How Businesses Can Save Money While Helping the Environment
The following article was provided by Whittlesey. It is posted here with permission.
As the world continues to face environmental challenges, the concept of going green has become increasingly popular.
This not only benefits the environment but can also lead to significant cost savings for businesses.
One way companies can reduce their consumption of resources is by taking advantage of various tax credits and incentives that encourage the adoption of eco-friendly practices.
In this article, we will explore several tax credits and deductions that can help businesses go green while also improving their bottom line.
Green Vehicle Tax Credit
If your business uses environmentally friendly vehicles, you can often get additional tax credits for these vehicles and their maintenance.
These tax credits include:
- Alternative Motor Vehicle Credit (Form 8910)
- Alternative Fuel Vehicle Refueling Property Credit (Form 8911)
- Biodiesel and Renewable Diesel Fuels Credit (Form 8864)
Investment Tax Credits
One of the benefits of becoming a green business is the investment tax credits you can get for the equipment you purchase.
To qualify for investment tax credits:
- The investments must be in investment credit property that can be depreciated or amortized;
- The equipment must be owned or been built by your business;
- The property must be operational (placed into service) the year you take the credit for it; and
- The equipment must meet a specific set of standards for performance and quality.
There are several general investment tax credits located in Form 3468 that you may be able to claim.
These include solar energy property and solar illumination, qualified fuel cell property, and qualified small wind energy property.
Solar Investment Tax Credit
To qualify for the Federal Investment Tax Credit and the 30% credit in the Inflation Reduction Act, businesses must comply with specific regulations.
This requirement applies to all Schedule C, Schedule E, and business tax returns. Eligibility criteria include:
- Use of solar photovoltaic by a business that is required to remit federal income taxes;
- A U.S.-based business;
- The PV system must be new or applicable equipment and not used to heat a swimming pool; and
- Solar PV system construction must have begun before the end of the tax year, with significant work performed, or integral expenses incurred within three and a half months after payment.
Eligible expenses that can be claimed under the tax credit include:
- Solar PV panels, racking, equipment system, sales tax;
- Installation costs;
- Step-up transformers and other electrical work; and
- Energy storage devices charged by the solar system more than 75% of the time.
The process to get the solar PV system tax credit involves the business beginning or hiring a company to commence construction of the system before year-end.
Additionally, businesses need to file Form 3468 on their tax return to claim the credit, and they can take the 30% credit from the Inflation Reduction Act to increase their tax savings.
Businesses must retain ownership of the solar PV system for six years to claim the credit; if they sell it before the six-year mark, recapture rules come into place.
Depreciation deductions are available since solar PV systems are considered assets of the business.
Green Building Deductions
You can get a tax deduction for reviving your building with extremely high-energy systems that turn your building into a green building.
Typically, these renovations include systems such as high-efficiency HVAC, hot water systems, interior lighting, and/or more efficient building envelopes—including walls, floors, doors, windows, and roofs.
To qualify for this type of tax deduction, you must:
- Own or lease the commercial building being upgraded.
- Certify that the building will reach at least the required base level of energy savings at 25%.
- Typically, it is best to get this certification ahead of time. You can receive a certification from a qualified engineer.
As of Jan. 1, 2023, if you can certify a 50% reduction in energy and power usage, you can get an energy tax deduction of up to $5 per square foot of your building’s floor areas with these new high-efficiency systems installed.
If you cannot certify a 50% decrease in energy, you can get a partial deduction equal to $2.50 per square foot of your building.
To do this, you must certify that the building has reached a 25% reduction in power costs and energy usage. For every percent reduction in your building’s energy over 25%, you can receive an additional $0.10 deduction per square foot of your building.
Keep in mind that the numbers noted above are for projects that meet prevailing wage and apprenticeship standards.
If your project does not meet these standards, your deduction will be between $0.50 and $1 per square foot.
How Do I Claim These Tax Credits?
Energy investment tax credits require additional filings with your business tax returns.
The forms can be complicated, so save your documentation and give it to your tax advisor to ensure the form is filled out correctly.
Whittlesey tax advisors help businesses save money on taxes using these green tax credits and deductions.
About the author: Brenden Healy is a Whittlesey tax partner in Hartford. He consults with businesses and individuals and focuses his practice on Nonprofit organizations, closely held businesses, manufacturing and distribution, and retail industries.
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