Green Business Entities and Eco-Friendly Tax Deductions

Environmental Tax Deductions and Environmental Tax Credits for Businesses

The U.S. offers both environmental tax deductions and environmental tax credits for businesses. And, if you work from home, you may also qualify for additional tax credits.

The Energy Efficient Commercial Buildings Deduction (§179D Tax Deduction)

The primary environmental tax deduction for businesses is the §179D tax deduction. The deduction comes in two forms: the energy efficient commercial building property (EECBP) deduction and the energy efficient commercial building retrofit property (EEBRP) deduction. These credits may be available to businesses that place qualified commercial buildings in service and to designers of green features installed in buildings owned by certain tax-exempt entities.

General Section 179D Requirements

To qualify for the deduction, the building must: 

• Be located within the U.S.

• Have environmentally friendly features

• Those features must follow the green energy standards established by the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) and the Illuminating Engineering Society of North America (IESNA)

  
  

Also, the environmentally friendly features must be a part of the building’s:

• Interior lighting system

• Heating, cooling, or ventilation system

• Hot water system

• Envelope (the building components that separate indoors from outdoors)

  
  

You place the property in service for tax purposes when it is available and ready for use, even if you have not yet started using it. It also must be the kind of property you can amortize, like startup and organizational costs, the cost of acquiring a lease for business property, or research and experimental expenses. 

Qualified EECBP Buildings

To qualify for the EECBP deduction, you must create a plan based on the ASHRAE and IESNA green energy requirements. The plan must reduce consumption by at least 25% compared to the ASHRAE and IESNA minimums. A professional must certify that the features being installed meet that standard.

Qualified EEBRP Buildings

A building must establish a qualified retrofit plan to qualify for the EEBRP deduction. The building’s owners must have placed it in service within five years of establishing the plan.

A professional must design the retrofit plan to qualify for the deduction.

Deduction Amount 

You can typically deduct the lesser of the cost of the installed property or an amount calculated as follows:

• For a building with 25% energy savings, $0.50 per square foot

• Plus an extra $0.02 per square foot above 25% savings

• Up to $1.00 per square foot for 50% savings

  
  

If you deducted building expenses in the previous three to four years, subtract the amount of those deductions before calculating your current deduction.

The Advanced Energy Project Credit (Section 48C Tax Credit)

The advanced energy project credit applies to entities that invest in qualifying advanced energy products. Qualifying advanced energy products include:

• Clean Energy Manufacturing and Recycling Projects

• Industrial Decarbonization Projects (formerly named Greenhouse Gas Emissions Reduction Projects)

• Critical Materials Projects

  
  

Unlike most tax credits, you apply for the §48C tax credit through the U.S. Department of Energy (DOE). 

Clean Energy Manufacturing and Recycling Projects

Clean Energy Manufacturing and Recycling Projects establish, expand, or reequip facilities for the manufacture of:

• Property or equipment designed to produce solar, wind, geothermal, or other renewable energy sources

• Fuel cells, microturbines, or energy storage for electric or hybrid-electric vehicles

• Electric grids to store or transport renewable energy

• Property or equipment designed to capture carbon dioxide

• Property or equipment refining or blending renewable energy

• Energy conservation technologies

• Electric motor vehicles and their components

  
  

Projects intended to refine or blend nonrenewable fuels do not qualify.

Industrial Decarbonization Projects

Industrial Decarbonization Projects involve retrofitting industrial or manufacturing facilities, especially those related to: 

• Cement

• Iron

• Steel

• Aluminum

• Various chemicals

  
  

The retrofit must be designed to reduce emissions of greenhouse gasses by 20% or more to qualify.

Critical Materials Projects

Critical materials projects establish, expand, or reequip industrial facilities for the processing, refining, or recycling of critical materials. Critical materials include the following items that have a high risk of supply chain disruptions and serve an essential function in the energy technology process:

• Non-fuel minerals

• Elements

• Substances

• Critical minerals

  
  

The following are not critical minerals:

• Fuel-related minerals

• Water, ice, and snow

• Many sand, gravel, stone, pumice, cinders, and clay varieties

  
  

Critical minerals typically include rare earth elements.

Credit Amount

The advanced energy project credit allows you to claim 30% of the investment costs for projects that meet prevailing wage and apprenticeship requirements. For projects that do not meet those requirements, you can claim 6% of your expenses.

You meet the prevailing wage requirements if you pay your workers no less than the amount usually paid for the type of work in the area, as determined by the U.S. Department of Labor (DOL). You meet the apprenticeship requirements if you employ apprentices from registered programs for a specified number of hours—and those hour requirements vary.

Applying for the Credit

You apply for the credit through the DOE’s §48C Portal. When you apply, you must submit:

• A narrative description of the project and a workforce and community engagement plan

• A §48C Application Data Sheet

• A business entity certification

  
  

Templates and forms are available through the §48C Portal.

The credit does not follow the typical tax timeline. The DOE publishes application deadlines each year. For example, in 2024, the application period opened on August 29 and closed on October 18.

When evaluating applications, the DOE considers the project’s:

• Commercial viability

• Domestic job creation potential

• Impact on air pollutants and greenhouse gasses

• Potential for technological innovation and commercial deployment

• Energy generation or storage costs or reductions to energy consumption or greenhouse gas emissions

• Expected timeline

  
  

The DOE selects qualifying projects based on these factors.

Green Tax Credits for Business at Home

If you work from home, you may be able to claim the energy efficient home improvement credit, the residential clean energy credit, or both. Although not specifically green tax credits for business expenses, these credits can apply if you use your home as your business. You can apply the credit to a home office based on the percentage of the home that qualifies as your office. You can take full credit if the business uses 20% or less of the home. If it uses more than 20%, you can claim a share based on what percentage of the home you use for non-business purposes.

The Energy Efficient Home Improvement Credit 

The energy efficient home improvement credit applies to qualifying expenditures related to an existing home, including additions or renovations involving:

• Qualified energy efficiency improvements (for example, improvements to exterior doors, windows, skylights, insulation, and air sealing materials or systems)

• Residential energy property expenses (for example, costs related to central air conditioners, natural gas, propane or oil water heaters, propane or oil furnaces, and hot water boilers)

• Biomass stoves and boilers, heat pumps, and water heaters

• Home energy audits of a main home

  
  

The credit allows you to claim up to $2,000 for qualified heat pumps, biomass stoves, or biomass boilers and $1,200 for energy property costs and certain energy efficient home improvements.

The Residential Clean Energy Credit

The residential clean energy credit applies to new, qualified clean energy equipment installed in a U.S. home between 2022 and 2033. Qualified clean energy equipment may include:

• Solar electric panels

• Solar water heaters

• Wind turbines

• Geothermal heat pumps

• Fuel cells

• Battery storage technology

  
  

You can claim up to 30% of the costs of these projects.

Claiming Your Green Tax Deductions and Credits

The U.S. government offers green tax credits and deductions to help businesses become and stay environmentally friendly. Claiming these credits can be complicated, especially the advanced energy project credit, which requires an application with the DOE. A lawyer or certified public accountant specializing in green energy can help you apply.

Frequently Asked Questions (FAQs)

Do Companies Get Tax Breaks for Being Environmentally Friendly?

Companies can get tax breaks to increase the energy efficiency of their facilities or to complete projects related to producing and storing renewable energy.

Who Is Eligible for a Section 179D Tax Deduction?

People or entities that own property that qualifies as an energy efficient commercial building property (EECBP) or energy efficient commercial building retrofit property (EEBRP) qualify for the §179D deduction. Property may be eligible if it involves an environmentally efficient installation related to the lighting, HVAC system, hot water system, or the building’s envelope.

What Is an Advanced Energy Project?

An advanced energy project may relate to clean energy manufacturing or recycling, industrial decarbonization, or critical materials. 

How Does the Section 48C Tax Credit Work?

To get the §48C tax credit, you have to submit several documents to the DOE’s online §48C portal. Then, the DOE evaluates the project’s effectiveness and efficiency to determine whether to grant the credit.

Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.

Resources:

• 26 U.S. Code § 48C (2022), link.
• 26 U.S. Code § 179D, link.
• 30 U.S. Code § 1606, link.
• ASHRAE, Standard 90.1-2022 — Energy Standard for Sites and Buildings Except Low-Rise Residential Buildings, link.
• DOE, Qualifying Advanced Energy Project Credit Program, link
• DOE, Qualifying Advanced Energy Project Credit (48C) Program, link.
• IRS, Advanced Energy Project Credit, link.
• IRS, Energy Efficient Home Improvement Credit, link.
• IRS, Energy efficient commercial buildings deduction, link.
• IRS, Frequently asked questions about energy efficient home improvements and residential clean energy property credits - Residential clean energy property credit: Qualifying expenditures and credit amount, link.
• IRS, Instructions for Form 4562 (2023), link.
• IRS, IRS: Going green could help taxpayers qualify for expanded home energy tax credits, link.
• IRS, Publication 946 (2023), How To Depreciate Property, link. IRS, Prevailing wage and apprenticeship requirements, link.