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federal taxes can be combined (to account for the deduction of state taxes on federal returns) to estimate an effective tax rate as ~ o I I o w s ~ ~ : Effective Tax Rate = State Tax Rate +Federal Tax Rate(1 - State Tax Rate) (2-14) The analyst may also need to factor in special tax considerations that may apply to the analysis, such as energy tax credits, capital gains and losses, depreciable assets, net operating loss carrybacks and carryovers, dividends, interest deductions, and installment tax payments. Weston and Brigham (198I) cover these subjects in more detail in Managerial Finance. Energy tax credits and depreciation are important components of the tax issue and warrant special attention. These subjects are covered in the next two sections. Renewable Energy Tax Credits Energy tax credits for technologies such as renewables can enhance after-tax cash flow and promote investment. An energy investment tax credit is an immediate reduction in income taxes equal to a percentage of the installed cost of a new investment. The tax code mandates that when an energy tax credit is taken, the depreciable base (capital sum to be recovered by depreciation) of the property for which the credit was taken must be reduced by 50% of the amount of the tax credit. Another key provision of the tax code allows for depreciation to be carried through to other businesses owned by that specificfirm. Thisisimportantbecauseincomeisusuallynotverylargeintheearlyyearsofrenewable projects. The Energy Policy Act (EPACT) of 1992 includes a 10% tax credit applicable to solar and geothermal property used for the generation of electricity; however, public utilities are not eligible for this tax credit (CCH 1992). This tax credit was available prior to the EPACT as well, but EPACT extended it indefinitely. EPACT also includes a production tax credit applicable to wind systems and dedicated biomass(cropsgrownspecificallyforenergyproduction)systemsthatgenerateelectricity. Thiscredit provides a 10-year, 1.5 cent/kWh production tax credit. State governments may also offer energy tax credits that are applicable to renewables when calculating state income taxes. State energy tax credits may vary considerably fi-om those of the federal government’s. Also, some states have property tax exemption laws that apply to renewable energy projects. Theanalystshouldresearchtheapplicablefederalandstateenergytaxcreditrulesattheonset of an analysis to determine appropriate levels, applicability, and special rules that may apply. When applying a tax credit in an analysis, the analyst should be cautious because tax credits usually apply onlytospecificcostsandnottothetotalcostoftheproject. Forinstance,federalinvestmenttaxcredit rules do not allow credits to apply to transmission costs. States may have limitations as well. It is recommended that the analyst be certain of the costs the credits may be applied to. Table 2-6 provides a summary of state tax credits and other financial incentives for solar technologies. An explicit definition of solar technologies is not provided because the table is not comprehensive. For example, a state may provide incentives for residential photovoltaics but not for utility solar-thermal systems. Because of these circumstances, the table should only be used for general information. The analyst should research further to identify more specific incentives. 140neimplication of using an effective tax rate that includes both federal and state income tax is that the state depreciation rules are assumed to be the same as the federal depreciation rules. 16PDF Image | A Manual for the Economic Evaluation of Energy Efficiency and Renewable Energy Technologies
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