With the growing costs of utilities, more dairy owners across the nation are turning to renewable energy alternatives. There are many benefits to using renewable energy, such as the long-term savings, less maintenance, decreasing your carbon footprint and even saving money on your taxes.
For starters, let us discuss the energy tax credits. A 30 percent tax credit is available for energy property such as solar, fuel cells and small wind. A 10 percent tax credit is available for other types of energy property, including geothermal, microturbines and combined heat and power.
The most common energy property purchased by companies are solar products, which include property that uses solar energy to generate electricity, to heat or cool a structure or to illuminate the inside of a structure using fiber optic-distributed sunlight.
Eligible energy property must be new, not previously owned, and the property must be operational in the year in which the credit is first taken.
A nice tax benefit is that the tax basis of the property for depreciation purposes is only reduced by half of the credit taken. For example, if a dairy purchases solar panels eligible for the 30 percent tax credit, the depreciable tax basis of the property is only reduced to 85 percent of the purchase price.
If available, please note that bonus depreciation may also be utilized to deduct even more of the tax basis in the year the property is placed in service.
There are many other incentives to take into consideration, including savings from rebates, sales and use tax exemptions, property tax exemptions, low-interest financing and state tax credits for certain states and certain types of equipment.
For dairies that do not have large enough tax liabilities to utilize the credit, there are other options to take advantage of the tax benefits of purchasing eligible energy property.
Three models commonly used are sale/lease-backs, partnership flips and inverted leases. A common option in the dairy industry is for the dairy to lease solar energy property from the lessor, who claims the credit and then passes it back to the dairy business via reduced lease payments.
In many arrangements, the dairy will sell the low-voltage energy produced to the utility company and buy back the power they need to run their operations. Depending on the system and the electricity needs, this arrangement can work out in favor of the dairy. Therefore, the economic benefit of electricity generated is passed to the dairy farm rather than the utility companies. With rising utility costs, that benefit will likely continue to grow.
Where will you put the panels? There are several areas that farmers choose to place the panels, such as freestall and barn roofs, open ground space and several other underutilized areas. Your local laws may determine where you can place the panels.
For example, in 2012, California passed Senate Bill 594, which allows the farmer to choose where on their property they would like to put their systems, meaning the systems were no longer limited to the areas located near electricity meters. Keep in mind that going solar could require infrastructure upgrades in order to accommodate the panels.
For example, if you decide to place them on the ground, it is recommended to purchase fencing to surround the panels to prevent theft and vandalism.
Aside from the fiscal benefits of using solar energy, there is a big public image benefit for the dairy industry to use solar energy since environmental issues have become a big topic over the last decade. Based on the kW of the solar panel system chosen, the carbon dioxide emissions for the dairy operation can be reduced from 10 percent to 45 percent.
Some other useful information about energy tax credits includes the following:
- Make sure you keep the manufacturer’s tax credit certification for all types of energy property purchased, just in case of an audit.
- The tax credit vests at 20 percent per year, which means the taxpayer must retain ownership of the property until the sixth year or the IRS will require to be paid back a portion of the tax credit.
- The tax credits are non-refundable, which means the taxpayer will not receive a tax refund for any amount that exceeds the taxpayer’s tax liability for the year. The unused portion of a business energy credit is available for a one-year carry back and 20-year carry forward.
- Labor, installation costs and other costs may be included in the tax basis of eligible energy property for the purpose of calculating the tax credit.
- Before purchasing energy property, it is a good idea to determine the return on investment to ensure your purchase will actually save the business money. Return on investment can be calculated by determining the cost of the system, the length of its useful life and the current likely future cost of conventional energy the system will replace.
Most of the solar systems put in place claim a profit after six to 10 years, while some hybrid systems boast a return of less than five years.
The tax credits for business energy property are set to expire on Dec. 31, 2016, and if extended, most experts are currently expecting a reduction in the credit for certain property from 30 percent to 10 percent.
For those of you considering alternative energy, the clock is ticking. PD
- Frazer LLP
- Email Kevin Hernandez