A Guide to Renewable Energy Tax Credits for Small Business
By NOPEC on October 29, 2018
For small business owners, there is no typical day. Operations includes everything from management to sales and marketing to HR. One thing remains consistent, however: a focus on revenue and profitability. While most small business owners’ efforts to increase the bottom line are focused on bringing in more revenue, they could be missing out on opportunities to reduce operating costs and even receive tax credits back.
Here we’ll explore some of the opportunities for small business owners to take advantage of renewable energy tax credits:
Business Energy Investment Tax Credit (ITC)
This United States federal corporate tax credit applies to commercial, industrial, utility and agricultural sectors, and it includes energy technologies like solar, fuel cells, small wind turbines, geothermal systems, microturbines, and combined heat and power (CHP).
- Solar Technologies - This would include solar energy equipment to generate electricity, heat or cool a structure, or provide solar process heat.
- Fuel Cells - Fuel cells convert hydrogen-rich fuel into electricity and do not need to be periodically charged. Instead, they continue to produce electrical power as long as a fuel source is provided. Commonly used fuel cells include:
- Solid Oxide Fuel Cell
- Direct Methanol Fuel Cell
- Alkaline Fuel Cell
- Phosphoric Acid Fuel Cell
- Molten Carbonate Fuel Cell
- Proton Exchange Membrane Fuel Cell
- Small Wind Turbines - Wind turbines convert wind energy into electrical energy. Wind power can be used for specific tasks, like pumping water, or it can be converted into electricity using a generator.
- Geothermal Systems - Geothermal energy is heat from the earth. Systems covered by the ITC include geothermal heat pumps and equipment used to produce, distribute or use energy derived from a geothermal deposit.
- Microturbines - Microturbines, while they sound similar to “wind turbines,” are quite different. They use rotational energy to generate power.
- Combined Heat and Power (CHP) - Also known as cogeneration, combined heat and power (CHP) is the concurrent production of electricity or mechanical power and useful thermal energy from a single source of energy.
The Business Energy Investment Tax Credit provides a 30% rebate for solar, fuel cells and wind, and a 10% rebate for geothermal, microturbines and combined heat and power (CHP).
Maximum rebate values:
- Fuel cells - $1,500 per 0.5kW
- Microturbines - $200 per kW
- Small wind turbines placed in service 10/4/08 - 12/31/08 - $4,000
- Small wind turbines placed in service after 12/31/08 - no limit
- All other eligible technologies - no limit
According to energy.gov, “the original use of the equipment must begin with the taxpayer, or the system must be constructed by the taxpayer. The equipment must also meet any performance and quality standards in effect at the time the equipment is acquired. The energy property must be operational in the year in which the credit is first taken.”
Commercial Buildings Energy Efficiency Tax Deduction
While the Business Energy Investment Tax Credit (ITC) is tax credit, meaning the full amount reduces the amount of money that your business pays, the Commercial Buildings Energy Efficiency Tax Deduction will simply lower taxable income.
According to energy.gov, “A tax deduction of $1.80 per square foot is available to owners of new or existing buildings who install (1) interior lighting; (2) building envelope, or (3) heating, cooling, ventilation, or hot water systems that reduce the building’s total energy and power cost by 50% or more in comparison to a building meeting minimum requirements set by ASHRAE Standard 90.1-2001 (for buildings and systems placed in service before January 1, 2016) or 90.1-2007 (for buildings and systems placed in service before January 1, 2017).”
For clarification, building envelope refers to the “wrap” on the building, including the walls, floors, windows, doors and roofs.
In addition, “Deductions of $0.60 per square foot are available to owners of buildings in which individual lighting, building envelope, or heating and cooling systems that partially qualify be meeting certain target levels or through the interim lighting rule. These three compliance pathways are shown in the table below.”
Calculating Energy Savings
How do you know that an investment is going to reduce the building’s energy and power cost by 50%? There are several software programs that assist with calculating commercial building energy and power cost savings to meet federal tax incentive requirements. These include:
- Hourly Analysis Program (HAP)
- IES<Virtual Environment>
- OpenStudio 2.3.0 with EnergPlus 8.8.0
- TRACE 700
A full list of software, including programs that can be used for buildings placed in service on or before December 31, 2015, can be found here.
Certification and Guidelines
To satisfy the energy efficiency requirements, the IRS requires a certification under IRS Notice 2006-52. The National Renewable Energy Laboratory has put together two useful guides for obtaining this tax deduction:
- Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions
- Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductions for Buildings in 2016 and Later
Other Renewable Energy Tax Credits/Deductions
While the above tax credit and deduction programs are the most common, there are several other opportunities for small businesses to take advantage of leveraging renewal energy sources or clean energy:
- Database of State Incentives for Renewables & Efficiency (DSIRE)
- Energy.gov Tax Credits, Rebates & Savings Search
- IRS Business Tax Credits (scan this list for renewable energy credits)
While the initial investment may take detailed planning and consideration, investing in renewable energy systems can not only have a positive long-term financial impact on your business, but can allow you take advantage of some short-term tax credits and deductions to help offset the cost.
NOPEC offers two energy efficiency financing programs to help commercial property owners finance these investments as well. Our STEP Loan offers financing for projects from $5,000 to $100,000 with a 3% interest rate, while our PACE Loan offers financing for projects from $100,000 to $500,000.Tags: NOPEC, Energy, Small business, Tax, Credits