Commercial and Manufacturing Tax Incentives for Energy Efficiency

Tax incentives for businesses can help defray the costs of improving a business’s energy efficiency or of manufacturing energy efficient appliances. This page seeks to present a general overview of the credits and deductions available to businesses to reduce the cost of energy efficiency.

For further details, businesses should consult tax professionals and the Internal Revenue Service.

Table of Contents

Credits vs. Deductions

In general, a tax credit is more valuable than a tax deduction of the same amount. A tax credit reduces the tax a company pays, dollar-for-dollar. Tax deductions lower a company’s taxable income on which the amount of tax is calculated.

What about other incentives?

In addition to the federal tax incentives, businesses in some areas of the country also will be eligible for state, local or utility incentives, including rebates or financing assistance. Some utilities manage customizable incentives based on potential energy savings of a given project. For information on these incentives, see the DSIRE database of state, local and utility incentives, or contact your state energy office or utility.

1. Energy Efficient Commercial Buildings Deduction

The tax deduction for commercial buildings (section 179D of the tax code) is available for businesses that improve the performance of three building elements:

  • Lighting
  • Building envelope
  • Heating, ventilation and air conditioning (HVAC) systems

The deduction is worth $1.80 per square foot of the building for retrofits that address all three of the above-mentioned areas. A partial deduction of $0.60 per square foot is available for projects that address one of these three areas. This deduction would usually be for the building’s owner, but in some situations could be claimed by a building tenant.

To qualify for the full deduction, the retrofit must bring the building to performance levels at least 50% better than the requirements of the ASHRAE Standard 90.1-2001 in the three categories.

For the partial credit, building retrofits in one of the three categories must reduce building energy use beyond the ASHRAE 90.1-2001 requirements by 16 2/3%.

The work must be certified by “qualified individuals” using approved software and must include a site visit. The National Renewable Energy Laboratory’s Energy Savings Modeling and Inspection Guidelines for Commercial Building Federal Tax Deductionsprovides extensive information on these requirements.
Only buildings covered by the ASHRAE Standard 90.1-2001 are eligible for this credit. It is available through 2013. For government-owned buildings, the credit may be claimed by the designer(s) of the retrofit.

For more information, see IRS notices 2006-52 and 2008-40, or the Department of Energy’s Building Technologies Program information and Tax Deductions for Commercial Buildings flyer.

2. Appliance Manufacturers’ Tax Credit

Credits for manufacturers of efficient appliances (section 45M in the tax code) provide an incentive for the manufacture of highly efficient dishwashers, clothes washers, and refrigerators.

The number of units of a product eligible for the credit is determined by subtracting the average annual production of units over the previous two years from the number of units produced in a given tax year. For 2011, a manufacturer may claim no more than $25 million, and the credit value cannot exceed 4% of the company’s gross receipts.

Further information is available from the IRS.

The credits for appliances manufactured in 2011 are as follows:

Appliance Type Credit Value Per Unit Eligibility Criteria
Dishwashers $25 Uses no more than 307 kWh per year and 5.0 gallons per cycle (5.5 gallons for dishwashers designed for more than 12 place settings)
$50 Uses no more than 295 kWh per year and 4.25 gallons per cycle (4.75 gallons for dishwashers designed for more than 12 place settings)
$75 Uses no more than 280 kWh per year and 4 gallons per cycle (4.5 gallons for dishwashers designed for more than 12 place settings)
Clothes Washers $175 Top-loading, has a modified energy factor of at least 2.2 and a water consumption factor of not more than 4.5
$225 Top-loading, has a modified energy factor of at least 2.4 and a water consumption factor of not more than 4.2
$225 Front-loading, has a modified energy factor of at least 2.8 and a water consumption factor of not more than 3.5
Refrigerators $150 Consumes at least 30% less energy than the 2001 energy conservation standards
$200 Consumes at least 35% less energy than the 2001 energy conservation standards

3. New Homes Builders’ Tax Credit

The New Energy Efficient Homes credit (section 45L of the tax code) is worth $2000 to builders of homes (including manufactured homes) that are projected to save at least 50% of heating and cooling energy compared to the requirements of the 2004 International Energy Conservation Code (IECC); building envelope components must meet at least one fifth of this improvement. Manufactured homes that meet Energy Star requirements or whose energy use is 30% below the 2004 IECC are eligible for a $1000 credit, with one third of this reduction coming from envelope components.

This credit had expired at the end of 2009, but was extended through the end of 2011, and retroactively for 2010, by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

4. Electric Vehicles & Refueling Property Tax Credit

Highway-capable battery-powered plug-in vehicles purchased new – by companies or individuals – may be eligible for a credit of up to $7,500, based on their battery capacity (section 30D of the tax code). This credit begins to phase out for a given manufacturer once that manufacturer has sold 200,000 qualifying vehicles in the United States.

Vehicle Make & Model Credit Amount
2008 – 2011 Tesla Roadster $7,500
2010 CODA Sedan $7,500
2011 Nissan Leaf $7,500
2011 Smart ForTwo Electric Drive $7,500
2011 Chevrolet Volt $7,500
2011 Think City EV $7,500
2011 Wheego LiFe EV $7,500

Source: IRS, updated April 5, 2011.

Further information about tax credits for electric vehicles is available at FuelEconomy.gov and from the IRS.

smaller credit of up to $2,500 for certain “low-speed” neighborhood electric vehicles (including two- and three-wheeled vehicles) is available through 2011 (section 30 of the tax code). A credit also exists for conversion of vehicles to plug-in hybrid vehicles; it is worth 10 percent of costs up to $40,000 and is available through 2011.

Certain “Alternative Fuel Motor Vehicles” may be available for a tax credit. These are vehicles that run on non-conventional fuels – typically natural gas. The IRS maintains a list of eligible vehicles.

There is also a credit for “Alternative Fuel Vehicle Refueling Property,” (section 30C of the tax code). The tax credit is worth 30% of costs for certain refueling equipment for alternative fuel vehicles, including equipment to recharge electric vehicles, as well as to refuel vehicles that run on such fuels as hydrogen, natural gas, high-ethanol content blends, and other alternative fuels. Various limits and restrictions apply.

Credits previously available for light and heavy duty hybrid vehicles have expired.

5. Grants in Lieu of Tax Credits

The ‘Grants in lieu of tax credits’ program, created by section 1603 of the American Recovery and Reinvestment Act(ARRA), allows businesses to apply for grants for certain renewable energy and energy efficiency investments that would otherwise have been eligible for tax credits, subject to various criteria. Eligible types of projects include: fuel cells, wind energy, geothermal energy, microturbines, combined heat and power, and geothermal heat pumps. Applications must be submitted before October 1, 2012. More information is available from the Department of The Treasury.

Source: www.ASE.org

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