Investment Tax Credit Vs. Production Tax Credit

Current tax law encourages businesses to develop and operate renewable energy projects, such as wind turbines and solar farms. Not only is renewable energy equipment given a preferential depreciation schedule, but businesses may qualify for credits that offset their tax liability. The Investment Tax Credit and the Production Tax Credit both offset taxes owed dollar-for-dollar, helping bolster the profits of companies generating renewable energy. Investors in partnerships and S-Corporations can claim their proportion of the credit even if they’re uninvolved in day-to-day operations.

Calculation of Credit

Determining the amount of the credit differs between the investment tax credit and the production tax credit. The investment tax credit depends on the amount, in dollars, of capital investment in renewable energy projects. Taxpayers can generally claim 30 percent of the project’s costs under the investment tax credit. Production tax credit depends on the amount, in kilowatt-hours, of energy generated by the renewable energy project. The per-kilowatt-hour rate of the credit varies based on technology, such as wind, geothermal or hydrokinetic.

When Earned

The timing of the tax credit is set in part by how the amount is calculated. The investment tax credit depends on the capital investment, which is the amount it costs to place the project into service. Businesses can claim the investment tax credit in the year it is placed into service. The production tax credit, on the other hand, varies with the output in kilowatt-hours. Although businesses can carry the production tax credit over to different tax years, renewable energy projects must generate energy to earn and set the amount of the credit.

Cash Grant

Rather than taking the investment tax credit to offset the year’s tax bill, businesses can elect to receive a cash grant from the Treasury equal to the tax credit they otherwise could claim. By claiming the cash grant, businesses can receive up to 30 percent of the capital investment upfront to offset challenges, such as higher costs of capital or limited financing options. Businesses can elect investment tax credit treatment of certain production tax credit-eligible projects to take advantage of the cash grant option.

Eligibility

The production tax credit and investment tax credit have similar eligibility requirements. Both stipulate that only taxpayers can claim the tax credit. The production tax credit requires the taxpayer to sell electricity to an unrelated third party, and it excludes utility companies that aren’t investor-owned. The investment tax credit doesn’t require the taxpayer to sell electricity, but it generally only applies to new equipment. Even public utility companies can benefit from the investment tax credit. Both credits have unique placed-in-service time requirements that are subject to change if the credits are extended or reenacted.

Investor Activism

The impact of the investment or production tax credit on a company's financial statements can be significant. If a company you've invested in qualifies, claiming the credit would reduce the tax bill and increase earnings per share and any divisible surplus. Check out the company's filings for disclosure notes on the tax credits, and contact someone in the investor relations department if you believe they're failing to claim this credit.