Managed Accounting, Tax Accounting

Unpacking Green Energy Tax Credits

Posted on June 21, 2024

By Michele Roletter

July 22, 2024

The Inflation Reduction Act of 2022 expanded opportunities for business owners to claim green energy tax credits. These provisions relate to renewable energy projects, building upgrades, and even certain vehicles.

Whether you are thinking about constructing a new building, making energy efficient upgrades in an existing structure, or purchasing a new fleet of vehicles, it’s important to be aware of tax breaks your business might be eligible for.

In this article, we’ll cover the basics of green energy tax credits, including an overview of common credits your business should consider.

What are Energy Tax Credits?

An energy tax credit is a tax incentive business owners can claim for qualifying energy expenditures. Generally, the upgrade or expense must have a direct link to energy efficiency. For example, installing solar lights reduces the amount of electricity consumed in the building.

Energy tax credits can have a major impact on your tax situation as they are a dollar-for-dollar reduction of your tax bill. Let’s say that you owe $5,000 and qualify for a $2,000 green energy tax credit. Your overall tax due will only be $3,000. This makes tax credits more powerful than tax deductions.

Businesses that have a pass-through structure, like S Corporations and Partnerships, will pass the credits down to shareholders and partners. This means that the credit will be claimed on the individual tax return.

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5 Business Green Energy Tax Credits

Keep in mind that the below list doesn’t contain every green energy tax credit available. In fact, there are other less common credits that you might be eligible for depending on your industry. If you are in the fuels or manufacturing industry, reach out to a qualified accountant to discuss other tax-saving opportunities.
Nevertheless, here are some of the small business energy tax credits you might be eligible to claim.

Business Energy Investment Tax Credit

The Business Energy Investment Tax Credit gives organizations the ability to claim a tax credit of up to 30% of the installation cost of certain energy efficient property. Qualifying property includes solar panels, wind turbines, fuel cells, and geothermal systems.

This tax credit is based on the kilowatts of electricity generated by the energy efficient property in the first 10 years of implementation. To claim the full 30% credit, you must pay wages for the construction, alteration, and repairs according to the Treasury Department’s labor rates.

Additional “bonus” credits are available to increase the Business Energy Investment Tax Credit. For example, installing qualifying property in an energy community leads to an additional 10% credit. Provisions for this credit are in place through 2032.

New Energy Efficient Home Credit (For Home Builders)

Small businesses in the home construction sector might be eligible to claim the Energy Efficient Home Credit. This credit applies to eligible contractors that construct new or substantially new residential homes.

The Energy Efficient Home Credit is available up to $5,000 per eligible home and is based on energy efficiency and the date the home is acquired. There are two main programs dictating credit eligibility: Energy Star and Zero Energy Ready Home.

An important provision of this credit relates to manufactured homes. Manufactured home producers are considered eligible contractors for credit claiming purposes. If your business creates this type of dwelling unit, you may be able to claim up to $5,000 per home.

Alternative Fuel Vehicle Refueling Property Credit

The Alternative Fuel Vehicle Refueling Property Credit applies to businesses that implement charging stations for alternative fuel sources. This includes electric charging stations, natural gas, propane, and hydrogen refueling stations.

The base credit is 6% of the cost of the property. However, if you meet prevailing wage requirements according to the Treasury Department’s regulations, you might be eligible for a credit of up to 30% of the cost of properly placed in service.

It’s important to note that your business must be the first user of the qualifying property. This means that a used Tesla charging station would not qualify for the credit. Additionally, you cannot double-dip by claiming this credit and the Business Energy Investment Tax Credit.

Renewable Electricity Production Tax Credit

The Renewable Electricity Production Tax Credit applies to businesses that produce electricity from certain renewable sources, including biomass, geothermal, hydropower, and wind. A separate tax form is required for each qualified facility that is claiming the credit.

The amount of the credit varies based on the type of technology installed and the year placed in service. Additionally, meeting specific labor requirements results in an additional credit up to 2.75 cents per kilowatt-hour.

The facility is considered placed in service if physical work of a significant nature has begun or 5% of the total construction costs are incurred. The credit is available for up to 10 years.

Commercial Clean Vehicle Credit

It can be difficult to qualify for green energy tax credits unless you are producing energy or installing energy efficient upgrades. However, one credit that is easily accessible is the Commercial Clean Vehicle Credit.

The credit gives businesses that purchase qualifying vehicles a credit of up to $40,000. The credit is calculated as the lesser of 15% of your basis in the vehicle (30% if the vehicle is not powered by gas or diesel) or the cost of the vehicle. In addition, the maximum credit for vehicles under 14,000 pounds is $7,500, while vehicles over 14,000 pounds are eligible for a credit of up to $40,000.

One of the advantages of this credit is that there are no limits on credit claiming ability. If your business purchases three eligible vehicles, you could potentially have a credit worth $120,000. Not to mention that there are other advantages of purchasing business vehicles, like depreciation.

Getting Started

Navigating the complexities of green energy tax credits can significantly benefit your business, but understanding all the nuances requires expert guidance. KDG’s dedicated tax team is well-versed in tax legislation that impacts your business most, ensuring you capitalize on every credit available to you. If you’re considering energy-efficient upgrades or have questions about your eligibility for specific credits, don’t hesitate to reach out. Contact KDG’s expert tax team now and ensure you’re making the most informed decisions for your business’s financial health.

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Michele is an accomplished Accountant, bringing a wealth of knowledge and expertise to her current CPA role at KDG. Experienced in Sage Products, Tax Preparation, GAAP, Financial Accounting and Managerial Accounting. Michele has spent her career overseeing tax preparation and accounting services at a multitude of organizations, even owning her own successful CPA firm.

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