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Your Energy Use Has Tax Implications: Do You Know What They Are?

April 14, 2016 / by Max Dworkin


When you go to pay your own taxes, or hopefully to file for a refund, you probably spend a good deal of time and effort making sure that your forms are filled out right and that you are minimizing your tax burden.

 No one wants to pay more than they have to.

Depending on your role at your company, you may spend little to no time directly dealing with taxes. But when you are considering the role energy management could play in your company’s financial picture, taxes should definitely be part of the conversation. Because how you buy energy, how you use energy, and the types of energy you choose all have tax implications for your business.

Every company is different, so do not consider this to be specific advice or documentation of exactly how energy management will impact your business. Instead, just look at this as the beginning of your energy tax education.


Energy Efficiency Tax Savings

The impetus for many tax savings measures that apply to energy is improving efficiency and ultimately reducing overall energy use. Such is the case with something like Section 179d, known as the Energy Efficient Commercial Buildings Tax Deduction. This particular provision is designed to offer tax incentives to build energy efficient buildings and to update existing building with energy saving appliances, such as high efficiency lighting or HVAC systems. The tax benefits, which were first introduced as part of the Energy Policy Act of 2005, offer a deduction of up to $1.80 per square foot for efficiency improvements that increase energy efficiency by at least 50%.

 

Part of proper energy management is ensuring maximum efficiency where possible and prudent, which can mean significant cost savings on energy and can even qualify some for significant tax breaks.

Energy Investment Tax Savings

Building and renovating energy efficient systems are not the only way that business energy use can have tax implications. In order to encourage the investment in alternative energy sources, the Business Energy Investment Tax Credit (known briefly as the ITC) was implemented to provide tax credits for businesses in the commercial, industrial, utility, and agricultural sectors. The credit is specifically applicable to the following types of alternative energy:

  • Solar water heat
  • Solar space heat
  • Solar thermal electric
  • Solar thermal process heat
  • Photovoltaics
  • Wind
  • Biomass
  • Geothermal electric
  • Fuel cells
  • Geothermal heat pumps
  • CHP/cogeneration
  • Solar hybrid lighting
  • Microturbines
  • Geothermal direct-use

Unlike 179d, the ITC is a credit rather than a deduction. The ITC means that you will be able to reduce your final tax bill by a certain amount, as opposed to reducing the amount you will be taxed on.

 

Investing in alternative energy sources can certainly be a part of comprehensive strategic energy management, since new energy sources can reduce energy costs and create a more sustainable long term plan.

 

The interplay between taxation and energy management is far more complex than a single blog post could cover. What is important to know is that the choices you make for your company’s energy use can have a very real impact on your ultimate tax burden at the end of each year. A strategic energy program will take tax issues, including deductions and credits, into consideration when determining the best way forward for your business.

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Max Dworkin

Written by Max Dworkin

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