Page 322 - Fluid Power Engineering

288 Chapter Thirteen

computed by using:
Taxable Income = Total Revenue − Total operating expenses
− Depreciation

The normal depreciation is called the “straight line” depreciation,
which is 5% for each of the 20 years. Table 13-6 contains the de-
tailed financial analysis with straight-line depreciation and 35% in-
come tax rate. Here, earnings before-interest, taxes, and depreciation
(EBITDA) = revenue – total annual operating expenses. Taxable in-
come is computed by subtracting depreciation from EBITDA. In this
scenario, the project will pay $0.49 million in taxes each year.
The 5-year accelerated depreciation case is presented in Table
13-7. In years 1 to 3, the taxable income is negative. Assuming tax
loss carry forward is not allowed, then the tax benefit cannot be uti-
lized and, therefore, the cash flow is taxable income + depreciation.
A tax benefit of $0.64, $1.61, and $0.58 (in millions) cannot be uti-
lized. However, if this wind farm were owned by an entity that has
appropriate amount of tax liability (say, $2.06 million each year), then
it could lower its tax liability by the “tax benefit” amount. This sce-
nario is in Table 13-8, where the tax benefit has been added to compute
the cash flow, which is equal to taxable income + depreciation + tax
benefit.
In the next scenario, consider accelerated depreciation plus pro-
duction tax credit (PTC). In 2009, PTC was $0.021/kWh. For every
kilowatt-hour of electricity production the company is entitled to a
tax credit. Obviously, if the company has no tax liability, like in years
1 to 3, then the tax credit cannot be used. This project generates a tax
credit of $1.05 million each year. As illustrated in Table 13-9, if the
wind farm owner has sufficient amount of tax liability (from some
other business), then it would lower the tax liability by $1.05 + $0.56,
$1.05 + $1.69, $1.05 + $0.48 in years 1 to 3.
The final scenario is an illustration of investment tax credit (ITC).
In 2008, the United States added a new incentive that is an investment
tax credit of 30%, which may be taken in the first year of production.
ITC may be used in lieu of PTC. As shown in Table 13-10, the amount
of ITC is added to the tax benefit, yielding a net tax benefit of $8.74
million. With ITC, the depreciable value of the asset must be reduced
by 15%.
The financial performance of the various tax-related scenarios is
in Table 13-11. Tax incentives play a significant role in improving the
performance of wind projects. As illustrated, most wind projects do
not produce enough income to avail of PTC or ITC. In some case,
PTC or ITC can be rolled over and applied to subsequent years of the
project. Even when roll over is allowed, most wind projects cannot
effectively use all the tax credits. This is the reason for a proliferation