Tax Credits for Purchase of Recycling Equipment

To encourage the development or expansion of recycling systems, effective Jan. 1, 1993Jan. 1, 2004, Virginia allows individuals, corporations and partnerships or other legal business entities to take a 10% income tax credit for the purchase of machinery and equipment used in processing recyclable materials. The credit is equal to 10% of the equipment's original total capitalized cost, less capitalized interest. The total credit allowed cannot exceed 40% of the Virginia income tax liability in any tax year; however, the unused portion of the credit can be carried over for the next 10 years. The credit applies to corporations as well as partnerships and S corporations, in which case the credit shall be allocated to the individual partners or shareholders in proportion to their ownership or interest in the partnership or S corporation.

To qualify for this tax credit, an individual or corporation must receive certification from the Director of the Department of Environmental Quality (DEQ) on Form DEQ 50-11S that the machinery and equipment are integral to the recycling process. The machinery or equipment must be used primarily to recess recyclable material to meet a manufacturer's material input specifications or to incorporate recyclable material into a manufacturing process. Form DEQ 50-11S should include detailed information on machinery and equipment use, their locations, a statement that would qualify the purchase for the tax credit, the purchase price of the machinery and equipment and documentation of ownership. If the application is approved by the DEQ, the Director of the DEQ will sign Form DEQ 50-11S. To qualify for a state income tax credit, the applicant must attach the signed form (or other certification document prepared by the DEQ) along with documentary proof of the purchase price paid to its Virginia return, even if the purchaser carries the tax credit over to succeeding years.

Virginia also has other state credits that serve as incentives for pollution prevention, such as the conservation equipment tax credit available to farmers, the vehicle emissions testing equipment credit and the credit for equipment used exclusively for burning waste motor oil at a business facility. The state also has sales and use tax incentives for purchasing pollution-control equipment.

The Federal government also provides pollution-control incentives, such as credits for selling or producing fuel that comes from an unconventional source, a credit for electricity produced from certain renewable resources, and deductions for certain expenditures paid for the purpose of soil or water conservation or for the prevention of erosion of land used in farming.

Both the Federal government and several state governments provide credits for clean-fuel vehicles.

Other states also have similar tax incentives for recycling equipment. For example, Arkansas allows a 30% tax credit for the cost (including installation) of equipment purchased exclusively for reducing, reusing or recycling solid waste material for commercial purposes, which a taxpayer can carry forward for three years. Arizona allows a 10% tax credit, which a taxpayer can carry forward 15 years, for recycling equipment purchases. New Jersey allows a 50% business tax credit (subject to limits) on the purchase of certified recycling equipment. Most states have a certification process that taxpayers must meet to claim credits.

From Allyson del Rosario, CPA, Brown, Dakes, Wannall & Maxfield, P.C., Fairfax, VA