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Business Builder: Go Green and Reduce Taxes

Posted: May 20, 2009


Numerous tax incentives and program credits exist to help businesses save energy and money at the same time.
By Mark E. Battersby

Reducing energy costs is probably on every pet-product retailer and supplier’s mind these days. Although additional costs can be associated with saving energy, U.S. federal tax laws already contain a variety of tax savings for businesses wishing to achieve energy savings while “going green.”

Tax incentive programs offered by federal, state and local governments, combined with programs offered by utility companies, have long helped businesses overcome the relatively high front-end costs of achieving energy efficiency or savings. Today, tax incentives not only reduce the cost of acquiring and installing energy-efficient products, but they significantly reduce the day-to-day costs of business operations.

New Life for Old Energy-Related Tax Breaks
Last year, as part of the Emergency Economic Stabilization Act of 2008 (EESA), several energy-related tax credits were extended. Solar credits landed an eight-year extension for an existing 30-percent tax credit for residential and commercial solar installations, while a $2,000 cap for deducting the cost of installing these systems was removed.

green buildings tax creditWith the extension, the U.S. is now poised to become the largest solar market in the world. Additionally, the wind-energy industry received a one-year extension of the production tax credit that many believe will help it reach new levels of growth in 2009.

Tax credits—direct reductions of an operation’s tax bills as opposed to a “deduction” that merely reduces the annual tax bill—are not the only tax-related benefits for achieving energy efficiency, of course. The so-called “green buildings” tax credit is an important incentive offered to pet product retailers, suppliers and manufacturers under U.S. federal tax laws.

Commercial Buildings
For many years, U.S. tax laws treated commercial property less favorably than residential property. Today, however, tax breaks are available for commercial buildings, creating significant incentives for making those properties more energy efficient. Businesses can benefit from tax deductions for new or renovated buildings that save 50 percent or more of projected annual energy costs for heating, cooling and lighting compared to model national standards. Partial deductions are also available for efficiency improvements to individual lighting, HVAC and water heating, or buildings’ envelope systems.

Rather than a deduction for the cost of equipment or systems that make a commercial building more energy efficient, a tax deduction of up to $1.80 per square foot is available for owners or tenants of both new and existing commercial buildings. However, the improvement must save at least 50 percent of the heating, cooling, ventilation, water heating and interior lighting energy cost.

Only buildings covered by the scope of the American Society of Heating, Refrigeration and Air Conditioning Engineers’ (ASHRAE) Standard 90-1-2001 are eligible. A partial deduction of $0.60 per square foot can be taken for improvements made to one of three building systems: the building envelope, lighting or heating, or cooling system.

Commercial Property Savings
Commercial property is usually defined as property intended for use by retail, wholesale, office, hotel or service users, or for manufacturing or other industrial purposes. A building envelope component is any insulation material, a system designed to prevent heat loss or gain, exterior windows (including skylights), exterior doors and any metal roof with either pigmented coating or cooling granules designed to reduce heat gain.

Qualified energy property is defined as “energy-efficient building property,” including qualified natural gas, propane or oil furnace or hot water boiler, or an advance main air-circulating fan that meets specific performance and quality standards. Qualified energy-efficient building property includes electric heat-pump water heaters, qualified electric heat pumps, qualified central air conditioners and qualified stoves, which use biomass fuels.

Saving Tax While Saving Energy
An increasing number of pet-product businesses employ solar heating or lighting. Some are also installing on-site wind systems. Not too surprisingly, many of those retailers and suppliers are eligible for tax credits.

In order to qualify for the tax credits, equipment must either use solar energy to generate electricity, heat or cool a structure, provide hot water, or use solar energy to illuminate the inside of a building by means of fiber-optic-distributed sunlight (tube systems and passive solar are not eligible). The credits are available for systems “placed in service” between Jan. 1, 2006 and Dec. 31, 2016.

Geothermal Heat Pumps
As part of the EESA, an incentive was added to the energy-related tax rules for installing geothermal heat-pump property or equipment. The incentive for businesses is available from Oct. 3, 2008, through Dec. 31, 2016.

The incentive covers 30 percent of the expenditures in the year the incentive is taken, up to a cap of $2,000. Qualified geothermal heat-pump property refers to any equipment that uses the ground or groundwater as a thermal energy source to heat the taxpayer’s residence, or as a thermal energy sink to cool the residence. The unit must meet the requirements of the Energy Star program in effect when the heat pump is purchased.

The tax credits for solar, wind power and even geothermal heat pumps are available to businesses, farmers and homeowners who install equipment for their use, as well as to individuals who install qualifying systems on homes they use as residences. More exotic write-offs for energy saving are also included in U.S. tax laws.

Other Energy Incentives
In addition to the tax incentives provided by U.S. tax laws, there are a number of local, state and utility company programs. States often lead the way in adopting progressive policies that promote energy efficiency.

The American Council for an Energy-Efficient Economy, for example, offers the State Energy Efficiency Policy database. The database is searchable by either state or policy area.

Another database, established in 1995 and funded by the U.S. Department of Energy, is the Database of State Incentives for Renewables & Efficiency. It is a project of the North Carolina Solar Center and the Interstate Renewable Energy Council (IREC) that provides a comprehensive gateway to detailed information of a variety of state energy policies.

Ever-increasing energy costs and an interest in “going green” are making many pet-product retailers, suppliers and manufacturers think about the environment when planning renovations or construction for new facilities. With lawmakers pondering the economic big picture and future legislation centering on funding energy-efficiency, it is important to remember current U.S. tax laws already help pet-product businesses reduce the out-of-pocket, up-front expenditures that are essential to long-term energy savings. <HOME>

Mark E. Battersby is a long-time expert and writer on news and developments within the ever-changing tax and financial arenas.



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Business Builder: Go Green and Reduce Taxes

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Reader Comments
The geothermal tax credit is much higher than stated. It appears to confuse the residential tax credit with the commercial. From my white paper on the subject "The geothermal system may also be eligible for treatment as energy property under section 48(a) of the IRS Code that provides a 10% tax credit on the cost of the entire HVAC system. It is also classified as 5 year depreciable property under section 168(e)(B)(vi)(I) of the Internal Revenue Code. I would like to refer people to your article, it is very important to understand this huge benefit.
Micheal, Orlando, FL
Posted: 4/26/2012 7:13:40 AM
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