In an attempt to reduce energy consumption and expand the use of clean energy, tax credits enable taxpayers to lower their tax bill while taking a bit of the bite out of the initial investments in green energy systems. Businesses are not left out in the cold with respect to tax savings from energy tax incentives. This blog post will explore different ways that businesses can slice their tax bill.
Deduction for Energy-Efficient Commercial Building
Rather than capitalizing the cost for a lengthy period, an owner or designer of an energy-efficient building can take an accelerated current deduction.
- The deduction is available for reductions in the energy usage of these systems:
- Building envelope
- HVAC/hot water systems
- Interior lighting systems
- There is maximum limit to the deduction. The limit is based on $1.80 per square footage for any building. An example of this computation is below:
EcoBuilder Co. (EBC), a builder of corporate office space, constructs a new 100,000-square-foot office building that uses new technology to reduce the building’s use of energy in the lighting, heating, cooling, ventilation, and hot water supply systems and places it in service in 2015.
EBC incurs qualified energy savings costs of $100,000 in 2015 and $200,000 in 2016. It has a maximum allowable deduction of $180,000 ($1.80 X 100,000 square feet).
EBC can fully deduct $100,000 in 2015 and $80,000 in 2016. The remaining 2016 costs of $120,000 must be capitalized and depreciated under the general tax rules.
- Note that there is also an alternative partial deduction based on $.60 per square footage if the energy cost reduction test is not met.
- Good through 2016.
Credit for Builders of Energy-Efficient New Homes
As part of the general business credit, eligible contractors can claim this credit for building and selling energy-efficient new homes. This credit comes in two forms:
- A home that had a 50% reduction in energy usage is allowed a $2,000 tax credit.
- A home that had a 30% reduction in energy usage is allowed a $1,000 tax credit.
The credit is available for homes acquired before January 1, 2017. In order to qualify for the credit, eligible homes: (1) must be qualified, new energy-efficient homes, (2) constructed by an eligible contractor, and (3) acquired by a person from the eligible contractor for use as a residence during the year.
Final Thoughts on Energy Tax Incentives
While we have focused on homes and buildings, there are additional tax incentives that were also extended by the PATH Act which are worth mentioning in this article:
- The wind energy production tax credit is extended through 2019, subject to phase-out.
- The solar investment tax credit and credit for qualified residential solar property are extended through 2021, subject to phase-out.
- The following credits and incentives have been extended through 2016:
- Production for Indian coal facilities
- Alternative fuel refueling property
- Second-generation biofuel production
- Biodiesel and renewable diesel incentives
- Biofuel plant property
- Alternative fuels
If you have questions on energy tax credits, please consult with a tax professional.