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Knowledge & Insights

Tax Planning in Green: The Business Energy Investment Tax Credit


Every business owner knows that strategic planning is essential to running a successful operation. While factors like market trends, customer behavior, and new technologies often take center stage, it’s equally important to consider how government incentives, especially in sustainability and renewable energy, can impact your bottom line. One such incentive is the Business Energy Investment Tax Credit (ITC).

This article aims to demystify the ITC and how it can substantially benefit your company’s tax planning and overall financial strategy.

Introduction to the Business Energy Investment Tax Credit (ITC)

The Business Energy Investment Tax Credit, often called the ITC, is a government incentive designed to stimulate investment in renewable energy projects. It was established to encourage businesses to invest in green technologies, create new jobs, and keep work in the United States.

The ITC is offered by the Internal Revenue Service (IRS) to both individual taxpayers and corporations investing in projects involving renewable energy. These projects can range from solar and wind to fuel cell and geothermal energy technologies.

Understanding the Amount You Can Claim

The amount of tax credit that qualifying entities can claim depends on the type of technology used in the project and the construction period. The tax credit can reduce up to 30% of the capital costs of the renewable energy projects.

For example, for eligible solar projects that commence construction from 2022 to 2032, taxpayers can claim 30% of the ITC. However, if construction starts in 2033, the claimable amount reduces to 26%, and for projects beginning construction in 2034, the claimable amount further reduces to 22%.

Understanding these timelines is crucial when planning your capital improvements to maximize your potential tax savings.

Eligibility Criteria for the Credit

The ITC applies to various renewable energy projects, including solar, biogas, geothermal, and fuel cell energy. To qualify, these projects must use domestically sourced technology.

In addition to using domestic technology, renewable energy projects must have a positive net present value, produce energy utilizing sustainable sources, not emit any air pollutants, use technologies available to the general public, and have a long operational lifespan.

Economic and Environmental Benefits of the ITC

Economic Benefits

The ITC offers substantial economic benefits for businesses. Companies can save significantly on their annual tax bill by investing in renewable energy projects using this credit. Additionally, investing in solar or other green energy generation for your business you have the ability to lower your overhead expenses by saving on energy consumption.  Depending on your state, you have the potential to sell power back to energy utilities making the investment revenue positive. 

Environmental Benefits

From an environmental perspective, renewable energy projects combat the adverse effects of climate change, encourage the use of environmentally friendly technologies, and motivate other companies to invest in renewable energy. By leveraging the ITC, businesses can contribute to a sustainable future while reaping financial benefits.

Requirements to Qualify for the Credit

Qualifying for the ITC, entities do not need to hold a certification or license. However, they should ensure they invest in domestically sourced technologies. The projects should produce energy using sustainable sources, not emit any air pollutants, use technologies available to the general public, and be expected to operate for a lengthy period of time.   

Breaking down this requirement.  If you invest in roof top solar or other green energy generation at your business where it has a life expectancy of one or two years, you qualify. 

How to Apply for the ITC?

Applying for the ITC involves a deep understanding of renewable energy technologies, tax laws, and IRS regulations. It’s advisable to work with a professional tax advisor or a certified public accountant (CPA) who has experience with the ITC to guide you through the application process.

A crucial part of applying for the ITC involves determining the total amount spent on eligible property. Eligible property for the ITC includes solar PV panels, inverters, racking, balance-of-system equipment, and sales and use taxes on the equipment.

What Happens If the Project Is Sold?

If a project is sold within five years after claiming the ITC, a recapture will be made on the unvested portion of the ITC. Therefore, it’s essential to factor in this potential consequence when planning the sale of a project that has benefited from the ITC.

Summary and Conclusion

In summary, the Business Energy Investment Tax Credit (ITC) is a government incentive for renewable energy projects that offers up to 30% of capital costs for qualifying entities, depending on the technology and construction period used. It provides both economic and environmental benefits, stimulating the economy, reducing greenhouse gas emissions, encouraging sustainable technologies, and motivating companies to invest in renewable energy.

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