Business Tax Credits for Energy-Efficient Renovations
What you need to know about new tax credits and whether such credits can make energy-efficient renovations cost-effective for your business
As a group, business owners have never been so motivated to improve their business's energy-efficiency to keep a lid on skyrocketing energy costs. And while there are many environmentally-conscious business owners, the bottom line savings of potential renovations continues to drive the industry as a whole. To help spur these energy-efficient building methods and renovations, the federal government recently expanded the deadline for these improvements. Tax credits for certain energy-efficient improvements to commercial buildings now run from January 1, 2006 to December 31, 2013. To this end, here's what you need to know about these tax credits and whether such credits can make energy-efficient renovations cost-effective for your business.
Tax Credits for Energy-Efficient Business Renovations
Here are some of the potential business tax credits available to businesses that complete certified energy-efficient renovations:
- For a comprehensive energy-efficiency overhaul that reduces the energy consumption of heating, cooling, ventilation, and lighting by 50% or more, tax credits are available up to $1.80 per square foot of your business location.
- For more targeted projects that reduce energy consumption by 20% for heating and cooling, 20% for lighting, or 10% for the building envelope (walls, foundation, roofing, doors, and windows), tax credits of up to $.60 per square foot are possible.
- Virtually every state and/or municipality helps incentivize energy-efficiency in one way or another. If not direct tax credits, many utility companies and local authorities offer rebate programs, grants, favorable loans, and/or free consultation services.
Renewable Energy Sources
As an alternative to energy-efficiency renovations, you may want to consider installing a renewable energy source for your business. Again, this renewable energy source must meet certain criteria, but if it does, you can instead claim a tax credit of up to 30% of the project costs. This tax credit is in lieu of the energy production tax credit, which allows for a tax credit of 2.1 cents for every kilowatt-hour of electricity produced from renewable energy sources.
Building Standards for Energy-Efficient Renovations
The tax code for energy-efficient credits for businesses isn't exactly user-friendly. Your energy-efficient renovations will need to meet certain building criteria, as well as pass a field inspection that ensures energy-efficiency goals are being met. The guidelines for these renovations are found in ASHRAE Standard 90.1-2001, which can be purchased at the ASHRAE website. Needless to say, you probably don't have the time to read this fine print, and fortunately, in most cases, you don't have to. Talk to your renovation contractor about what's necessary to qualify for these tax credits, as well as whether the credits justify any extra costs associated with meeting these standards. With large, potential tax savings, it's not a bad idea to insert ASHRAE certification guarantees in the contract you sign with the renovation contractor.
(It's worth noting that while building standards must be adhered to, you may not have to own the building to receive these tax credits. Tenant businesses may be eligible for these credits if they're the ones paying for the improvements.)
Building Inspections and Energy Audits
Adding renewable energy sources into the mix seems to overwhelm an already complicated process, but the truth is that, with or without tax credits, cost-effective energy-efficient renovations require a preliminary building inspection. Says Peter Gross, CEO of EYP Mission Critical Facilities Inc., "The single most important step is to find ways to measure efficiency in your facility. You cannot control what you cannot measure." Fortunately, free building inspections may very well be part of the financial incentives offered by state and local governments. Comprehensive energy audits for commercial buildings can get prohibitively expensive themselves, but if you're not eligible for a free inspection, shorter consultations can still deliver enough accuracy to make a sound judgment for the most cost-effective energy-efficiency solutions for your business and building. Indeed, while every business should keep an eye on applicable tax credits, these credits do not guarantee cost-effective renovations, nor does being ineligible for these credits imply that the renovations won't be cost-effective on their own.