“Federal Income Tax incentives for Energy from Renewable Resources”

Appearing in JNREL Vo1. 20, No.2, the following article was written by John Kaufmann. Staff member Kyle Hermanson wrote the following abstract. Readers should note that this article discusses the tax code as it existed at the time of the article's publication. Any person citing the article or engaged in tax planning should consult the current edition of the Code.

Countless experts have discussed the necessity for the United States to develop clean, renewable sources of energy in order to avoid the parade of horribles attendant upon continued dependence on fossil fuels. Despite this national dialogue, businesses and consumers have not invested heavily in renewable energy projects until recently. Two things are now beginning to make these projects cost effective. First, the tremendous increase in the cost of fossil fuel in the recent past has encouraged academics and business people alike to turn to renewable energy sources as a way to avoid the risks of price fluctuation in the fossil fuel markets. Second, the cost of energy from renewable sources is approaching that from traditional sources. Given these factors, investment in renewable energy sources presents a unique opportunity to do normative good and at the same time, to succeed economically.

When weighing an investment in a renewable energy project, one of the factors a business person needs to consider is the tax effect of the project. The Internal Revenue Code contains several sections which provide tax subsidies for users and producers of renewable energy sources. Many of these tax credits were added or amended by the American Jobs Creation Act of 2004 and Title XIII of the Energy Policy Act of 2005. The tax code implicates everything from events as small as a taxpayer adding a residential solar water heater or photovoltaic cell to events as large as an agricultural operation becoming an open-loop biomass energy facility. This article explores and explains the federal income tax benefits of renewable energy investments, listing subsidies and discussing their real effect on different classes of taxpayers.