- Hetal Parekh
Green Financing 101: Tax Incentives
Government provides green incentives for commercial properties in the form of tax relief for qualifying building systems upgrade as an incentive to increase the uptake of energy efficiency projects. However, many businesses and commercial property owners miss out on the opportunity to utilize this incentive, which can significantly accelerate the write-off for their energy retrofit expenses. Federal tax credits and deductions for improving energy-efficient commercial projects often go under-utilized due to low visibility and understanding of the technical criteria.
Read on for a tax incentives primer - what are the different types, who offers them, how to qualify, how does it impact your project and how to get them.
Types of tax incentives
Tax Incentives are offered at both the federal as well as local level of the government for a variety of energy conservation measures (ECMs) and green/renewable energy measures. Depending on the nature of the incentive program and the offering entity, these could benefit either the personal taxes, corporate taxes or property taxes. There are two prevalent tax incentive structures - credits and deductions. While the concept is to lower the taxes as a financial incentive, the treatment of the two varies.
A tax credit reduces your tax liability, giving you dollar-for-dollar reduction on the total taxes owed.
A tax deduction or a tax abatement, on the other hand, reduces your taxable income. This lowers the total income that is subject to taxes, often times helping you qualify for a lower tax bracket.
Let us understand the impact on your bottom line for a $10,000 federal tax credit vs a $10,000 federal tax deduction on your personal taxes. Let us assume an annual taxable income of $90,000 (fall under 24% tax bracket), and see what the taxable income, tax liability, final taxes owed and savings look like for both scenarios:
How does an energy efficiency rebate impact my project?
There are multiple considerations relating to the first bottom-line that a property owner should take into account while making an energy efficiency investment. By leveraging tax incentives as a part of the retrofit financing strategy, you can expect to improve the project profitability and ROI and reduce the payback period.
Visibility: Tax incentive programs tend to have a low visibility, but particular program details can be found on websites of governmental departments such as IRS, or state economic development etc. Further, qualifying energy conservation measures (ECM, the associated incentive amount and the program duration are periodically updated. EnerYields' database provides an easy alternative, with the most up-to-date information and our experts can maximize the rebate by making sure all equipment and design are aligned with the rebate program.
Application process: Tax incentives are availed as a line item on on the tax return filing every year. Due to the complex and technical nature of paperwork involved, it is advisable to seek a good CPA to navigate through the process, realize maximum savings, and avoid any audits.
Approval period: The processing time for tax filings are generally 6-8 weeks from the application receipt, depending on the volume of paperwork.
Impact on upfront cost: All tax incentives are processed as reduction on the annual taxes owed, as opposed to an upfront payment. Since the owner is responsible for the day-1 out of pocket expense for purchase and installation, a tax incentive does not lower the upfront capital expense for the project.
Impact on end of year-1 savings: Tax incentives help offset the associated first cost and increase the overall impact on the savings and the project ROI. A tax specialist or a CPA can help you identify the maximum refund for your project.
Impact on payback period: Due to part of the initial investment being refunded in the form of a discount on the taxes owed, the time for your upgrade to payback the initial investment goes down.
If you have recently carried out any upgrades to your property, EnerYields can help identify tax reduction for an increased cash flow. Click on this link to find green incentives you may be eligible for, and to get connected to qualified experts for appraisals and valuations that maximize savings.
Note: This blogpost borrows from the founder's PhD research. Full dissertation can be found here.