Clean Energy Tax Credits: How Do They Work?

As the world moves towards a more sustainable future, clean energy has emerged as a frontrunner in the fight against climate change; however, transitioning from traditional energy sources to renewable ones is not always easy or affordable. Recognizing this challenge, governments worldwide, including the United States, have implemented energy credit incentives to encourage the shift.  

Investment Tax Credits (ITCs) and Production Tax Credits (PTCs) stand out as the IRS’s most powerful tools for driving the clean energy transition. Let’s delve deeper into how these incentives work and why they are pivotal for our sustainable future. 

Investment Tax Credits 

What is the Investment Tax Credit (ITC)? 

The ITC provides financial incentives for businesses and homeowners who invest in renewable energy installations. It allows taxpayers to deduct a percentage of the eligible costs of installing a renewable energy system from their federal taxes. 

How Does the ITC Work? 

The percentage a taxpayer can claim depends on the type of technology installed and when the installation took place. For example, solar energy projects began construction before the end of 2019 and were eligible for a 30% tax credit; however, this percentage decreases over time, as the intent is to stimulate rapid adoption and market maturity. 

Benefits of the ITC 

By offsetting the upfront costs of renewable energy systems, the ITC typically appeals to investors in renewable projects that incur high installation costs or qualify for bonus credits. This offset of costs also helps accelerate the deployment of solar panels, wind turbines, and other renewable energy technologies. 

Production Tax Credits 

What is the Production Tax Credit (PTC)? 

While the ITC is based on the investment or capital cost of a renewable energy project, the PTC is a per-kilowatt-hour tax credit for electricity generated by solar or other qualifying technologies. It applies for the first ten years of a system’s operation, reduces the federal income tax liability, and is adjusted annually for inflation. 

How Does the PTC Work? 

The PTC primarily benefits large-scale photovoltaic, wind, biomass, geothermal, and certain hydropower projects. Once a project is operational, the credit earned is based on the actual energy produced and delivered to the grid. The credit amount varies depending on the technology, with wind projects historically receiving the highest credit. 

 Benefits of the PTC 

By rewarding energy production, the PTC ensures that people are not just building renewable energy projects but also efficiently operating them. It supports ongoing operations and maintenance of existing projects and incentivizes continuous clean energy production. 

 How to Leverage Energy Tax Credits for Your Organization   

The ITC and PTC play crucial roles in the clean energy transition. By reducing financial barriers and incentivizing production, they have catalyzed significant growth in the renewable energy sector.  

As the urgency to combat climate change grows, such tax credits ensure that clean energy remains a competitive, viable solution for the world’s energy needs. This is not just about going green – it’s about making it financially feasible and rewarding for everyone involved. 

Do you need help assessing how these clean energy incentives could impact your organization? The EisnerAmper Federal Tax experts have decades of experience navigating federal tax credit and incentive opportunities.