Fed Tax Incentives: Investment Tax Credit (IRC § 46)

Background

In order to stimulate the economy, the Investment Tax Credit (ITC) was designed to encourage the development and expansion of energy production facilities through the purchase of certain new or used assets for use in a trade or business. The ITC was originally enacted in order to bolster economic growth by promoting investments in various capital projects across many industries including energy, transportation and communications.

However, legislative updates over time has repealed, suspended, modified the amount of the ITC and eligibility rules, and added and removed qualifying types of investment activities.

Currently, the U.S. tax code provides multi-billion dollar support to the energy sector by providing a number of targeted tax incentives, or tax incentives. The federal government's energy industry support is generally attributed to tax incentives supporting primarily fossil fuels and renewables, and the remaining tax incentive support toward nuclear energy, efficiency enhancements, and alternative technology vehicles.


Although the majority of energy produced in the United States continues to be derived from fossil fuels, the cost of tax incentives for renewables has exceeded the cost of incentives for fossil fuels in recent years. 

Pursuant to 26 U.S. Code § 46, for purposes of section 38 ("general business credits"), the amount of the investment tax credit for any taxable year represents the sum of the following credits listed below. Note, other than the Rehabilitation and Energy Credits, the other referenced credits required applications and certification by specific deadlines which have already lapsed.

Investment Credit Property: IRC § 46 Background

In general, in order to qualify for the ITC, the taxpayer must complete the construction, reconstruction or erection of eligible qualified property (e.g. "section 38 property") or acquire the property for original use and depreciation (or amortization) must be allowed on the property. In addition, the basis of the property must generally be reduced by 50% of the amount of the credit.

However, taxpayers may not be able to claim the ITC available for the following types of property (See 26 U.S. Code § 50(b): 

  • Used predominantly outside the United States (except for property described in section 168(g)(4));

  • Used by a governmental unit or foreign person or entity (except for a qualified rehabilitated building leased to that unit, person, or entity; and property used under a lease with a term of less than 6 months (determined under section 168(i)(3)).);

  • Used by a tax-exempt organization (other than a section 521 farmers' cooperative) unless the property is used mainly in an unrelated trade or business (under section 511) or is a qualified rehabilitated building leased by the organization;

  • Used for lodging or in the furnishing of lodging (see section 50(b)(2) for exceptions); or​​​

    • This exception for lodging may not apply to—

      • ​nonlodging commercial facilities which are available to persons not using the lodging facilities on the same basis as they are available to persons using the lodging facilities;

      • property used by a hotel or motel in connection with the trade or business of furnishing lodging where the predominant portion of the accommodations is used by transients;

      • a certified historic structure to the extent of that portion of the basis which is attributable to qualified rehabilitation expenditures; and

      • any energy property.

  • Certain MACRS business property to the extent it has been expensed under section 179 of the Internal Revenue Code.​ See also Treas. Reg. § 1.46-5(g)(2). ​

See IRS Link for additional background:
  • See Form 3468 under IRC § 46 to claim the investment tax credit.

    • The investment credit consists of the rehabilitation, energy, qualifying advanced coal project, qualifying gasification project, and qualifying advanced energy project credits. 

  • Any required recapture is reported on Form 4255. For details, see Form 4255, Recapture of Investment Credit.​

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