Innovation Could Create an Investment Tax Credit for Transportation, Logistics
It’s cold here in Wisconsin right now but sometimes winter produces the brightest days. Plus, it’s that time of year when we think about taxes.
Given that, let’s talk solar power and tax credits. If you are seeking ways to reduce your utility bill, decrease your business’s environmental impact, acquire equipment to depreciate, and receive a tax credit, then the investment tax credit (ITC) might be for you. For warehouse or distribution centers — where assets typically have long depreciation lives — this may be an especially attractive tax benefit.
There are several nuances to the credit, but for our purposes we will keep it high level:
- The ITC is generally a 30% credit on the cost of building the solar system.
- It must be placed in service after 2021 and construction must begin before 2033. Starting construction after 2033 results in a reduced credit with a phaseout in 2036.
- To receive the full 30% credit, the project must satisfy labor requirements. These requirements include paying a prevailing wage for the construction, alteration, or repair of the project given its location and apprentices performing a required amount of the labor hours.
- A domestic content bonus and energy community bonus could boost the credit by 10% each.
- Additionally, projects in designated low-income areas or on qualified low-income residential building projects could add another 10-20%.
Utility companies or state and local governments may also provide rebates for these projects. In most cases, while the rebates are taxable income, they don’t reduce the cost of the project for purposes of calculating the credit amount.
Let’s look at an example of a potential benefit of a $500,000 project completed by S-corporation ABC owned 100% by Joe. We will assume the project only qualifies for the base credit amount of 30% (labor requirements met) and receives a $50,000 state rebate.
The $150,000 credit will flow through to Joe on his K-1 and can offset his federal tax dollar-for-dollar. If the credit reduces tax to zero, any excess credit available can be carried back one year or forward up to 20 years.
If you’re thinking about a project, reach out to CLA’s tax credits and incentives team to discuss the opportunity.
Nathan is a CPA and has more than ten years of experience providing tax planning, consulting and compliance services to a number of privately held businesses and individuals in a variety of industries, with a special focus on the transportation and logistics industry. He actively communicates with clients and seeks ways to align their individual and business goals with available tax strategies to allow them to make well-informed decisions.
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