As action on climate change becomes more and more urgent, governments around the world are extending and adding tax credits and deductions to support business solutions.
The United States is no exception. U.S.-based sustainable businesses and startups producing or using renewable energy, as well as sequestering carbon, have more financial incentives than before.
While many businesses leverage research and development or startup credits, many others can reduce your tax burden. We looked at 8 eco-friendly tax credits or deductions to consider for your 2023 tax return and beyond.
8 Tax Credits and Deductions for Eco-Friendly Businesses
1. Advanced Energy Project Credit
The 2023 Inflation Reduction Act introduced a new tax credit for manufacturers and other organizations that invest in advanced energy projects. Entities that meet the prevailing wage and apprenticeship requirements will gain the most, with a credit of 30% of qualified investment costs. Those that don’t meet these requirements will get a 6% credit.
Not every project qualifies for this tax credit. An eligible project must:
Re-equip, expand, or establish an industrial or manufacturing facility for producing or recycling certain advanced energy properties or processing, refining, and recycling critical materials
Have technology that reduces greenhouse gas emissions by a minimum of 20%
Facilities that refine or blend non-renewable transportation fuels are not eligible for this credit.
2. Alternative fuel vehicle refueling property credit
Businesses that install a qualified vehicle refueling and recharging property in your business may qualify for this alternative fuel refueling credit.
Businesses that meet the prevailing wage and apprenticeship requirements and the depreciation equals 6% can tap into up to 30% in investment cost tax credit with a $100,000 limit.
Organizations with qualified refueling tools would also qualify for a credit of 30% of the cost, but it would be limited to $1,000 per item.
If your refueling property was installed before 2023, the credit is 30%, with a maximum of $30,000 for depreciable items and $1,000 for others.
Qualifying properties must meet these requirements:
Store and dispense clean-burning fuel
Have been installed during the tax year
Original use began with the taxpayer
Used primarily in the United States
Must be placed within low-income communities or non-urban census tracts
In addition, qualified properties include charging stations for 2- and 3-wheeled vehicles, as well as bidirectional charging properties.
3. Biodiesel, Renewable Diesel, or Sustainable Aviation Fuel Mixture Credit
This credit enables businesses to offset tax obligations for selling renewable fuels, such as:
Biodiesel
Renewable diesel
Biodiesel mixtures
Renewable biodiesel mixtures
Small agri-biodiesel producers
To be eligible for this credit, organizations must:
Include a certification for biodiesel and, ideally, a Statement of biodiesel Reseller
Total gallons of sustainable fuel on the certificate
Total gallons claimed on Schedule 3
Total gallons claim don Form 720, Quarterly Federal Excise Tax Return, Schedule C
Total gallons claimed on Form 4136, Credit for Federal Tax Paid on Fuels
The amount earned from this credit is variable on whether or not fuel was claimed in other credits, the amount of fuel claimed, and what type of fuel is listed.
4. Carbon oxide sequestration credit
The carbon oxide sequestration credit enables organizations to offset taxes with a credit per metric ton of qualified, captured carbon dioxide. This amount ranges based on several different factors, including the amount of carbon captured, the equipment used, the disposal or storage method, and whether or not the gas was used by the taxpayer.
5. Cost Recovery for Qualified Clean Energy Facilities, Property and Technology
As a part of the Inflation Reduction Act of 2022, qualified energy facilities, property, and technology that were implemented after December 31, 2024, may be eligible for a 5-year modified accelerated cost recovery system (MACRS) depreciation deduction.
To be considered a qualified facility, it must:
Used for generating electricity
Is in service after 2024
Has a greenhouse gas emission rate of zero or less
Must be less than 10 years old
A qualified energy property refers to equipment that:
Uses solar energy to generate electricity to heat or cool a structure
Uses solar energy to illuminate the inside of a structure
Produces, distributes, or uses energy from geothermal deposits
Qualifies as a fuel cell property
Qualifies as a microturbine property
Qualifies energy storage property
Qualifies biogas property
Qualifies small wind energy property
Qualifies as a combined heat and power system property
Qualifies as a waste energy recovery property
Includes microgrid controllers
6. Energy-Efficient Commercial Building Deduction
Owners of qualified commercial buildings can deduct either the cost of the installed property or savings per square foot. The square footage credit is calculated as:
$0.50 per square foot for a building with 25% energy savings
Plus $0.02 per square foot for each percentage point of energy savings above 25%
If using the square foot calculation, there is a maximum of $1.00 per square foot for a structure with 50% energy savings or more.
Businesses that adhere to the prevailing wage and apprenticeship requirements can increase their savings per square foot by 5 times.
Eligible buildings for this deduction are divided into two categories: energy-efficient commercial building property (EECBP) or energy-efficient commercial building retrofit property (EEBRP).
An EECBP must meet the following qualifications:
Located in the United States
Within Reference Standard 90.1 of the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) scope
Within the Illuminating Engineering Society of North America's scope
It is installed as a part of interior lighting systems, heating, cooling, ventilation, and hot water systems, or the building envelope
Certified as part of a plan to reduce the total annual energy costs of these systems by 25% or more
Depreciation or amortization must be allowable
An EEBRP must:
Be located in the United States
Be installed as a part of the interior lighting system, heating, cooling, ventilation, water system, or the building envelope.
Be in service for more than 5 years before the retrofit plan
7. Qualified plug-in electric drive motor vehicle credit
Businesses with electric motor drive or clean vehicles approved by the IRS can leverage this tax credit. In addition to a manufacturer’s certification that your vehicle is eligible, owners will also need to show:
Ownership of the vehicle
That the vehicle was in service during the tax year
That the original use of the vehicle began with your business
You did not acquire it for resale
It’s used primarily in the United States
The final assembly occurred in North America for vehicles purchased after 2022
The total credit amount is based on the vehicle, depreciation, and other factors.
8. Renewable electricity production credit
Organizations selling renewable electricity in the United States or U.S. territories can claim credits on their upcoming taxes. A qualified facility can be credited:
0.3 cents per kilowatt-hour (kWh) for the sale of electricity produced
½ of 1.5 cents for open-loop biomass, landfill gas, trash, hydropower, marine, and hydrokinetic renewables
There is also a bonus credit for adhering to prevailing wage requirements. An additional 10% could be added to this credit if the steel, iron, and manufactured products used in the facility were produced domestically.
What are prevailing wage and apprenticeship requirements?
The credits on this list focus on the environmental impact of businesses. Some, however, are tied to wage-related initiatives. In particular, there are additional bonuses with some of these credits if businesses meet the prevailing wage and apprenticeship requirements. These dictate that organizations must:
Pay laborers in construction, alteration, or repair prevailing wages, usually the basic hourly wage and fringe benefits set by the Secretary of Labor
Employ apprentices from registered programs
Apprentices must work at least 12.5% of the total project hours in 2023 and 15% in 2024 onwards
Tap into more capital
Another way to boost cash flow is through startup awards. The Wallet Max Bold World awards, based on ESG and SDG goals, will award 3 startups at our April 2024 Emerald Summit.
The April 2024 Bold World Awards include:
Climate Action Business (SDG 13) – This organization takes urgent action to combat climate change and its impacts.
Best Food Security Innovation (SDG 2) — This organization has made strides to end hunger, achieve food security and improved nutrition, and promote sustainable agriculture.
Sustainable FinTech Startup (SDG 8) — This award recognizes a fintech startup with sustained and inclusive economic growth and decent work for all.
You can nominate your startup if it is:
Not a partner, sponsor, speaker, or affiliated with a Wallet Max employee or board member
Able to prepare a 10-minute LIVE or pre-recorded speech to present at the Wallet Max Emerald Summit on April 26, 2024
A women-led startup, where women-identified members represent 50% of the leadership team.
Maintains no more than 50 employees
Is legally registered and has been operating in your country of residence for at least one year.
The deadline is March 21, 2024, so get a head start and nominate Your Startup Today