Editor: Anthony S. Bakale, CPA, M. Tax.
Credits Against Tax
Any organization has much to gain by purchasing more energy-efficient equipment and systems. Long-term savings result from reducing energy costs, and various long-term benefits accompany participating in environmental stewardship efforts.
What an organization might not be aware of, though, is how many tax incentives are available in the United States at the federal, state, and local levels to defray the costs of purchasing and installing more energy-efficient equipment and systems.
While incentives vary among states and municipalities, dozens of programs are available that reduce the initial costs of conservation efforts. Those programs encompass construction and design considerations for new buildings, as well as improvements to existing facilities.
Organizations operating in a variety of industries can capitalize on these incentives. A manufacturer may benefit from purchasing more efficient production equipment. A real estate company that owns and rents residential housing may benefit from installing new windows in its apartment units. Those windows may also reduce the strain on existing heating and air conditioning systems.
Installing rooftop solar panels may enable a health care clinic to reduce its natural gas use for water heating, while a professional services firm may realize substantial savings in electricity costs by installing new light fixtures in its offices.
General Classifications for Incentives
Depending on an organization’s circumstances, a variety of incentives may be available. Those incentives fit within one of the following five categories:
Gross income exclusions: A company can exclude from gross income part or all of incentive payments or grant funds it receives for qualified energy conservation projects. At the federal level, for example, Sec. 136 allows the exclusion of a subsidy provided by a public utility for the purchase or installation of any energy conversation measure. Such measures may include items that reduce consumption of electricity or natural gas, such as meters installed in customers’ homes (Letter Ruling 201046013).
Tax credits: Each dollar offered for a tax credit reduces the total amount of business income subject to tax. Such credits include one for production of renewable electric energy (Sec. 45) and a 10% combined heat and power property (CHP) tax credit (Sec. 48).
Deduction in lieu of depreciation: Sec. 179D, the energy-efficient commercial building deduction, allows taxpayers to deduct the cost of energy-efficient new plant and energy equipment rather than depreciate it. The total savings realized from Sec. 179D vary, based on the entity’s circumstances.
A company that installs energy-efficient commercial building property in a 100,000-square-foot building, for example, can deduct up to $1.80 per square foot of expenditures, or a total of $180,000, in the tax year that the energy-efficient property is placed in service, rather than having to depreciate the entire property over a 39-year schedule (the property’s basis is reduced by the amount of the deduction taken). However, the amount that can be deducted instead of depreciated is reduced by any deduction taken for energy-efficient commercial building property with respect to the same building for all previous years.
Ancillary funding and allowances: Incentives exist for green industry companies and the jobs they create. Depending on the circumstances, incentives may also be available for companies operating in other industries to receive support for hiring or training employees in the operations aspects of energy conservation. Virginia, for example, offers a $500 annual tax credit—for five years—for the creation of a green job with an annual salary of $50,000 or more (Va. Code §58.1-439.12:05).
Multiple opportunities: Organizations can tap multiple incentives for each project, including loans, performance-based incentives, deductions, tax exemptions, and grants, as well as property and sales tax rebates.
Factors to Consider for Energy Conservation Plans
Some tax incentives for energy-efficiency improvement efforts are only available for limited durations. For example, the Sec. 179D deduction will expire at the end of 2013 unless Congress extends it (Sec. 179D(h)). An organization interested in attaining such savings should study its options now, before those incentives expire.
Also, while incentives at the federal level are available to taxpayers throughout the United States, individual states and municipalities have varying energy-conservation objectives and tax codes. For example, Oregon offers a sustainable building tax credit to businesses with buildings that meet the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) standards (Or. Rev. Stat. §469), while Kansas’s Facility Conservation and Improvement Program promotes tax-exempt financing for energy conservation efforts (Kan. Stat. §75-37,125).
While most of the tax codes and incentive provisions are relatively straightforward, hiring a tax professional with experience in the area to research and evaluate which incentives may apply is worth the effort.
In addition to being more familiar with the nuances of various incentives, such a tax professional may be able to draw upon past experiences helping other taxpayers in similar situations. That experience can translate into additional ideas for conserving cash.
Being aware of the financial benefits associated with various tax incentives then enables a company to fully evaluate the costs and savings associated with specific plans. Architects, contractors, and energy professionals can then review potential plans, determine whether those plans are feasible, and provide detailed information regarding material and labor costs.
Immediate and Long-Term Benefits of Energy Conservation Credits
At any given time, an organization faces numerous potential needs for new technology, expanded marketing plans, research and development efforts, and other activities. Capitalizing on available tax savings helps preserve funds for such activities.
Reduced energy consumption translates into long-term savings, thereby improving future cash flow. By taking steps to conserve energy, an organization also signals to employees, customers, and other stakeholders that it is taking an active role in advancing environmental stewardship.
Anthony Bakale is with Cohen & Co., Ltd., Baker Tilly International, Cleveland.
For additional information about these items, contact Mr. Bakale at 216-579-1040 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with Baker Tilly International.