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Reduce, Reuse, Recycle 

Generous tax exemptions and credits exist for those that reduce the use of fossil fuels and waste, reuse resources, and recycle. Exemptions exist for income taxes, sales and use taxes, and property taxes. 

Reduce Use of Fossil Fuels: Tax Credits for Producers of Alternative Fuels and Energy 

When one thinks of green fuels and energy, it is common to think of fuels and energy that come from plentiful or renewable resources such as oil shale or biomass. One might also think of windmills or solar panels. Kentucky has tax incentives for producers of green fuels and energy. 

The Kentucky Economic Development Finance Authority (“KEDFA”) has the authority to enter into a tax incentive agreement with a company to construct, retrofit or upgrade a facility that produces qualifying alternative fuels or energy, providing it with an up to 100% credit against income and limited liability entity tax (“LLET”) from the project for up to 50% of the capital investment in the project. See KRS 154.27-010, et seq.; KRS 141.421. An approved company is also eligible for wage assessments [see KRS 154.27-080] and sales tax incentives [see KRS 139.517]. 

To take advantage of these incentives, a company must make a minimum investment:

• An alternative fuel (i.e., fuels used for powering vehicles, aircraft or machinery) facility or gasification facility that uses oil shale, tar sands, or coal as the primary feedstock requires a minimum investment of $100 million; 
• An alternative fuel facility or gasification facility that uses biomass resources (which would include renewable organic matter such as crops, trees, wood, plants, animal fats and by-products, etc.) as the primary feedstock requires a minimum investment of $25 million; 
• An energy-efficient alternative fuel (i.e., fuels produced from processes designed to densify feedstock coal, waste coal, or biomass resources with a greater energy density than the feedstock) facility requires a minimum investment of $25 million; 
• An alternative fuel facility that primarily produces for sale alternative transportation fuels using natural gas or natural gas liquids as the primary feedstock requires a minimum investment of $1 million, but KEDFA can only approve a maximum of five of these projects; and, 
• A renewable energy facility that generates qualified amounts of electricity for sale to unrelated entities via wind power, biomass resources, landfill methane gas, hydropower, solar power, etc. requires a minimum investment of $1 million.

The Commonwealth also provides producers and blenders of biodiesel and renewable diesel fuel a $1 per gallon nonrefundable credit against income tax and LLET. See KRS 141.422, et seq; 103 KAR 15:110; 103 KAR 15:120; 103 KAR 15:140. Biodiesel is diesel fuel derived from agriculture crops, plant oils, or residues as well as from animal fats and waste products. The credit is, however, not unlimited; there is a $10 million annual cap. 

Reduce Energy Use: Tax Credits for Using Energy Efficiently 

Relatively modest nonrefundable credits are available against income tax and LLET to an owner of a residential dwelling or commercial property that makes improvements to property to make it more energy efficient. See KRS 141.435 & KRS 141.436. 

An owner of a residential dwelling (such as a residence or rental unit) can receive a credit of 30% of the installed costs of upgraded insulation (up to $100), energy-efficient windows and storm doors (up to $250), or qualified energy property, i.e., a qualifying heat pump, air conditioner, hot water heater, etc. (up to $250), with a maximum credit of $500 per taxpayer. Similarly, an owner of commercial property (excluding residential units) can receive a credit of 30% of the installed costs of an energy-efficient interior lighting system (up to $500) and an energy-efficient heating, cooling, ventilation, or hot water system (up to $500), with a maximum credit of $1,000 per taxpayer. 

A credit of 30% of the installed costs of a solar space-heating system, water heating system, wind turbine or wind machine or $3 per watt direct current of rated capacity of a solar photovoltaic system is available to residential and commercial property owners. The maximum credit is $500 for a residence or single-family residential unit (like a rental home) and $1,000 for commercial property or a multi-family residential unit (like an apartment building). 

A nonrefundable credit against income tax and LLET is also available for a taxpayer that builds ($800) or sells ($400) a single-family residence or manufactured home that qualifies for and receives the ENERGY STAR label under the federal Environmental Protection Agency’s program of that name. See KRS 141.437. 

The last year for these credits is 2015. 

Reduce Waste: Tax Benefits for Pollution Control Equipment 

Kentucky provides a sales and use tax exemption for property that has been certified as a pollution control facility. See KRS 139.480(12); KRS 224.01-300; 103 KAR 30:260. Qualifying equipment includes equipment that: reduces or eliminates air pollution; water pollution or noise pollution; converts waste into an item of economic value; converts hazardous waste to nonhazardous waste; and, removes certain substances from raw materials that would have a deleterious effect on the environment when the finished product was utilized. See KRS 224.01-300(1). Note that certain pollution control equipment may also qualify for the sales and use tax exemption for machinery for new and expanded industry. See KRS 139.480(10); KRS 139.010(13). 

Pollution control equipment that has been certified as such also receives favorable property tax treatment. See KRS 132.200(8); KRS 132.020(1)(k). This equipment is subject to a reduced state property tax rate of $0.15/$100 versus the default rate tax for tangible personal property of $0.45/$100. See KRS 132.020(1)(k)&(r). Moreover, it is not subject to local property tax. See KRS 132.200(8). 

Observe that favorable treatment for pollution control equipment for sales and use tax and property tax purposes is available only for property that is certifiedas such. It is thus of utmost importance that a taxpayer file an Application for Pollution Control Tax Exemption Certificate, Form 51A216, with the Kentucky Department of Revenue prior to purchasing pollution control equipment. See 103 KAR 30:260. 

Sales and use tax and property tax benefits for pollution control equipment are available to many different industries. Nonrefundable income tax and LLET credits, however, are available to an electric power company (or a parent that wholly owns such a company) that owns or operates a clean coal facility in the amount of $2 per ton of eligible coal purchased and used to generate power. See KRS 141.428. To qualify, the clean coal facility must be certified by the Kentucky Energy and Environment Cabinet as reducing emissions of pollutants released during the generation of electricity through the use of clean coal equipment and technologies. 

Reuse: Credits for Turning Brownfields Green 

A taxpayer may receive a credit for expenditures made at a qualifying voluntary environmental remediation property in order to correct the effect of a release of hazardous substances, pollutants, contaminants, petroleum, or petroleum products on the property consistent with a corrective action plan approved by the Energy and Environment Cabinet, provided that the cleanup was not publicly financed. See KRS 141.418. The amount of the credit, however, is limited to $150,000 and cannot be taken until after the taxpayer submits receipts to the Cabinet and the Cabinet approves the amount of the credit. 

Recycle: Tax Benefits for Recycling Equipment 

Recycling equipment receives favorable sales and use tax treatment. A business, industry or organization’s purchase or lease of machinery or equipment used primarily for recycling purposes is exempt from sales and use tax. See KRS 139.480(23). In this context, recycling is defined to mean “those activities undertaken in which materials that would otherwise become solid waste are collected, separated, or processed in order to be reused or returned to use in the form of raw materials or products….” KRS 139.010(22). 

In addition, a taxpayer can receive a credit against the income tax or LLET for 50% of the cost of equipment purchased for use exclusively within Kentucky for recycling or composting postconsumer waste. See KRS 141.390. It is helpful to refer to the statutory definitions of postconsumer waste, recycling equipment and composting equipment. See KRS 141.390(1). Nonetheless, disputes can arise. See, e.g., Bavarian Trucking Company, Inc. v. Dep’t of Revenue, File No. K09-R-16, Order No. K-21008 (2010), on appeal. 

The amount of the credit in a tax year cannot exceed 10% of the total credit allowable or 25% of the taxpayer’s tax liability. A major recycling project, i.e., one requiring an investment of more than $10 million in recycling or composting equipment by an employer of more than 750 qualified employees with plant and equipment of more than $500 million, is, however, limited to the lesser of $2.5 million or 50% of the excess of the taxpayer’s tax liability over its baseline tax liability (the most recent tax year ending prior to January 1, 2005). Note that the credit is potentially subject to recapture if the equipment is sold. To be eligible for the credit, a taxpayer must apply for it prior to the first day of the seventh month following the close of the taxpayer’s tax year, which is July 1st for calendar year taxpayers. 

An environmental stewardship credit is also available via KEDFA. See KRS 154.48-010, et seq.; KRS 141.430. But, a taxpayer receiving this credit is not eligible for the recycling and composting credit provided by KRS 141.390. SeeKRS 154.48-025(4). 

Be Smart. 

“It’s smart. Reduce, reuse, recycle. You should do it.” Dee Reynolds in It's Always Sunny in Philadelphia, Season 1, Episode 2 (2005). Be smart. Get the green tax exemptions and credits that you deserve.

About the author: Mark A Loyd, Esq., CPA, is a member of Greenebaum Doll & McDonald in Louisville and chairs its State and Local Tax Team. He is a former member of the KyCPA Board of Directors; chair of the Editorial Board; member of the Foundation Trustees; and former chair of the Taxation Committee. He can reached at mal@gdm.com; 502.587.3552.