As commercial energy costs rise across the United States, businesses are finding more reasons than ever to go green. According to the Consumer Energy Alliance (CEA), business-related energy costs will rise by at least $41.4 billion in 2022. Many businesses have turned to energy-saving upgrades as a solution — but did you know you can also save money on your taxes just for saving money on your energy bill?
At National Tax Group, our tax experts specialize in finding ways to lower your business’s taxes, and energy-efficient tax incentives are one of our specialties. We’ll walk you through our best solutions to implement energy-saving property improvements and earn qualifying tax incentives.
Credit vs Deduction
Before diving into the different options for property improvements through government programs, it’s important to understand the difference between tax deductions and tax credits. Tax deductions reduce the amount of income that is subject to taxes, which results in a reduced tax bill. Tax credits directly reduce the amount of taxes you owe. For example, if you earn a $1000 tax credit, you can deduct $1000 from your tax bill.
The United States government offers both a tax deduction and a tax credit for energy-efficient property improvements: the 179D tax deduction and the 45L tax credit.
179D Tax Deduction for Energy Efficient Property Upgrades
The 179D tax deduction allows building owners and eligible designers to deduct up to $1.80 of taxable income per square foot of property if they install energy-saving upgrades and improvements. To qualify, the upgrades must reduce the energy consumption by 50% or more compared to buildings that meet the minimum requirements. However, if your building doesn’t meet all the requirements for the full deduction, you could still qualify for a partial deduction of up to $0.63 per square foot if individual elements meet certain target levels.
Eligible energy-saving upgrades include:
- Hot water systems
- Building envelope systems
- Heating, ventilation, and air conditioning (HVAC)
- Interior lighting systems
- Insulation in ceilings, walls, floors, and roofs
- Lighting sensor and controls
Who Can Claim the 179D Tax Deduction?
The 179D tax deduction is not applicable to all industries and types of commercial buildings, so be sure to check that your business qualifies. Buildings must be primarily commercial or industrial, and they must use electricity and fossil fuels to qualify. Multifamily homes only qualify if they are more than three stories tall.
Common building types that qualify for this deduction include office buildings, industrial buildings, warehouses, and apartment complexes over three stories tall.
If you are a commercial building owner, an architect, an engineering firm, or a construction firm, you may be able to claim this tax deduction for your energy-saving upgrades. If you’re not sure if you qualify, National Tax Group’s tax experts can help you find out — free of charge! Contact us today for a free assessment.
45L Tax Credit for Energy Efficient Property Upgrades
While 179D applies to commercial properties, the 45L tax credit provides a tax incentive for energy-efficient apartments and homes. Builders and contractors can claim $2000 for each residential unit that decreases its energy consumption by 50%. In buildings with multiple units, only occupied units qualify; however, you can claim the credit in later years once previously vacant units become occupied.
Eligible energy-saving upgrades include:
- Wall insulation R-13+
- Roof insulation R-38+
- Foundations and slabs with extra insulation
- Vinyl low thermal emissivity windows
- Double or triple-pane windows
- Insulated exterior doors
- Reflective roofing materials
- Air conditioning with SEER (Seasonal Energy Efficiency Rating) of 13+
- Gas furnaces with at least 80 percent efficiency, or a radiant heating system
Who Can Claim the 45L Tax Credit?
To qualify for the 45L tax credit, properties must be sold or leased as a residence. The credit applies to single-family homes, apartments, condominiums, assisted living homes, and student housing, although all buildings must be three stories high or less. If the property has multiple units, each occupied unit is eligible.
To claim the tax credit, the qualified contractor must own the property during construction or renovation. To find out more about this tax credit and to find out if you qualify, reach out to National Tax Group’s tax experts. Our free assessment will determine if you are eligible, and we can help you through the application process.
How to Claim Tax Incentives for Property Improvements
Both the 179D tax deduction and the 45L tax credit require a licensed third-party to perform a detailed energy efficiency analysis. This analysis includes modeling your property’s energy consumption against reference buildings and an in-person visit for a physical inspection.
Since government entities do not qualify for tax deductions themselves, their tax incentives are passed down to the contractor or developer responsible for the energy-efficient upgrades. If you are a contractor looking to claim tax incentives for upgrades your company made to a government building, you will need an allocation letter from the government entity in order to apply, in addition to the standard documentation and energy analysis.
Do you think your business may be eligible for an energy-efficient tax incentive? National Tax Group can perform a free assessment to find out if you qualify. Our tax experts specialize in finding the lesser-known tax credits and deductions so that you receive all the savings your business has earned. Send us an email or give us a call to start the process.