How Can Small Businesses Take Advantage of Clean Energy Tax Credits?

 Posted on May 15, 2023 in Taxation Law

As part of the ongoing efforts to address global climate change, the U.S. government has taken steps to promote the use of clean energy in a number of ways. This includes offering tax credits and deductions for small businesses that take steps to cut energy costs and reduce reliance on fossil fuels. By investing in energy efficiency, small business owners may be able to realize significant savings by reducing their expenses and lowering their tax bills.

Types of Clean Energy Credits and Deductions

There are several options that may be available for small businesses that make the shift toward clean energy, including:

• Solar energy tax credits - Businesses that purchase new solar energy systems have two options for receiving tax credits. The investment tax credit (ITC) will reduce a business's federal tax liability in the year in which a new solar power system is installed, while the production tax credit (PTC) will provide ongoing credits based on the electricity generated by a solar power system within the first 10 years of operation. The ITC provides a credit of 30 percent of the amount spent on systems such as solar panels, inverters, transformers, circuit breaks, and energy storage devices, and it may be the preferred option for smaller-scale solar power projects. The PTC provides a tax credit of 2.75 cents per kilowatt-hour of electricity generated in a tax year, and it may provide more tax savings in situations involving large-scale projects that will generate a significant amount of electricity over several years. Both the ITC and PTC will be available for systems that began operating in 2022 or later, as long as construction begins prior to 2033.

• Energy-efficient commercial building deductions - Starting in 2023, owners and long-term lessees of commercial buildings will be able to take advantage of an expanded tax deduction when they make energy efficiency improvements. The installation of systems that reduce the total energy and power costs for lighting, heating, cooling, ventilation, or hot water will allow for a tax deduction over a 4-year period. The base deduction will be between 50 cents and one dollar per square foot of a building, and it will be based on the increase in efficiency. A taxpayer may receive five times the base deduction amount if they meet requirements for prevailing wage rates and apprenticeships, potentially resulting in a total deduction of five dollars per square foot.

• Commercial clean vehicle credit - Businesses that purchase qualifying commercial vehicles for business use may receive a tax credit for the year that the vehicle was purchased. Qualifying vehicles include plug-in electric vehicles and fuel cell motor vehicles. The credit will be either 15 percent of the taxpayer's basis in the vehicle or the incremental cost of the vehicle, whichever is less. The maximum credit is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds or $40,000 for other types of vehicles. Multiple credits may be claimed if a business purchases multiple vehicles.

Contact Our San Jose, CA Business Tax Credit Attorney

These are just a few of the tax credits and deductions that may be available for small business owners. If you have questions about whether you can claim tax credits for clean energy, or if you need to resolve issues related to a tax audit that has been initiated by the IRS based on deductions you have claimed, John D. Teter Law Offices can provide invaluable assistance. Our San Jose small business tax lawyer can help you understand the steps you can take to minimize your tax liabilities and protect your business's bottom line. Contact us at 408-866-1810 to discuss these issues in a consultation.

Sources:

https://www.energy.gov/eere/solar/federal-solar-tax-credits-businesses

https://www.irs.gov/credits-deductions/commercial-clean-vehicle-credit

https://www.whitehouse.gov/wp-content/uploads/2022/12/Inflation-Reduction-Act-Guidebook.pdf