By Philip Drudy, CPA
 
With President Obama's appointment of Dr. Steven Chu as Secretary of Energy, the President has sent a clear signal that he will support the development of alternative energy sources and applications. As we begin 2009, and given the current economy, businesses may have an incentive to develop and utilize renewable energy systems. With renewable energy, businesses have an opportunity to reduce these costs and have the government pay for a significant portion of them. But is it cost effective for businesses to go green?

While companies should be receptive to the environmental concerns of their customers and employees, there should be a practical balance between what is good for the environment and what is a good business decision. As governments start to increase their environmental protection legislation and energy conservation initiatives, business owners need to be proactive in preparing for these changes.

Throughout the country, there are many systems that have harnessed the renewable resources of a particular area, such as wind farms in California and Texas. In New Jersey, many companies are switching to more renewable energy sources, including the installation of solar panels on buildings. When considering the use of solar energy, one must weigh the many advantages and disadvantages of its use:
 
Solar Energy Advantages

• A tax credit is provided against the costs of installation and accessories.
• It is a completely renewable source that cannot be depleted.
• Easily installed, there is little or no maintenance going forward. Currently, the typical solar panel has a life span of about 20 to 30 years.
• It is quiet and generates no pollution. 

Solar Energy Disadvantages

• The initial investment can be expensive and, given demand, may be in short supply. 
• In low-output settings, more cells may be needed and it may take longer to get a return on your investment. 
• The location needs to be conducive to solar panels. The area cannot be in the shade and must be large enough to place an appropriate amount of cells. 
• The cells do not work well on cloudy days and during storms. 
• The power generated needs to be stored in batteries and the storage technology is imperfect.  
• The panel and the batteries are not environmentally friendly and may create a disposal issue.

Solar panels certainly have potential, but since the technology is still being developed, there are issues that need to be worked through to determine whether they are feasible for a particular building or business. To help spur interest in renewable energy, the government has enacted an energy credit. Under Internal Revenue Code (IRC) Section 48, a business that installs solar panels on its property is entitled to a 30-percent credit against the cost of installing the panels. This credit can offset both the AMT for property placed in service after October 3, 2008, and for regular tax. An unused credit can be carried forward or back under the general investment tax credit rules on a separate credit basis per IRC Section 38. The credit reduces the federal depreciable base of the installed property by 50 percent.
 
The Benefits of Renewable Energy Certificates
States are starting to create programs that require utilities to either generate a portion of their energy from renewable sources or purchase renewable energy certificates (REC). In addition, large businesses are being asked to reduce their carbon footprint, and many are doing so voluntarily. Many utilities and businesses do not have the capability to comply with the new renewable energy rules that the states are now imposing. Currently, there are 25 states that have programs that require a percentage of the electricity be generated from renewable sources. New Jersey currently requires 6.5 percent of the energy be generated by renewable sources and 22.5 percent by the year 2021. Under a REC program, a company that generates renewable energy through solar panels, wind turbines or other renewable sources can sell or trade a certificate to a company that needs to meet a state requirement. In states with REC programs, a certificate is generally issued for every kilowatt hour (kWh) of electricity produced.

For a business to determine whether it makes sense to go green, it must weigh all of the financial and non-financial advantages and disadvantages. For example, a property owner installs $2 million worth of solar panels that will generate 20 percent of the building’s need for 100,000 Kwh of electricity a year. The current market for RECs is $0.50 per kWh. Thus, the property owner will receive a credit against regular and AMT taxes of $600,000 ($2 million x 30 percent) and an annual payment from the utilities of $10,000 (100,000 Kwh x 20 percent x $0.50). The balance of the depreciable base ($2 million-(600,000 x 50 percent) 1,700,000) is depreciated over five years for federal tax purposes. Consult the specific state as to whether it uses federal depreciable base or entire basis depreciation.

The benefit of using solar panels is available to the property owner for the life of the panels and as long as the utility companies need to purchase RECs to meet state requirements. The long-term benefit of converting to renewable energy sources must be considered against the initial cash outlay needed to purchase the equipment. In order to maximize the benefit, the company installing the renewable energy equipment must generate enough profit to fully utilize the energy credit and the annual depreciation. In addition, the property must have enough useable space with ample sunlight to maximize the energy generated from the renewable source.

There are many environmentally friendly systems available that business owners should evaluate to determine the proper one for their property. These systems include wind turbines, micro-hydro generators (water mills) and fuel cells. Renewable energy is only one area a green business owner can address. Other areas are alternative fuels and energy-efficient equipment and software.

Philip Drudy, CPA, Esq., is a tax partner at J.H. Cohn LLP. He can be reached at pdrudy@jhcohn.com or 973-403-6950.