July 30, 2009

Going green with government tax incentives

  • There are many new tax incentives available for businesses and individuals wanting to reduce their environmental footprint.
    Grant Thornton LLP


    The increased cost of energy, the country’s dependence on foreign oil and the environmental impact of current energy use has inspired many companies to go green. Companies are also seeking ways to exhibit their green corporate citizenship.

    Current economic challenges may increase demand for incentives to go green. Federal and state governments are expanding tax credits, tax incentives and grant programs to help companies produce energy from renewable sources. Many of these credits and incentives are designed to foster the use of renewable energy sources to sustain business operations.

    Businesses need to do their homework to find out how they can take advantage of these new tax incentives and how going green can affect their bottom line in a positive way.

    Incentives for businesses

    • Energy-efficient commercial business deduction. Businesses can deduct up to $1.80 per square foot of space in new or existing buildings where they install interior lighting, HVAC or hot water systems. The same deduction applies for building envelope components — windows, doors, roofing, foundation, siding, floor, etc. — that reduce power use to 50 percent compared to a reference building. Certification is required and the provision expires for property placed in service after 2013.

    • Business energy investment tax credit. Taxpayers can take a 10 percent (for geothermal, microturbines, or combined heat and power systems) or 30 percent (for solar, fuel cells or small wind turbines) credit for alternative energy property designed to generate power for the taxpayer’s own use. Examples include solar property used to generate electricity for heating or cooling, or equipment that uses ground water to heat or cool a structure. Businesses can also apply to the IRS to take this credit as a grant.

    • Alternative motor vehicle credit. Internal Revenue Code (IRC) Section 30B provides a credit of up to $2,400 for the purchase of a qualifying fuel cell, hybrid, advanced lean burn technology or alternative fuel vehicle. There are various phase-outs depending on the make and model of the vehicle.

    • Plug-in electric vehicle credit. IRC Section 30D provides a credit for businesses and individuals who purchase or lease and place in service a qualifying plug-in hybrid vehicle. The credit is available in three forms: a $7,500 maximum credit for qualifying cars and trucks; a 10 percent credit up to $2,500 for low-speed vehicles, motorcycles and three-wheeled vehicles; and a 10 percent credit up to $4,000 for plug-in vehicle conversions.

    • Alternative refueling property credit. IRC Section 30C provides a 50 percent credit (30 percent for hydrogen) of up to $50,000 ($200,000 for hydrogen) for installing a qualified clean-fuel vehicle refueling property to be used in a trade or business. Clean-burning fuels are at least 85 percent composed of ethanol, natural gas, compressed natural gas, liquefied natural gas, liquefied petroleum gas or hydrogen — or any mixture of biodiesel and diesel containing at least 20 percent biodiesel.

    • Qualified reuse and recycling property. Businesses can take the equivalent of bonus depreciation for qualified reuse and recycling property that otherwise would not qualify. The machinery or equipment must be used exclusively to collect, distribute or recycle qualified reusable and recyclable materials. The software necessary to operate such equipment also qualifies.

    • Fringe benefits for employees. Bicycle commuters are now allowed a $20 per month fringe benefit exclusion, and the fringe benefit exclusion for transit has increased from $120 to $230 in 2009. Fringe benefits are not taxed as income, even if the employer offers a choice between cash compensation and the fringe benefit.

    Incentives for manufacturers and developers

    • Energy-efficient appliance credit. IRC Section 45M provides manufacturers of appliances a credit for the production of energy-efficient clothes washers ($75—$250), dishwashers ($45—$75) and refrigerators ($50—$200).

    • Energy-efficient new homes credit. IRC Section 45L provides home builders and developers a credit of up to $2,000 for newly constructed homes that meet certain energy-efficiency standards.

    • Alcohol fuel (ethanol) producer credit. Businesses can take a 60 cents per 190-proof gallon credit for alcohol produced for use as a fuel or blending into fuel. An additional 10 cents per gallon small ethanol producer credit is available, as is a higher credit rate for cellulosic biofuel.

    • Biodiesel and renewable diesel credit. IRC Section 40A provides up to a $1 per gallon credit for qualifying biodiesel and renewable diesel, similar to the Section 40 ethanol credit. The incentive may be taken as an income tax credit, an excise tax credit or as a payment from the Treasury.

    Incentives for individuals

    • Residential energy-efficient home improvements credit. Individuals can take a 30 percent credit of up to $1,500 for installing in their homes energy-efficient items, such as water heaters, furnaces, boilers, heat pumps, air conditioners, building insulation, windows, doors, roofs or circulating fans used in a qualifying furnace.

    • Residential energy-efficient property credit. Individuals can take a 30 percent personal tax credit for energy-efficient property, such as solar water heaters, geothermal heat pumps, fuel cells or wind turbines.

    State and local incentives

    Incentives to promote the production and use of renewable energy vary widely among states, but often include corporate income tax deductions, exemptions and credits. States provide property tax assessment relief and exemptions, sales tax exemptions and refunds, and grant and rebate programs.

    In addition to state incentives, local utilities such as Seattle City Light and Puget Sound Energy offer incentives, rebates and permitting assistance to customers who would like to go green by upgrading their equipment, lighting and water systems to maximize energy efficiency. Grants are also available for new construction or remodeling of properties with the savings rate based on the level of energy performance improvements beyond code.

    Incentives in Washington state

    • Renewable energy production equipment. Effective July 1, a sales and use tax exemption of 100 percent is allowed in Washington for sales tax paid on machinery and equipment used to create energy from fuel cells, sun, wind, biomasses, tides and waves, and geothermal resources. The exemption also applies to technology that converts otherwise lost energy from exhaust or landfill gas.

    • B&O tax credit for energy-efficient commercial appliances. A B&O tax credit of 8.8 percent of the purchase price is available for qualifying commercial appliances that are rated energy efficient. Appliances include commercial freezers and refrigerators, commercial clothes washers, ice machines and convection ovens. This tax credit is available through July of 2010.

    • Renewable energy production incentive. Seattle City Light business customers can take advantage of incentives of up to $2,000 per year for generating electricity from solar, wind or anaerobic digesters.

    Donald A. Corbett is the tax practice leader in Seattle office of Grant Thornton LLP.

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