Environmental Tax Credits for Businesses

More and more businesses are “going green”—operating in a way that’s better for the environment. Going green not only benefits the planet, it can also be good for business; many people prefer to do business with environmentally-conscious companies. But helping the environment is more than just a savvy marketing choice; it can also help your company save on taxes.

Local, state, and federal tax laws have two goals: to generate revenue and create incentives for certain behavior. Since the government wants businesses to be environmentally conscious, it creates tax incentives for them to do what’s best for the planet.

Tax Deductions and Tax Credits for Environmentally Friendly Businesses

If your business is taking steps to go green, you are leaving money on the table by ignoring available tax credits and deductions such as those listed here. Before we dive in, a brief reminder about the difference between tax credits and tax deductions: both reduce your taxes, but they are not interchangeable terms. A tax credit reduces the amount of taxes owed dollar for dollar. If your business owes $10,000 in taxes but has a $2,000 tax credit, the amount due drops to $8,000. A tax deduction reduces the amount of income on which your business’s taxes are based. If the business has $250,000 in income, but tax deductions worth $40,000, the business will be taxed on $210,000 of income.

Tax Deductions for Energy-Efficient Commercial Buildings

Making energy-efficient upgrades to your building can pay off at tax time. Improvements to HVAC systems, water systems, heating, insulation, and lighting can yield tax deductions of up to $5.36 per square foot. This deduction, known as the 179D Commercial Buildings Energy-Efficiency Tax Deduction, was increased significantly by the Inflation Reduction Act of 2022, from a previous maximum of $1.88 per square foot.

ENERGY STAR Tax Initiatives

The U.S. Environmental Protection Agency (EPA) established the ENERGY STAR program to improve energy efficiency while reducing greenhouse gas emissions that could harm the environment. The program allows businesses to deduct certain expenses associated with the installation of ENERGY STAR-rated equipment and appliances. In addition, the program helps businesses with technical guidance to improve their energy efficiency.

Commercial Clean Vehicle Credit

If your business (or tax-exempt organization) needs to purchase one or more vehicles, the commercial clean vehicle credit offers a powerful incentive to buy electric vehicles. Qualifying vehicles with a gross vehicle weight rating of under 14,000 pounds are eligible for a maximum credit of $7,500; the maximum credit for all other vehicles is $40,000.

While there is no limit on the number of credits a business may claim, these credits are non-refundable; a business cannot get back more in refunds using the credit than it owes in taxes. If your company is planning to buy an electric vehicle, consult your tax professional to see if the vehicle you have in mind qualifies for the credit.

Biodiesel Income Tax Credit

Businesses that fuel their vehicles with pure, unblended biodiesel (B100) may be eligible for an income tax credit of up to $1.00 per gallon. Originally set to expire at the end of 2022, this credit has been extended through December 31, 2024. Agri-biodiesel and renewable diesel are also eligible for the biodiesel income tax credit.

Alternative Energy Tax Credits

Tax credits for environmentally friendly businesses and nonprofits include alternative energy tax credits, such as those for solar energy, geothermal energy, and wind energy. A business that installs a solar energy system may qualify for a tax credit of up to 30% of the cost of its installation. A tax credit of up to 10% of the costs associated with a geothermal energy system or microturbines is available to qualifying businesses.

Because some alternative energy tax credits have maximums, it’s important to consult with your tax professional to see how using alternative energies can benefit your business.

Investment Tax Credits

Investment tax credits (ITC), as the name suggests, provide an incentive for businesses to invest in certain industries or technologies. Originally introduced in the early 1960s to protect American businesses from growing foreign competition, ITCs are now used to promote investment in environmentally-friendly energies and pollution control technologies. In addition to the Federal Business Energy Investment Credit, there are ITCs offered to businesses at the state level in many states as well.

Qualifying for Environmental Tax Credits and Other Tax Incentives

It’s not enough for businesses to simply use alternative energies, invest in green industries, or make eco-friendly improvements to their facilities. In order to qualify for environmental tax credits or tax deductions, a business must document its efforts to save energy, and the costs of doing so. That means keeping meticulous records of expenditures and investments. In some cases, such as when claiming a 179D tax deduction for an energy efficient commercial building, it may be necessary to have a certified energy auditor confirm that the organization meets qualifications.

The Bottom Line

Your tax professional can not only help you identify environmental tax credits for businesses, but maintain records to help your business qualify for these tax incentives. To learn more about environmental tax credits, schedule an appointment today with the accounting and tax preparation professionals at Gudorf Tax Group.