The Energy Policy Act of 2005 (Public Law 109–58), in an effort to stimulate energy-related research and development (R&D), added a new component to the long-standing credit for increasing research activities (R&D tax credit) by establishing an energy research consortium credit equal to 20 percent of amounts paid or incurred by a taxpayer, including contributions, to an energy research consortium for qualified energy research. This credit isn’t subject to the incremental nature of the traditional R&D tax credit—it’s simply a flat credit equal to 20 percent of the total amount of qualifying expenditures. Taxpayers in the oil and gas, manufacturing, chemical manufacturing and utilities industries might not be taking full advantage of the energy research consortium credit.
Defining an Energy Research Consortium
To be considered an energy research consortium, an organization must be a 501(c)(3) tax-exempt organization that’s operated primarily to conduct energy research. The organization can’t be a private foundation and must conduct its research for the public interest. In addition, at least five unrelated persons or entities must pay or incur amounts, including contributions, to the organization during the tax year, and no single person or entity may pay or incur more than 50 percent of the total amounts received by the organization.
Section 41 doesn’t characterize energy research in specific terms; as such, taxpayers making payments to qualified energy consortia to improve the efficiency of household lighting or to develop new refining methods to increase fossil fuel yield could consider their payments as potentially qualifying for the credit. The only stipulation is that energy research must meet the definition of qualified research under §41(d). Therefore, it must be presumed that the research must relate to energy in some manner. The following are some examples of qualified energy research:
- Improving household appliance energy efficiency
- Creating new energy storage systems, e.g., battery technology
- Establishing power conversion systems (solar conversion, wind turbines)
- Improving fossil fuel extraction methods
- Formulating and testing new biofuels
- Developing enhanced refining methods to improve batch yield
- Developing new building controls software to increase energy efficiency
- Researching intelligent grid technologies
- Enhancing transmission systems capacity
- Improving the energy efficiency of vehicles, machinery and other technology
Claiming the Credit
Taxpayers who have incurred, paid or contributed payments to organizations that meet the criteria of a qualified institution can claim the energy research consortium credit. Any expenses included in the energy research consortium credit can’t also be claimed as qualified contract research for purposes of the alternative simplified or regular credit. A taxpayer who doesn’t wish to use the energy research consortium credit can elect to take these expenses as contract research expenses at a rate of 75 percent instead of the traditional 65 percent in the alternative simplified or regular credit.
The energy research consortium credit allows taxpayers who might not be able to claim the R&D tax credit to take advantage of the flat 20 percent credit for payments made to qualified institutions. Taxpayers wanting to claim this credit should segregate these costs and examine them thoroughly to effectively substantiate a claim for the credit. BKD’s R&D Tax Credit Services consultants can help your organization perform an analysis of payments made to qualified energy consortia.
For more information, contact Ashley or your trusted BKD advisor.