Can Businesses Take Energy Credit?

Energy credits are forms of financial incentives that help businesses offset costs related to using renewable energy sources or improving energy efficiency. These can include tax credits, rebates, grants, and more. Businesses may want to take advantage of energy credits for several reasons:

Energy credits can help reduce energy bills and overhead costs. By installing energy efficient equipment or making upgrades, businesses can qualify for credits and incentives that lower operating expenses.

They allow businesses to adopt greener practices and reduce environmental impact. Energy credits make investments in renewable energy more affordable. This helps companies meet sustainability goals.

Certain energy credits may improve public perception and branding. Consumers increasingly favor companies that use clean energy. Obtaining credits to go green can boost a company’s reputation.

Businesses can reinvest the savings into growth and expansion. Lowering energy costs frees up capital to put towards other business objectives.

Numerous federal, state, and utility incentives are available. So there are many opportunities for different types of companies to obtain credits and maximize savings.

Types of Energy Credits for Businesses

There are several types of energy credits businesses can take advantage of to lower their energy costs and become more sustainable, including:

Investment Tax Credits

The federal government offers investment tax credits that allow businesses to deduct a percentage of the cost of certain renewable energy investments, like solar panels or wind turbines, from their federal income taxes. The commercial solar ITC allows businesses to deduct 26% of solar energy system costs from their taxes through 2032 (Federal Solar Tax Credits for Businesses).

Production Tax Credits

Production tax credits provide tax incentives based on the amount of electricity generated and sold by eligible renewable sources. For example, wind energy production tax credits give 2.5 cents per kilowatt hour of power generated for the first 10 years of operation (Bloomberg Tax).

Grants

Federal, state, and local governments offer grants to support renewable energy projects. These are direct subsidies that do not need to be repaid. Grants help offset upfront project costs.

Rebates

Many electric utilities and states give rebates to commercial customers as incentives to install energy efficient equipment or renewable energy systems. Rebates directly reduce purchase and installation costs.

Performance-Based Incentives

Some incentive programs provide ongoing payments to businesses based on the actual energy production of their renewable energy systems over a period of time. These performance-based incentives encourage optimal system performance.

Federal Tax Credits

The federal government offers several tax credits that can help businesses reduce the costs of installing energy efficient technologies and renewable energy systems like solar panels. The main tax credit is the investment tax credit (ITC).

The ITC allows businesses to deduct 26% of the cost of installing solar panels, fuel cells, small wind turbines, geothermal heat pumps, and other renewable technologies from their federal income taxes. For even greater savings, businesses can combine the ITC with accelerated depreciation deductions. There is no maximum limit for the ITC. Federal Solar Tax Credits for Businesses

To claim the ITC and other federal energy tax credits, businesses report them on IRS Form 3468 and attach it to their income tax return. Receipts and other documentation showing the costs of materials and labor for installing the renewable energy system must be retained. The equipment must be operational in the tax year the credit is claimed.

State/Local Incentives

Energy incentives and credits available to businesses vary greatly depending on location. Many state and local governments offer grants, rebates, and tax credits to promote energy efficiency and renewable energy. These incentives can help offset the upfront costs of upgrades and improvements.

For example, California offers a variety of programs such as the Energy Incentive Program which provides financial incentives to install energy-saving equipment (https://www.energy.gov/eere/buildings/tax-incentives-energy-efficiency-upgrades-commercial-buildings).

To find programs available in your area, check databases like the Database of State Incentives for Renewables & Efficiency (DSIRE) which aggregates incentives across the U.S. (https://www.energy.gov/energysaver/financing-and-incentives). Local utilities and energy offices are also great resources.

Taking advantage of state and local energy credits allows businesses to lower operating costs while supporting sustainability goals.

Using Energy Credits to Lower Costs

Energy tax credits can help businesses reduce costs in several ways

One of the key benefits is that they offset capital expenditures on qualifying energy systems. The cost of installing high-efficiency equipment such as solar panels or HVAC upgrades can be substantial. Tax credits help defray these upfront costs so businesses don’t have to bear the full financial burden themselves.1

Credits can also lower operating expenses over time. If a business installs a solar array or makes their building more energy efficient, their ongoing utility bills will be decreased. Since they are now using less energy from the grid, the business saves money. Tax credits make the return on investment for efficiency upgrades happen faster.2

Finally, properly utilized tax credits improve a business’s cash flow. Rather than paying the full amount for new equipment or installation, credits reduce the outlay of cash. And the reduction in operating expenses from upgrades frees up capital that would have gone toward energy bills. With more cash on hand, businesses can invest in growth or weather economic downturns.3

Qualifying for Energy Credits

There are certain eligibility requirements that businesses must meet to qualify for federal and local energy tax credits. The primary requirement is that the business must be based in the United States and pay taxes.

To apply for federal energy tax credits like the EV charging tax credit or the Investment Tax Credit (ITC), businesses can claim the credits by filing IRS Form 3468 along with their federal income tax return.

For state and local energy incentives, applications are submitted to the relevant energy office or public utilities agency. For example, businesses in California can apply through the California Electric Vehicle Incentive Project.

The deadline to claim federal energy tax credits is typically with the business’s annual income tax return. State and local incentive programs may have different timelines, such as funding on a first-come, first-served basis until funds are depleted.

Maximizing Energy Credit Benefits

Businesses can maximize their energy credit benefits by combining multiple incentives, using tax planning strategies, and making energy efficiency upgrades. According to the National Renewable Energy Laboratory, “Dollars saved through energy efficiency can directly impact a business’s bottom line and enable it to be more competitive in today’s market.”

One strategy is to combine federal tax credits with state and local incentives. For example, a business in California could pair the federal Investment Tax Credit (ITC) for solar installations with additional state solar incentives like the California Solar Initiative Rebate Program. This layering of incentives can substantially reduce the payback period for installing renewable energy systems or making energy efficiency improvements.

Businesses should also use tax planning strategies to optimize the value of any credits. With proper planning, tax credits can be used to offset tax liabilities and essentially provide “free money” to make energy upgrades. For example, if a business has limited tax liability in a given year, it may make sense to phase energy projects over multiple years to maximize the tax credits.

Finally, subsidized or financed energy efficiency upgrades like HVAC replacements, lighting retrofits, window films, or insulation can provide immediate energy savings while allowing businesses to monetize incentives over time. The U.S. DOE estimates most energy efficiency measures provide returns of 200-300% in energy savings over their lifetime.

By combining incentives, planning strategically, and targeting cost-effective upgrades, businesses can maximize energy credits to substantially lower their operating costs and environmental impact.

Trends and Outlook

The outlook for energy credits for businesses is positive, with several key trends emerging:

First, federal tax credits have been extended and expanded in recent years, providing more opportunities for businesses. The Inflation Reduction Act of 2022 extended solar tax credits and created new credits for energy storage, green hydrogen, and more (Novoco). These credits are now available through 2032.

Second, many states and local governments are creating new incentives for renewable energy and efficiency. For example, some states offer property tax exemptions for solar installations or grants for upgrading to efficient HVAC systems (Bloomberg Tax). More localized programs are likely to emerge.

Third, future policy changes could further expand credits. There is interest in Congress to enhance electric vehicle credits and add new incentives for technologies like carbon capture and nuclear energy. The clean energy transition enjoys bipartisan support, signaling more legislative action (WSJ).

In summary, businesses have significant opportunities to reduce costs through federal, state, and local energy credits now and in the coming years.

Overcoming Barriers

Many businesses face barriers when trying to take advantage of energy credits and incentives. Some key barriers include:

High Upfront Costs

Implementing more energy-efficient equipment or systems often requires high upfront costs that small businesses may struggle to afford (Source). While energy credits can offset ongoing costs, the initial price tag can deter adoption.

Meeting Technical Requirements

To qualify for some tax credits, businesses must meet specific technical requirements and install equipment certified as energy efficient (Source). Navigating these specifications takes time and effort.

Lack of Tax Liability

Since many credits take the form of tax deductions, businesses without significant tax liability cannot always take full advantage. Startups and companies operating at a loss may fall into this category (Source).

Conclusion

In summary, businesses both large and small can benefit from a variety of energy credits and incentives at the federal, state, and local levels. Key federal tax credits like the Investment Tax Credit (ITC) and Production Tax Credit (PTC) have helped spur solar, wind, and other renewable energy growth. Many states and utilities also offer additional rebates, grants, and financing options to help offset the upfront costs of energy efficiency upgrades or renewable energy systems.

The financial savings from energy credits and incentives can be substantial over time. Investing in energy efficiency reduces utility bills and operating costs, while renewable energy offsets ongoing electricity purchases. Upgrading old, inefficient equipment with modern high efficiency alternatives also improves operations, productivity, and competitiveness.

Businesses interested in utilizing energy credits should research options carefully, consult with financial and tax advisors, follow application procedures, and maintain good recordkeeping. With proper planning and execution, companies can leverage these incentives to cut costs, boost their bottom line, reduce environmental impact, and future-proof their operations.

To learn more about qualifying for energy credits and making the most of available incentives, contact a specialized advisor or accountant for guidance catered to your specific business situation and goals.