Would you like to save green by going green? If your business values renewable and green energy practices, you may qualify for federal renewable energy credits. The United States government offers incentives for businesses and individual taxpayers to support energy efficiency initiatives. Here are a few green energy credits available to businesses.
What are Tax Credits?
Tax credits directly reduce your income taxes dollar-for-dollar. For example, if your business's tax liability was $40,000, and you have a $2,000 tax credit, your new tax liability is $38,000.
Tax credits are more valuable to your business than deductions, which merely reduce your taxable income. In contrast, if you have a $2,000 deduction and your marginal income tax rate is 24%, it results in a $480 reduction to your tax liability.
Federal Investment Tax Credit
Federal investment tax credits incentivize businesses to invest in certain renewable energy sources. In return, the business can receive a tax credit for a percentage of their investment cost on their taxes. Be aware, you cannot simply make a renewable energy property purchase intending to place it into service at a later date. You must claim these tax credits in the year your business places the property in service, regardless of the date you purchased it.
Although this tax credit is commonly associated with solar energy via the solar investment tax credit, there are federal investment tax credits available for other energy properties as well. Qualifying renewable energy purchases include geothermal heat pumps, wind turbines, and fuel cells. Energy Star provides a detailed list of eligible renewable energy property and their requirements.
Under the current tax law, most types of energy property become ineligible entirely if construction begins after 2023. Based on the year construction begins on your project, you can claim the following percentage of your purchase costs.
When Renewable Energy Property Credits Expire (End of Year)
- Solar, Fiber Optic Solar, Fuel Cells, Small Wind Turbines, and Waste Energy Recovery Property: 30% in 2019
- Solar, Fiber Optic Solar, Fuel Cells, Small Wind Turbines, and Waste Energy Recovery Property: 26% in 2022
- Solar, Fiber Optic Solar, Fuel Cells, Small Wind Turbines, and Waste Energy Recovery Property: 22% in 2023
- Microturbines, Combined Heat and Power, Geothermal Heat Pump: 10% in 2023
- Offshore Wind: 30% in 2025
- Solar, Geothermal Energy: 10% in Permanent
For this tax credit, the IRS considers construction to have begun when physical work of a significant nature has commenced or when the taxpayer has paid at least 5% of the total project costs. For example, if construction begins in 2022 but is not finished until 2023, you can still claim 26%. However, any solar energy property placed in service after 2025 can only receive a 10% tax credit regardless of when construction began.
Alternative Motor Vehicle Credit
The alternative motor vehicle credit provides businesses a tax credit of up to $4,000 to purchase an alternative-fuel vehicle. Currently, only four-wheeled vehicles powered by hydrogen fuel-cell technology qualify for the tax credit. Vehicles that meet these strict criteria include the Hyundai Excient Fuel Cell, the Hyundai Nexo, and the Toyota Mirai II. You must purchase the vehicle new to qualify. This tax credit is due to expire after the 2022 tax year.
Qualified Plug-In Electric Vehicle Energy Credit
The qualified plug-in electric vehicle credit provides businesses a tax credit of up to $7,500 to purchase a qualified plug-in electric vehicle. Cars and trucks that draw energy from a five-kilowatt hour or greater battery, have at least four wheels and weigh less than 14,000 pounds qualify for this tax credit. Like the alternative motor vehicle credit, you must purchase the vehicle new to qualify.
A vehicle with a five-kilowatt hour battery is eligible for the minimum $2,500 credit. The credit increases by $417 per additional kilowatt-hour, up to the maximum $7,500 credit. You can search the United States Department of Energy to see the credit value for various vehicle makes and models.
The tax credit phases out for car manufacturers after their 200,000th sale. As of 2022, Tesla and General Motors have passed the phase-out limit, so their vehicles do not qualify for this tax credit.