Committee. He is a past Chairman of the Partnership Committee of the NYSSCPA and is on the advisory board for the Executive’s Tax & Management Report newsletter, published by CACHE Publications.Phil has worked for national, Big Four firms, as well as regional firms in the New York Metropolitan area. This broad range of experience has helped him build substantial expertise in many aspects tax, including representation in front of the IRS, complex corporate compliance and structuring, and succession planning.Phil is a frequent speaker at seminars and conferences across the country on tax, estate planning, and business life cycle issues. He is ‐ often called upon by the national and local media for contribution on current topics in these areas, including The Tax Adviser and NJ

Monthly. He has been quoted in The Wall Street Journal, The New York Times and several Bloomberg financial publications and has also been published in manuals and newsletters. Phil is a graduate of Brooklyn College with a B.S. in Science and a graduate of Brooklyn Law School with a Juris Doctor degree.