Energy Tax Credits for Your Small Business

Energy Tax Credits for Your Small Business

Energy Tax Credits for Your Small Business

Small and mid-sized business owners have enough on their minds without falling down the rabbit hole of deciphering energy tax codes.

However, many don't realize just how many of these credits they qualify for. Armed with that awareness, they're soon overwhelmed with the proper prerequisites, tax form filings, infrastructure and installation requirements, plus other qualifiers non-negotiable in receiving a state or federal energy tax credit.

Untangle this important business incentive once and for all with this guide to business energy tax credits. You'll explore:

  • Energy tax credits versus deductions
  • General outline to apply for a small business energy tax credit
  • Major energy tax credits available today
  • Additional resources ensuring you're doing all you can to lower your business' energy bills and taxes

What's the Difference Between a Tax Deduction and a Tax Credit?

Business tax deductions reduce the total taxable income your business qualifies to pay. This type of tax statute, therefore, reduces your taxable income bracket and the subsequent tax rates your business falls into but doesn't translate into a straight deduction when filing your taxes.

On the other hand, a tax credit awards your business a dollar-for-dollar reduction on its taxes. For example, a $500 tax credit would reduce a $10,000 tax bill down to $9,500. Tax credits, therefore, provide a straightforward way to decrease the amount of taxes your business pays, keeping money in your wallet.

There are two categories of tax credits available to businesses:

  • Refundable: Refundable credits can lower total tax liabilities down to $0. Refundable credits, though, also go one step further. After a credit kicks in and brings your liability all the way down to $0, any leftover amounts in the credit translate into a refund, hence the name.
  • Nonrefundable: Nonrefundable credits can also lower your total tax liability down to $0 for the year. However, credits that exceed your business' taxed or billed totals do not roll over into a refund.

It's essential for small businesses to understand the differences between a credit and a deduction for several reasons:

  • Tax credits and tax deductions may require different qualifications.
  • Deductions introduce the option to itemize versus lump sum your tax deductions, each carrying pros and cons depending on your business' situation and other credits you qualify for.
  • Expanding small businesses may open themselves up to complex tax situations altering the viability and eligibility of a previous credit or deduction. Owners must, therefore, be particularly diligent about the credit or deduction types historically relied upon versus impending changes due to business growth.

What Are Business Energy Tax Credits?

Business energy tax credits are a dollar-for-dollar reduction on a commercial organization's energy bills.

What Are Business Energy Tax Credits?

Administered at the state or federal level, energy credits are often used as incentives for businesses to alter their fueling, energy, power, efficiency, material sourcing, and other operational practices from infrastructurally expensive or resource-intensive forms into contemporary, greener ones.

Small business owners may qualify for several government-administered tax credits if using or involved with these energy-related endeavors:

  • Solar panels or solar-powered equipment
  • Wind turbines
  • Microturbines
  • Geothermal system technology
  • Fuel cells
  • Combined heat and power (CHP)
  • Fleet-fuel and commercial vehicle efficiency standards
  • Investments in environmental preservation
  • And more

Subsequently, some of the most common energy tax credit types for businesses relate to the sources of fuel powering the technologies above, namely:

  • Solar energy credits
  • Biofuel credits
  • Biodiesels credits
  • Fuel efficiency credits
  • Electric vehicles, hybrid vehicles, and similar "alternative" methods of transportation credits
  • Renewable electricity credits
  • Business energy efficiency credits

The benefits of a business converting over to an energy tax-credit qualifying source of electricity, fuel, gas, or transportation go beyond lowered taxes, though.

Numerous studies show the long-term cost-savings of adding renewable energy sources into your business' power and energy portfolio. Plus, business owners contribute to the growing recognition behind the need for sustainable energy sources and infrastructure, contributing their part to this social, economic, and cultural shift.

How to Claim Small Business Energy Tax Credits

To claim an energy tax credit for your small business, you must first fill out that credit's specific tax form from t he Internal Revenue Service (IRS) for the year you wish to claim the credit.

Finding the appropriate tax form for a desired business energy credit can generally be done online using the IRS' own business tax credit form database, as well as navigating your state's online file portal.

Alternatively, you can work with an external tax professional to research and secure the proper energy tax credit forms you're seeking. Working with a licensed tax expert delivers peace of mind that you're filing the proper series of documents and supplemental materials, smoothing your path to lowered energy bills.

1. What Happens After I File the Appropriate Tax Form?

After filing, organizations looking to receive an energy tax credit are subject to several qualifications, terms, and conditions before officially receiving their credits:

  1. Your business must be categorized as a commercial, agricultural, or industrial enterprise.
  2. You must follow the usage guidelines or parameters for the alternative energy form or source you're seeking a credit for.
  3. You must meet federal or state energy performance qualifications as well as maintain proper alternative fuel or energy source standards across your alternative energy infrastructure.

A miscellaneous note to keep in mind when it comes to earning renewable and similar energy tax credits:

  • In addition to the specific energy tax credit, most small businesses will need to file Form 3800. Form 3800 calculates your total qualified credits for that year, including tax backs from previous years, carry-forwards, and refunds.
  • Sole proprietors filing their Form 1040 Schedule C may be eligible for particular energy credits related to the Earned Income Tax Credits (EITC). Again, consult a tax professional for more information on the EITC program and its workings with other credits and deductions.

7 Energy Tax Credits Small Businesses Should Know About

From renewable energy tax credits to business energy efficiency incentives — and plenty in between — consider these top small business energy tax credits you could be eligible for.

1. Alcohol Fuels Credit

Select businesses working with or involved in the production of alternative fuels are eligible for a credit related to the cost of that fuel's production.

For example, businesses producing alcohol-based fuel products for commercial use, such as ethanol, may qualify for credits based on the cost of the alcohol involved in its ethanol production.

The alcohol-fuels credit is nonrefundable and meant to bolster related green fueling initiatives such as hybrid-electric and boost cell-powered vehicle research as well as wider alternative fuel transportation and HVAC infrastructure.

2. Federal Investment Tax Credit

The federal investment tax credit is one of the largest and most widely known energy credits available to businesses today. It is more commonly known as the federal solar tax credit since it exclusively incentivizes the installation of solar panels on residential and commercial properties.

Under the federal investment tax credit, organizations that installed solar panel systems are eligible for a credit equal to 26% of the system's total cost — namely panel purchase and installation.

Federal Investment Tax Credit

The federal investment tax credit is time-sensitive, though. Written on a sliding percentage scale, business owners can expect the following diminishing tax credits depending on when they purchase and install their solar panels:

  • 2020: Small business owners may deduct 26% of total paneling-system costs, compared to 30% for previous years.
  • 2021: Small business owners can deduct 22% of a system's costs from their taxes.
  • 2022 and on: As of the most recent IRS outlines, business owners will be able to deduct just 10% of their solar panel systems. Residential systems will no longer carry any tax credits.

3. Accelerated Depreciation

Accelerated depreciation is one of the most expansive categories of tax credits enjoyed by small, mid, and large enterprises.

At its core, the concept of Accelerated Depreciation recognizes and supports businesses deducting the cost of certain assets earlier than those assets are actually depreciating.

Energy accelerated depreciation tax credits, therefore, are the IRS' way of allowing small businesses to write off as much as 85% of energy efficiency and green asset investments across tax years. Providing this expedited depreciation timeline allows organizations — particularly small and local businesses — to afford the upfront costs of purchasing technologies like new solar panels for their properties.

4. Alternative Motor Vehicle Credit

Businesses with company owned-vehicles can apply for the Alternative Motor Vehicle Credit, allowing them to earn credits up to $8,000 after their purchase of an alternative-fuel vehicle.

Qualifying alternative vehicles are those using hydrogen fuel-cell technology. In these vehicles, oxygen and hydrogen chemical energy is converted into electricity, powering the motor without the use of conventional gasoline.

The actual credit rate will depend on your business vehicle model and must also be certified by the original manufacturer.

Do note the major exception surrounding the Alternative Motor Vehicle Credit, which can sometimes cause confusion:

  • Hybrids and electric vehicles don't apply. Both these vehicle types still use conventional fuels and therefore fall outside this credit's scope. See the Qualified Plug-in Electric or Electric Vehicle Credit and Alternative Fuel Vehicle Refueling Property Credit notes below for more information on credits for hybrid or electric cars.

5. Rehabilitation, Energy, and Reforestation Investment Credit

As its name implies, the Rehabilitation, Energy, and Reforestation Investment Credit is dedicated to helping businesses who invest in environmental preservation causes.

Rather than developing or taking on those environmental activities themselves, a business may choose to invest in resources or other organizations performing this work.

The credit also includes real estate investment renovations and restorations. For example, an organization that has bought a new building for its headquarters may be able to receive a rehabilitation credit relative to the cost of restoring that building. Small businesses constructing new buildings, however, do not qualify for this particular credit.

Businesses participating in the investment side of this credit also do not need to modify their own energy efficiencies, fuel, or electricity sources to qualify for this particular green tax credit. Instead, this tax credit rewards business owners for their support by allowing a deduction of 10% total investment expenditures but is capped at $10,000 a year.

6. Business Energy Efficiency Tax Credits

Business Energy Efficiency Credits are a diverse group of general business credits. This means their status is based on lingering or carried-forward credits from the previous tax year plus the total of new credits applied for and accepted by the IRS.

Generally speaking, these business energy efficiency tax credits offer some of the broadest and most approachable means for your organization to reduce its direct tax liability and save money every year. Some of the most common Business Energy Efficiency Tax Credits include:

 

Business Energy Efficiency Tax Credits

 

  • Alternative Fuel Vehicle Refueling Property Credit: Allowing those with battery-powered cars and subsequent charging ports to deduct $1,000 or up to 30% of the port's installation cost.
  • Low-Sulfur Diesel Fuel Production Credit: Allowing small businesses involved with the production of low-sulfur diesel to write off a portion of its costs on their annual taxes. Similar in purpose to the Alcohol Fuels Credit.
  • Qualified Plug-in Electric or Electric Vehicle Credit: Plug-in and electric cars from approved, eligible manufacturers allow businesses to receive a $7,500 nonrefundable tax credit.

7. Energy Efficient Commercial Building Tax Credit

Owners or lessees of commercial buildings may qualify for a special type of energy tax aptly named the Energy Efficient Commercial Building Credit.

With this credit, companies that install or update their buildings to contain efficient and contemporary energy infrastructure receive up to $1.80 per renovated square foot in credits, so long as the building's total energy and power usage rates are reduced by 50%.

Common examples of these qualifying energy-efficient systems include:

  • High-efficiency light bulbs or lighting systems
  • High-efficiency HVAC systems
  • High-efficiency hot water systems

See more systems that qualify in The Office of Energy Efficiency & Renewable Energy's tax incentive fact sheet.

Similar infrastructure changes can result in a partial credit of $0.60 per square foot if the renovations comprise a building's "envelope" — that is, its floors, walls, windows, doors, or roof.

Always Discuss Business Energy Tax Credits With Your Trusted Tax Professional

U.S. energy tax codes and credits are continually changing. A business that exceeds qualifications only the previous tax year or two may no longer be applicable the next, just as the very forms required to receive a credit can change annually.

Tax professionals are the way to ensure you're qualifying for as many energy tax credits as possible and to know when it's best to apply for them given your organizational energy needs, efficiency goals, and budget.

These certified individuals also provide an ongoing resource, helping you:

  • Meet and maintain tax compliance.
  • Outline savings possibilities in your current business energy expenditures.
  • Calculate cost segregation to determine if credits or deductions are genuinely best-fit for your business' scale.
  • Understand the differences between lump-summing or itemizing a deduction, if pertinent.

Additionally, the U.S. Small Business Administration (SBA) provides a robust database of federal tax credits and their related IRS forms for small business owners to use.

SBA's website also gives advice on additional documents to file and benchmarks to meet before many businesses are eligible for that dollar-for-dollar tax reduction.

Understand Your Commercial Energy Options

Contact Shipley Energy to learn more about commercial energy options and the benefits of a custom energy procurement strategy made for your organization.

We're committed to walking business owners like you through the confusing — and sometimes contradictory — assumptions about energy and power choices for commercial businesses. Contact us directly with your questions.

Understand Your Commercial Energy Options