Tax Credits and Deductions for Your Green Business
Is your business considering an alternative motor vehicle? Or maybe you're considering solar energy for a business building. You can be environmentally savvy and save on costs, and still get a tax credit from your business taxes for these projects.
Tax Credits and Deductions
Tax credits are under-appreciated because they are misunderstood. A tax credit is a dollar-for-dollar reduction in your business tax bill because the credit is applied against your gross income. So if you spend $100 on an energy-efficiency project, your business tax is reduced by $100.
Tax deductions are almost as good, but they come into play after your gross income is determined. In either case, making the most of all the tax deductions and tax credits you are eligible for is a great way to reduce your business taxes.
You can only get a tax credit for property or equipment that you buy and put into service (use) for a specific year. In other words, you can't just buy something and let it sit and hope to claim the tax credit.
"Green" Vehicle Tax Credit
Several tax credits are available for your business if you buy and use environmentally friendly vehicles:
- Alternative Fuel Vehicle Refueling Property Credit (Form 8911) for buying refueling property (gas pumps, etc.)
- Alternative Motor Vehicle Credit (Form 8910) for alternative motor vehicles you place in service during the tax year.
- Biodiesel and renewable diesel fuels credit (Form 8864) for sale or use of biodiesel, renewable diesel, biodiesel mixture renewable diesel mixture, and small agri-biodiesel products.
"Green" Investment Tax Credits
Form 3468 is a general investment tax credit that includes several different credits. Some of these tax credits are being reduced to 22% for property construction beginning in 2021:
- Solar illumination and solar energy property
- Qualified fuel cell property
- Qualified small wind energy property
The investment credit for wind facilities has been extended, but the credit has been reduced by 40% for facilities on which construction began in 2020.
Other tax credits have been reduced from 30% to 26% for property construction beginning in 2020:
- For solar illumination and solar energy property
- For qualified fuel cell property
- For qualified small wind energy property
Your business can get a tax credit for specific energy-saving investments, in a variety of forms. These investments must be in investment credit property that can be depreciated or amortized.
In order for your business to be eligible for this investment tax credit:
- Your business must own or have built the equipment
- The property must be placed into service (be operational) the year you take the credit
- The equipment must meet specific performance and quality standards
The Solar Investment Tax Credit
An important part of the tax credits available to businesses for energy-saving is the solar investment tax credit. It is part of the tax credit changes made in December 2015, and it provides a 30% tax credit for businesses that install, develop, and/or finance solar energy property. Legislation in December 2015 extended the credit for solar technologies and production tax credit-eligible technologies, with a gradual step-down of the credits between 2019 and 2022.
Tax Deduction for a "Green" Building
The Section 179D commercial buildings energy efficiency tax deduction is only available until December 2020. You must have built the systems and building and placed them in service by December 31, 2020.
If you want to revive your business building and turn it into a "green" building, you can get a tax deduction for this purpose. This Section 179D deduction is for incorporating high energy systems into your building, such as high-efficiency interior lighting, HVAC or hot water systems, of efficient building envelopes. (The building envelope is the "wrap" on the building — walls, floors, windows, doors, and roofs.)
You can get a deduction of up to $1.80 per square foot for building floor areas that have these new systems if they achieve a 50% reduction in energy and power costs.
- You must be the owner or lessee of the commercial building.
- You must get a certification that the required energy savings of 50% will be achieved, in order to get the deduction. It's best to get this certification, from a qualified engineer, ahead of time. You can get a partial deduction of $.60 per square foot if you can certify a 16 2/3% reduction in energy and power costs.
How Do I Claim These Tax Credits?
For small businesses filing their business taxes as part of their personal tax return, follow these steps:
- First, find the credit application form for the specific tax credit and complete the form.
- Then add the information from the form to Form 3800, the General Tax Credit.
- Finally, add the information from Form 3800 to your tax return.
Partnerships and S corporations must file the form to get the tax credit (not Form 3800).
To get the energy investment tax credit, you must file an application Form 3468, along with your business tax return. This is a complicated form, so save your receipts and give them to your tax preparer.
Deductions are a bit easier. This deduction can be included in the "Other Deductions" section of your business tax return. Don't forget you will need a certification, either before or after you complete the upgrades.
Note: As with all things IRS, there are many restrictions, qualifications, and limitations to these tax credits and tax deductions. The information in this article is intended only as general information, and not tax advice. Check with your tax professional before attempting to take advantage of any of these tax savings.
IRS. "Publication 334 Tax Guide for Small Business. Pages 18-20, Accessed Oct. 6, 2020.
IRS. "Instructions for Form 3468 Investment Credit." Page 1. Accessed Oct. 6, 2020.
Energy.gov. "179D Commercial Buildings Energy-Efficiency Tax Deduction." Accessed Oct. 6, 2020.
U.S. Department of Energy. "179D Commercial Buildings Energy-Efficiency Tax Deduction." Accessed Oct. 6, 2020.
IRS. "Publication 334 Tax Guide for Small Business. Page 20, Accessed Oct. 6, 2020.
IRS. "Instructions for Form 8910 Alternative Motor Vehicle Credit." Page 1. Accessed Oct. 6, 2020.