In the pursuit of decarbonization and a sustainable future, energy efficiency and renewable energy play a crucial role. Recognizing this, the federal government has implemented several programs and incentives to encourage commercial buildings and non-profit organizations to adopt clean energy practices.
All the following tax credits are available to both commercial and non-profit organizations, with the exception of the Energy-Efficient Commercial Buildings Tax Deduction, which is exclusive to for-profit entities.
The Inflation Reduction Act of 2022
Under the Federal Tax Credit program, businesses, non-profits, educational institutions, and state, local, and tribal organizations can take advantage of various tax credits to reduce renewable energy costs. These incentives are made possible through the Inflation Reduction Act of 2022 (IRA), which is hailed as the most significant climate legislation in U.S. history. The IRA provisions aim to finance green power, reduce emissions, lower costs through tax credits, and advance environmental justice.
By leveraging the tax credits offered through the IRA, organizations can actively contribute to the implementation of a clean energy transition. These incentives help reduce the costs associated with renewable energy technologies, making them more accessible and financially viable for organizations of all sizes.
In addition, the IRA recognizes the importance of involving tax-exempt organizations in the clean energy movement. To facilitate their participation, the act allows certain non-profits to transfer the tax break to contractors, enabling them to collaborate with contractors in implementing energy-efficient measures while still benefiting from the tax credits provided by the IRA.
Furthermore, the IRA also introduces grants and incentives to address air pollution and promote environmental justice. These measures emphasize reaching disadvantaged populations and communities that have been disproportionately affected by environmental issues. By providing increased access to tax credits, grants, and incentives, the IRA aims to create a more inclusive and equitable transition towards a clean energy future.
Under the IRA, tax credits will be available or enhanced in the following areas:
Renewable Electricity Production Tax Credit (PTC)
The federal Renewable Electricity Production Tax Credit (PTC) is a per-kilowatt-hour (kWh) tax credit designed to incentivize the generation of electricity from qualified energy resources. Established in 1992 and renewed and expanded multiple times, the PTC was last updated by the Inflation Reduction Act of 2022.
Under the PTC, the duration of the credit is 10 years from the date the facility is placed in service. The value of the credit varies depending on the type of energy resource and the labor requirements met by the project. The Inflation Reduction Act also introduced new prevailing wage and apprenticeship requirements for larger systems to qualify for the full value of the tax credit.
For wind, closed-loop biomass, and geothermal energy, the tax credit is set at 2.6 cents per kWh. Other eligible technologies, including open-loop biomass facilities, small irrigation power facilities, landfill gas facilities, and trash facilities, receive a tax credit of 1.3 cents per kWh.
The PTC offers bonus credits to encourage certain project features:
Projects with a capacity of less than 1 MW or larger projects beginning construction within 60 days after the Treasury Secretary establishes labor guidelines are not required to meet the new labor standards and can receive the full tax credit without adhering to the prevailing wage and apprenticeship requirements.
Projects over 1 MW that commence construction within the specified time frame can receive a base tax credit of 0.5 cents per kWh but can qualify for the full tax credit by meeting the labor standards. Unused credits generated under the PTC can be carried forward for up to 20 years or carried back one year if the taxpayer files an amended return.
It’s also worth mentioning that the Inflation Reduction Act of 2022 includes provisions for the transition from the PTC to a new technology-neutral tax credit, known as the Clean Energy Production Tax Credit (45Y), effective from January 1, 2025. The 45Y tax credit is designed to incentivize zero-emission generation facilities and will be phased out gradually as the U.S. achieves greenhouse gas emission reduction targets.
Business Energy Investment Tax Credit (ITC):
The Business Energy Investment Tax Credit (ITC) is a significant incentive for businesses to invest in eligible energy technologies. The ITC has undergone multiple amendments over the years, with the most recent and substantial changes introduced by the Inflation Reduction Act of 2022. The Act established new prevailing wage and apprenticeship requirements for larger systems to qualify for the full 30% tax credit.
The Department of the Treasury issued Initial Guidance on these requirements on November 30, 2022. As per the law, the labor provisions apply to projects that began construction 60 days or more after Treasury published its guidance; the effective date for the labor provisions is January 30, 2023.
To qualify for the Business Energy Investment Tax Credit, businesses must invest in a wide range of eligible technologies, some of which include:
These eligible technologies cover a wide spectrum of energy sources and applications, allowing businesses to choose the most suitable options based on their energy needs and infrastructure.
Energy-Efficient Commercial Buildings Tax Deduction
The Federal Energy Policy Act of 2005 introduced a tax deduction specifically for energy-efficient commercial buildings, initially applicable to qualifying systems and buildings placed in service between January 1, 2006, and December 31, 2007. However, this deduction has been extended several times and is now a permanent provision.
Owners of new or existing buildings can claim a tax deduction of $1.80 per square foot. To qualify, the installation of energy-efficient systems must result in one of the following:
These system upgrades should lead to a total energy and power cost reduction of 50% or more compared to a building that meets the minimum requirements outlined in the most recent ASHRAE Standard 90.1. An energy savings calculation must be conducted using qualified computer software approved by the IRS.
If individual lighting, building envelope, or heating and cooling systems meet target levels that reasonably contribute to an overall building savings of 50% when additional systems are installed, owners may claim deductions of $0.60 per square foot.
The energy-efficient commercial buildings tax deductions are primarily available to building owners. However, tenants may be eligible if they contribute to construction expenditures. In the case of energy-efficient systems installed on or in government property, tax deductions will be awarded to the person primarily responsible for the system’s design. Deductions can be claimed in the year when construction is completed.
The IRS issued interim guidance (IRS Notice 2006-52) in June 2006, establishing a certification process for taxpayers to demonstrate that their property satisfies the energy efficiency requirements outlined in the statute. Further clarification on the rules was provided through IRS Notice 2008-40 issued in March 2008. The National Renewable Energy Laboratory (NREL) published a report (NREL/TP-550-40228) in February 2007, which offers guidelines for modeling and inspecting energy savings required for compliance with the statute.
U.S Department of Energy Loan Guarantee Program
The Inflation Reduction Act (H.R. 5376) introduced significant changes to the Title 17 Program and related loan guarantee programs. The Act allocated approximately $11.7 billion to the Loan Programs Office (LPO) for issuing new loans and increased the loan authority by around $100 billion in existing programs. It also established the Energy Infrastructure Reinvestment (EIR) Program to support the improvement, repurposing, or replacement of energy infrastructure.
Under Section 1703 of the Energy Policy Act of 2005, the Department of Energy’s (DOE) Loan Guarantee Program was created and later revised by the American Recovery and Reinvestment Act (ARRA) of 2009 with the addition of Section 1705. While the 1705 Program is no longer available, DOE can still issue Loan Guarantees under the old Section 1703 Program. The program aims to provide loan guarantees for projects using new or significantly improved technologies that reduce air pollutants or greenhouse gas emissions, including:
The Alternative Fuel Vehicle Refueling Property Tax Credit (Corporate)
The Alternative Fuel Vehicle Refueling Property Tax Credit provides incentives for qualified alternative fuel vehicle refueling equipment, including electric vehicle charging equipment. Eligible property can receive a tax credit of 6% up to $100,000 for each individual item. However, projects that meet specific wage and apprenticeship requirements are entitled to a more substantial tax credit of 30%.
To qualify for the larger tax credit, the corporation must ensure that all laborers and mechanics employed by it or any contractor or subcontractor involved in the project receive prevailing wages. Additionally, the project must employ a certain percentage of apprentices and be located in a census tract described in section 45D(e) of the IRS Code or in a non-urban area.
The Department of the Treasury issued Initial Guidance on these requirements on November 30, 2022. According to the law, the labor provisions apply to projects where construction begins 60 days or more after the Treasury publishes its guidance. With the publishing date of November 30, 2022, the labor provisions became effective on January 30, 2023.
Qualified Commercial Clean Vehicle Tax Credit
Section 13403 of The Inflation Reduction Act of 2022 (H.R. 5376) established a tax credit for qualified commercial clean vehicles purchased on or after January 1, 2023. Eligible vehicles must have a gross vehicle weight rating of fewer than 14,000 pounds and a battery rating of at least 7-kilowatt hours.
Mobile machinery, which includes vehicles not designed for transporting loads on public highways, can exceed the weight limit but must have a battery capacity of at least 15-kilowatt hours. The tax credit is valued at 30% of the vehicle’s cost, with a maximum incentive of $7,500 for vehicles less than 14,000 pounds and $40,000 for mobile machinery. Additionally, Section 13801 of the act introduced procedures for monetizing certain tax credits, including this one, for equipment placed in service from January 1, 2023, through December 31, 2032.
The direct pay option allows eligible non-taxable entities, such as nonprofits, state or political subdivisions, and Indian tribal governments, to directly monetize the tax credit by treating it as a tax payment. This option makes the tax credit refundable for these entities and allows eligible taxpayers to transfer their tax credits to an unrelated taxpayer, with reporting to the IRS and a limit of one transfer per taxpayer. The election for transfer must be made by the due date for tax filing in the relevant tax year.
Expert Guidance for Maximizing Tax Credits
Navigating the complex landscape of tax credits and incentives can be a daunting task, especially when it comes to energy-related initiatives. However, with the expertise and guidance of Gilleran Energy Management, you can confidently explore the array of available options and determine which tax credits you qualify for. GEM specializes in providing comprehensive assistance to businesses and individuals seeking to maximize their energy efficiency and sustainability efforts while taking advantage of the financial benefits offered by various tax credit programs.
With our deep understanding of the ever-evolving energy industry and the latest legislative changes, GEM is well-equipped to assess your specific circumstances and identify the tax credits that align with your goals. Whether you’re interested in renewable energy projects, energy-efficient building upgrades, alternative fuel vehicle adoption, or other clean energy initiatives, our team of experts can help you navigate the eligibility criteria and guide you toward the most advantageous options. Contact us today at (707) 528-7318 to schedule a consultation.