BETC: Oregon’s Tax Incentive to Reduce Energy Costs
By Steven M. Hitchcock
SAALFELD GRIGGS PC
Over the last several years, one of the most pressing issues at both the local and national levels has been the drastic increase in the cost of energy. As a result, there have been increased efforts to develop alternative forms of energy to reduce our dependence on foreign energy sources and our impact on the environment. These efforts are driven, in part, by federal and state tax incentives. A renewed commitment from the Oregon legislature in the form of expanded tax incentives has resulted in significant increases in the number of applications for eligible tax credits for renewable resource projects.
Among the incentives provided by the Oregon legislature is the Business Energy Tax Credit (“BETC”). The BETC is a program that encourages Oregonians to produce and use renewable energy. The BETC provides tax incentives relating to projects that use solar, wind, hydro, geothermal, biomass, or certain fuel cells to produce energy, displace energy, or reclaim energy from waste.
The Oregon legislature expanded the scope of the BETC in several ways both in 2007 and 2008. Among the new features, the legislature increased the maximum project costs eligible for a tax credit from $10 million to $20 million. Additionally, tax credits were added for renewable energy systems installed by home builders. The credit was also extended to high-efficiency cogeneration projects and the manufacturing or distribution of alternative fuels.
For most taxpayers, the BETC functions in one of two ways. The first method is the straight tax credit option, in which the taxpayer receives a state income tax credit of up to 50% of qualified capital costs for renewable energy projects. The eligible cost for purposes of obtaining the BETC is equal to the lesser of the facility cost or the maximum eligible cost for a particular project as determined by the Oregon Department of Energy (“DOE”). Depending on the type and size of a project, along with the amount of increased efficiency created by the project, the maximum amount of eligible costs is $20 million.
Eligible costs must be directly related to the project. Such costs include equipment, engineering and design fees, materials, supplies and installation. Loan fees, permits and legal fees also may be claimed. If the total eligible costs of the project are $20,000 or less, the taxpayer may receive a tax credit of up to $10,000 in the year of the project. If the total eligible costs exceed $20,000, the taxpayer gets a credit of 10% of the eligible costs for a period of five years. If the tax credit in a particular year exceeds your tax liability, you can carry forward the unused portion for up to 8 years.
The second way to take advantage of the BETC is by using the “pass through” or “monetization” option. Here, the business or entity transfers the credit to a third party in return for a lump-sum cash payment upon completion of the project. The amount of the payment to the entity using this option varies based on a pass-through rate, which takes into account the net present value of the credit, as determined by the DOE. The pass through option may be advantageous for certain entities that don’t pay taxes, such as non-profit organizations, schools or government entities that have no tax liability. It may also be useful for businesses, with or without tax liability, that wish to reduce energy costs while infusing capital into current projects.
In its last session, the Oregon legislature also extended the BETC to home builder installed renewable energy systems, with an added credit for certain “high performance homes.” The basic credit is up to $9,000 for a single family dwelling and up to a $12,000 credit for high performance homes. A “high performance home” is a dwelling constructed by a builder licensed under the Oregon Residential Specialty Code. The home must meet certain BETC technical requirements established by DOE that result in a reduction of the net purchased energy for the home’s use.
Eligibility for the BETC requires adherence to strict guidelines. All projects eligible for the BETC must be pre-approved by DOE. Applications must be received by DOE before a project begins and must be completed within 3 years of preliminary certification by DOE. Furthermore, all credits must be claimed within 8 years of the tax credit date.
In addition to the BETC, there are numerous other incentives for homeowners, homebuilders or businesses, such as grants and loans that encourage the use of renewable energy. The federal government provides tax incentives that encourage energy conservation as well. Although some federal tax incentives are scheduled to sunset at the end of this year, it is anticipated that they will be renewed or even expanded. Of course, the outcome depends upon the results of the upcoming presidential election. Furthermore, incentives can be obtained from entities such as the Energy Trust of Oregon, an organization charged by the Oregon Public Utility Commission with investing in cost-effective energy conservation.
Although most people support the idea of the private production of renewable energy, one of the concerns has always been its prohibitive cost. Investors in such systems wish to see a short “break even” point, in which the sum of savings on energy bills exceeds the up front costs of the installation. Due to the availability of various public and private incentives, as well as advances in renewable energy technology, the break even point continues to grow shorter. For example, in some cases, businesses installing solar energy production cells have seen the break even point achieved in as little as 5 years.
Oregon’s government has a strong commitment to renewable energy. Private investors are showing a strong commitment as well, investing billions in capital in recent years in renewable energy technology. With the recent explosion in energy costs, the public is also increasing their use of renewable resources. In fact, the Oregon House Revenue Committee has been told to expect the use of up to $300 million in BETC tax credits over the next 5 years. It might make sense to see if your business can take advantage of this generous incentive.
If you would like more information on the matters addressed in this article or if you have questions regarding the BETC, please call a member of our Business and Taxation Group.