For many years, the federal government has been advocating for small businesses to “go green” and use more renewable energy. The Internal Revenue Service has codified some of these appeals into tax incentives, meaning you can get some breaks on your tax bill if your business goes green in qualifying ways.
Some of these incentives are tax credits, while others are tax deductions. A tax credit reduces your overall tax bill. A tax deduction reduces the amount of your business’s income that the IRS will tax.
Before leaping into an expensive energy project for a tax credit, however, you should consult a tax professional about the options available to you. In fact, for anything involving the IRS and your business, it is wise to have professional help.
Business Energy Tax Investment Credit
The Business Energy Investment Tax Credit (ITC) has become a very popular greening tax credit for businesses turning to solar energy and some other forms of renewable energy.
Eligible solar energy technologies include equipment—like solar panels—that generate electricity or that heat, cool, or provide hot water for a structure. Systems such as solar process heat and hybrid solar lighting systems are also eligible.
For these solar technologies, this tax credit will reduce your overall business tax bill by 26% of the cost of construction, if construction begins by December 31, 2020. The credit exists for future years, though the percent steps down every year. The same percentage incentive exists for fuel cells and small wind turbines.
ITC incentives have changed over the years due to legislation changes and extensions. Congress last adjusted the tax credit in 2018 and, before that, in 2015.
For geothermal electric systems, there’s a 10% tax credit for the cost of construction for the foreseeable future. For geothermal heat pumps, microturbines, and combined heat and power systems, a 10% tax credit exists—so long as the construction begins before December 31, 2021.
Credits for Energy Projects
As part of the ITC, the IRS offers incentives for investments in energy projects through Form 3468. These are typically utilized by property owners doing the projects on their own property—however, if you lease the property where you’re building the project, your business may be eligible.
Qualifying projects for the credit include coal projects that generate electricity from coal while reducing carbon dioxide emissions and many renewable energy projects. Gasification energy projects, where solid or liquid petroleum or biofuel products are converted to energy-providing gas, can qualify, too. Since qualifications change over time, check with the IRS to see if your energy project is eligible.
Another incentive through Form 3468 is for businesses that rehabilitate designated historic buildings.
Qualified Plug-In Electric Drive Motor Vehicle Credit
The IRS has established a tax credit for electric vehicles as an incentive for businesses to purchase greener cars.
To qualify, an electric passenger vehicle or light truck must have been purchased after December 31, 2009, and you must purchase a brand-new vehicle. The manufacturer will provide you with the needed certification for your car to qualify for the credit.
The battery of your electric car must have at least 5 kilowatt hours of capacity. The credit amounts to $2,500 for such a battery and increases by $417 for each additional kilowatt hour of capacity. The limit of the credit is $7,500.
To apply for the credit, use IRS Form 8936—the IRS keeps a list of qualifying cars. Once an automaker sells 200,000 qualifying vehicles for use in the United States, the IRS will start to phase out the credit.
Green Building Tax Deductions
The commercial buildings energy efficiency tax deduction, logged as 179D in the IRS tax code, provides a great incentive for building owners and tenants to make building improvements that improve energy efficiency.
Deductions are taken in the tax year when the new systems are placed into service, and 179D is set to expire on December 31, 2020. Therefore, you’ll want to make the improvements immediately—although it’s possible that the deduction could be extended.
The incentive is a tax deduction of $1.80 per square foot of new or existing buildings where improvements reduce the building’s total energy costs by 50% or more, by government estimates. Improvements can include more efficient interior lighting, a building envelope system, or other heating, cooling, ventilation, and hot-water systems.
Alcohol Fuels Tax Credit
If your business is involved in manufacturing alternative fuels, it could be eligible for tax credits. If you create biodiesel mixture fuel, meaning a mix of diesel and biodiesel, you could be eligible for a credit for each gallon of mixed fuel created. The IRS also provides credits for the creation of other alternative fuels, like compressed natural gas.
Not only are you helping the earth by going green with your small business, but there are also multiple ways that doing so can help lower your tax bill, too.