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Top 3 Environmentally Friendly Real Property Tax Credits for Businesses

7 minute read

Individuals aren’t the only ones incentivized to reduce their environmental footprints; businesses are also eligible for tax credits when they decrease energy consumption or take steps to preserve the environment. Today, we want to talk about energy efficient tax credits surrounding real estate and construction, but click here to learn how businesses can get tax credits for purchasing or using energy-efficient vehicles.

Solar Investment Tax Credit

The solar investment tax credit (ITC) is available to both businesses and individuals who install solar panels. The ITC currently offers a 26% tax credit on the cost of new solar panel systems, but the credit percentage is scheduled to be reduced for businesses (and phased out for individuals) in the next few years.

Commercial & Utility ITCResidential ITC
202026%26%
202126%26%
202226%26%
202322%22%
2024+10%0%

The commercial and utility ITC reduces business taxable income dollar-for-dollar, up to 26% of the cost to install, develop or finance the solar project. The IRS knows that solar projects can take years to complete, so businesses and utility companies may be eligible for the 26% or the 22% credit if they commence construction before 2024 and complete construction sometime before 2026. The IRS provides guidance on receiving the credit under these circumstances.

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Energy Efficiency Incentives Under Section 179D and Section 45L

Taxpayers can take a deduction under Section 179D or a credit under Section 45L for improving energy efficiencies in buildings. The two incentives are slightly different, but you’ll gain the highest reward under both programs when you can reduce energy consumption by at least 50%.

Your business may be eligible for one of these incentives when you install more energy-efficient:

  • Insulation
  • Windows
  • Doors
  • HVAC systems
  • Hot water systems
  • Lighting systems

The chart below compares the Section 179D deduction and the Section 45L credit so you can select the incentive that’s the best fit for your business.

Section 179D Energy Efficient Commercial Building DeductionSection 45L Energy Efficient Home Credit
Is it a deduction or a credit?DeductionCredit
What types of businesses tend to claim the incentive?Large-scale contractorsSmall-scale builders
What is the incentive?$1.80 per square foot of space with improvements that reduce energy consumption by at least 50%
or
Up to $1.20 per square foot if energy consumption is reduced by less than 50%
$2K per newly constructed home that uses 50% less energy than a comparable dwelling unit established by the Department of Energy
Does it expire?NoUnless renewed with future legislation, this incentive expired at the end of 2021; taxpayers can amend returns to take the credit in prior years
Who can claim the incentive?· Owners and tenants of commercial buildings
· Owners of four-story or greater residential buildings
· Architects, engineers, contractors and other designers of government-owned buildings
Eligible contractors (i.e., those who have basis in the building during the improvements); this means a building owner can hire a third-party contractor to complete the upgrades
What types of properties qualify for the incentive?New or remodeled commercial buildings, four-story or greater residential buildings and government-owned buildings constructed in 2006 or laterResidences no more than three stories tall that were sold or leased before 2022; they can be:
·  Single- and multi-family homes
·  Condos
·  Assisted living homes
·  Student housing
·  Houseboats
·  Trailer homes
·  Primary or vacation homes

Conservation Easement Tax Deduction

Though not a tax credit, the conservation easement tax deduction is worth considering. Businesses can take a deduction if they give up certain rights of ownership (to land or a building they own) to help preserve and protect the property for future generations.

Generally, there are four types of easements that qualify for a deduction. They are those that:

  • Protect natural habitats for wildlife or plants
  • Preserve land for public recreational or educational use
  • Preserve “open space” or undeveloped land
  • Preserve land or certified historic structures

Taxpayers can establish these easements by donating property rights to a qualified party, which is typically a 501(c)(3) organization or a governmental unit.

All of the following must occur for you to be eligible for the deduction:

  • You (and future owners of the property) must abide by the easement in perpetuity.
  • The easement must be listed in public records for the property (like deeds).
  • The property must be appraised by a reputable third party.
  • The recipient organization must agree to accept the donation.
  • You and the recipient organization must enter into a legal agreement that outlines how the easement is structured.

Business owners should be careful with this deduction; in recent years, the IRS has been on the lookout for sham or syndicated conservation easements, and taxpayers who take large deductions have a high risk of being audited. Consider reviewing the IRS’s audit guide before donating a conservation easement.

Two Birds, One Stone

Being environmentally savvy is not only good for the environment, but it can also save you tax dollars. If your business wants to adopt a new green initiative, consider investing in a tax planning tool like Corvee’s tax planning software. It shows you how environmentally friendly tax credits and deductions will affect your bottom line. This helps ensure you get the full benefits of the incentive before taking the steps to invest in a new environmentally friendly system or upgrade.

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