Expiration of the payroll tax deduction, changes to the capital gains tax rates, expiration of the Bush-era tax cuts, health insurance mandates, and diverging opinions between Democrats and Republicans on how to reform the Tax Code are creating much anxiety for both business and individual taxpayers alike. Tax issues are of paramount importance to businesses when faced with investment, expansion, or hiring decisions, and in the case of smaller businesses these decisions often flow through to the principals’ tax planning strategies.
Regardless of your political affiliation, the availability and usage of mechanisms that aid tax planning are important economic drivers. This article focuses on highlighting the role of tax credits as an economic engine, rather than their incorrect labeling as “subsidies”, particularly when they originate from the creation of renewable energy. The demise of companies such as Evergreen Solar and Solyndra, which received expensive loan guarantees or other subsidies only to fail spectacularly, costing taxpayers vast sums has only added to the political distaste for subsidies.
Tax credits, are an incentive that allows the outsourcing of governmental functions to the private sector. Tax credits, which allow a taxpayer an offset against taxes due, usually dollar for dollar, or are sale-able in the marketplace create a financing source for projects that otherwise would not exist. There are tax credits for remediation of environmentally contaminated properties, rehabilitation of historic buildings, producing renewable energy, and the creation of affordable rental housing, to name a few. The market for tax credits is fluid and vibrant, and it is important that the market for these tax credits remains strong. Take the conversion of biomass into renewable energy. Technologies that can perform such a conversion create energy and avoid the need to landfill industrial waste, yet these deals are difficult to finance through traditional lending channels. Generating tax credit equity for such ventures, while providing tax planning benefits to buyers of tax credits, such as large corporations, institutions, and individuals frees up businesses to invest in equipment, personnel, upgrades and other business needs that would inevitably be scrapped if these dollars were being paid as taxes.
Warren Kirshenbaum is the president of Cherrytree Group, LLC, Newton, Mass., a tax credit consultant, broker, and syndicator.