Over the last ten years, the search for energy efficiency in the form of cleaner, more sustainable forms of energy has made its way into both the federal and state tax laws. Especially at the state level, these incentives can take many different forms and have a bearing on the differing tax liabilities a business faces. This article will survey select incentives and credits that are available to businesses operating in the Mid-Atlantic region.
Maryland
Green Buildings Credit
Individuals or corporations can claim an income tax credit for green buildings and green building components in Maryland. To the extent that the credit remains unused because the amount of the credit exceeds the income tax liability, the credit can be carried forward for up to ten years after the taxable year for which the credit is allowed. The amount of the credit varies depending on the nature of the expenditure. One of the available credits is 8 percent of "allowable costs" for the construction or rehabilitation of a "green whole building."
A green whole building is a building for which the "base building" is a "green base building" and all tenant space is "green tenant space." A base building is all areas of a building not intended for occupancy by a tenant or owner, such as structural components, exterior walls, floors and the like. In order to be a green base building, this part of the building must, for new construction, meet certain specified standards of the American Society for Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE), certified as Silver under the Leadership for Energy and Environmental Design (LEED®) criteria, and meet certain other LEED accreditation standards.
Allowable costs are capital expenditures, other than for land, incurred after July 1, 2001, for construction or rehabilitation, commissioning costs, interest, architectural, engineering and other professional fees, recording taxes and fees, and certain finishing and furnishings (including lighting, plumbing, electrical and ventilation costs). Telephones, computers (other than electrical wiring), legal fees, site costs, other finishings and furnishings, or the cost of purchasing or installing fuel cells, wind turbines, or photovoltaic modules are not allowable costs. For purposes of the 8-percent credit, allowable costs are capped at $120 per square foot for the base building and $60 per square foot for that portion that comprises tenant space.
A separate 6-percent credit is available to owners for allowable costs paid or incurred for the construction of a new green base building or the rehabilitation of an existing building into a green base building. This 6-percent credit is likewise capped at $120 per square foot. A 6-percent credit also is available for owners or tenants for the construction or completion of green tenant space or the rehabilitation of space into green tenant space. The credit for tenant space is capped at $60 per square foot, and is allocated between the owner and the tenant according to specific ordering rules if both incurred costs. In order to qualify for the tenant space portion of the credit, an owner must occupy at least 10,000 square feet, and a tenant must occupy at least 5,000 square feet in order to claim the credit.
Additionally, there are credits available for certain costs incurred for the installation of fuel cells that are qualifying alternate energy sources (integrated or non-integrated photovoltaic modules, wind turbines and fuel cells that meet certain requirements).
The credits begin in the credit allowance year, which is the later of (1) the year the property for which the credit is sought is placed in service, (2) the year the alternative energy source is fully operational, or (3) the earliest taxable year that the initial credit certificate granted by the state permits the credit to be used. The total amount of the green credits granted by the state under the green buildings program is limited to $25 million. The program expires on December 31, 2011. The taxpayer can claim the credit by applying for and obtaining an initial credit certificate from the Maryland Energy Administration.
Solar Grant Program
The Maryland Energy Administration administers a solar grant program. The amount of the grant is equal to the lesser of $2,500 per kilowatt of installed electricity generation capacity of photovoltaic property, or $10,000; or $3,000 or 30 percent of the total installed cost of solar water heating property. "Photovoltaic property" is solar energy property that uses a solar photovoltaic process to generate electricity and that meets applicable performance and quality standards and certification requirements that are in effect at the time the property is acquired. "Solar energy property" is equipment that uses solar energy to generate electricity, to heat or cool a structure or to provide hot water for use in a structure, or to provide solar process heat. Similar to the language contained in the energy tax credit found in Section 48 of the Internal Revenue Code, it does not include a swimming pool, hot tub, or any other energy storage medium that has a function other than storage. "Solar water heating property" is solar energy property that, when installed in connection with a structure, uses solar energy to provide hot water and must meet applicable performance and quality standards and certification requirements in effect at the time of acquisition.
Credit for Qualified Energy Resources
Corporations can claim a Maryland income tax credit of $0.85 for each kilowatt hour of electricity it produces from qualified energy resources at a qualified Maryland facility over a five-year period specified in the credit certificate granted under the program by the Maryland Energy Administration and sold to an unrelated party. If the facility uses qualified energy resources that are co-fired with coal, the credit is limited to $0.05 per kilowatt hour of electricity the corporation produces from qualified energy resources at a qualified Maryland facility during the period. The credit is limited to one-fifth of the maximum amount of the credit granted in the initial credit certificate.
"Qualified energy resources" has the same meaning as it does under Section 45(c) of the Internal Revenue Code, which includes energy produced from wind, closed and open loop biomass, geothermal, solar, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Various other resources qualified for Maryland purposes are not included in the federal tax provision, including methane or any combustible gas resulting from anaerobic or thermal decomposition resulting from an agricultural operation as well as from a landfill or wastewater treatment plant. A "qualified Maryland facility" is located within the state, primarily uses qualified energy resources to produce electricity, and is originally placed in service on or after January 1, 2006 but before January 1, 2011. The credit is based upon certificates issued upon the approval of a particular project by the Maryland Energy Administration, which can offer no more than $25 million in the aggregate. Credits can be carried forward for up to ten years after the tax year in which the credit arose.
Virginia
Green Job Creation Tax Credit
Virginia has recently enacted a new green job creation tax credit applicable for tax years after January 1, 2010 but before January 1, 2015. Taxpayers are allowed a credit for each new "green job" created in Virginia. A "green job" is employment in industries relating to the field of renewable, alternative energies, including manufacturing and operation of products used to generate electricity and other forms of energy from alternative sources that include hydrogen and fuel cell technology, landfill gas, geothermal heating systems, solar heating systems, hydropower systems, wind systems and biomass and biofuel systems. The statute allows the Secretary of Commerce and Trade to develop a detailed definition and list of eligible jobs.
To qualify, the taxpayer must demonstrate that, after July 1, 2010, the green job was created by the taxpayer and that such job was continuously performed in Virginia during the taxable year. To be considered a "job," the job must entail at least 35 hours a week, 48 weeks a year, or at least 1,680 hours per year. A job will not be considered new if it is merely the shifting of responsibilities from one Virginia location to another. The credit is $500 for each new green job with a salary of at least $50,000, and each qualifying taxpayer is allowed a credit for up to 350 jobs created.
The credit is taken in $100 increments per job created, starting in the taxable year in which the job has been filled for at least one year and for each of the four succeeding taxable years provided the job is continuously filled during the taxable year. The credit is not refundable, and any excess credit can be carried over for five taxable years. Additionally, the credits granted to a pass-through entity such as a partnership or S corporation pass through to the owners, allocated in proportion to their ownership interests.
Clean Fuel Vehicle Job Creation Credit
Through December 31, 2011, a corporation is allowed credit for each job created for the following: (1) manufacture of certain major mechanical components for vehicles fueled by clean special fuels; (2) manufacture of components used to convert vehicles designed to operate on gas or diesel to operate on clean special fuels or biofuels; (3) the conversion of vehicles designed to operate on gas or diesel to operate on clean special fuels or biofuels; (4) the manufacture of vehicles designed to operate on clean special fuels; (5) the manufacture of components designed to produce, store and dispense clean special fuels or advanced biofuels; or (6) the production of advanced biofuels.
The credit is equal to $700 per job created, taken ratably over three years, from the taxable year in which the job is created and in each of the two successive taxable years. For purposes of this credit, a job is one that requires 40 hours of work a week for at least 40 weeks a year. In order to qualify for the credit, the corporation must demonstrate that the job was created during the taxable year for which the credit was claimed or was continued from the previous taxable year for which the credit was claimed and the employment level in the relevant job or jobs has increased when compared to the previous taxable year. This particular credit has a five-year carryover, and is not refundable. It can be taken by a pass-through entity and passed through to the owners, allocated in proportion to their ownership interests. The credit cannot be taken by an employer who is already taking advantage of Virginia's other major employment credit, the major jobs facility tax credit.
Pepper Perspective
In Maryland and Virginia, the credits seem to break down across clear lines. Virginia's green jobs credit is closely related to the Virginia major jobs facility tax credit, and is designed, like that credit, to spur employment in the state. Businesses in the targeted segments would be well served to consider basing or expanding their operations in Virginia as this would provide significant tax incentives. The major Maryland credit, on the other hand, encourages green real estate development, and may provide tax advantages to real estate developers considering various locations throughout the region. We anticipate that credits like these, despite the relatively short time frame to take advantage of them, may be extended by the legislature, especially in light of the need for jobs for this economy, as well as the highlighted focus on minimizing our carbon footprint that has resulted from the world's focus on the environmental damage being sustained in the Gulf of Mexico from the oil spill.
The material in this publication is based on laws, court decisions, administrative rulings, and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The Information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Internal Revenue service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
This article is republished with permission of Pepper Hamilton, LLP. Further duplication without the permission of Pepper Hamilton, LLP is prohibited. All rights reserved.
RELATED LINKS: For further discussion of state tax credits and incentives, see: