The business energy credit, a valuable federal income tax benefit, is intended primarily for businesses that use alternative energy (other energy tax breaks may apply for the use of alternative energy in the home or production of energy for sale). This tax benefit applies to the acquisition of several types of alternative energy property and may help you to manage the energy costs for your business.
Business energy credits for eligible property
For the following equipment, the business energy credit is equal to 30% of the basis:
- Equipment for which construction begins before 2024 that uses solar energy to generate electricity for hot water, heating and cooling structures, or heat used in commercial and industrial processes, excluding swimming pools.
- The credit rate is 26% if construction began in 2020 and is reduced to 22% for construction that begins in calendar year 2023.
- The credit rate is 10% if the property is not placed in service before 2026.
- Equipment for which construction begins before 2024 that uses solar energy and fiber-optic distributed sunlight to illuminate the inside of a structure.
- The credit rate is 26% if construction began in 2020 and is reduced to 22% for construction that begins in 2023.
- The credit rate is 0% if the property is not placed in service before 2026.
- Certain fuel-cell property for which construction begins before 2024.
- The credit rate is 26% if construction began in 2020 and is reduced to 22% for construction that begins in 2023.
- The credit rate is 0% if the property is not placed in service before 2026.
- Certain small wind energy property for which construction begins before 2024.
- The credit rate is 26% if construction began in 2020 and is reduced to 22% for construction that begins in 2023.
- The credit rate is 0% if the property is not placed in service before 2026.
- Certain waste energy property for which construction begins before January 1, 2024.
- The credit rate is 26% if construction began in 2020 and is reduced to 22% for construction that begins in 2023.
- The credit rate is 0% if the property is placed in service before 2026.
- Certain offshore wind facilities for which construction begins before 2026.
- There’s no phase-out for this property.
For the following equipment, the credit equals 10% of the basis:
- Certain cogeneration property for which construction begins before 2024.
- Certain microturbine property for which construction begins before 2024.
- Certain equipment used to produce, distribute, or utilize energy derived from a geothermal deposit.
- Certain equipment for which construction begins before 2024 that uses the ground or ground water to cool or heat a structure.
Pros and Cons
Unfortunately, there are a number of restrictions on these credits. If, for example, the credit is allowable for property, the basis of the property is reduced by 50% of the allowable credit. In addition, the credit can’t be used for property that’s acquired with certain non-recourse financing.
There are also certain favorable aspects, however. The credit can sometimes be used for a single property in combination with other benefits, such as state tax credits, federal income tax expensing, or utility rebates.
Your decision to use alternative energy may also be influenced by considerations unrelated to tax and non-tax benefits—and even if you do choose to use alternative energy, you may have to forego the business energy credit if you don’t own the equipment.
If you have questions, contact us today for help with addressing these alternative energy considerations.