Tax Breaks for Going Green

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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Going green can be a matter of personal choice — of wanting to make your business better for the environment. But going green can also be good business. With the many tax deductions and credits available to business owners, making your company more sustainable can pay off when you do your taxes.

Improving Your Infrastructure

Wherever you can make the infrastructure you need to operate your business greener, you may be eligible for a tax credit. If, for instance, you need a vehicle to complete your daily business (making deliveries, going to meetings, and so forth), you may be eligible for a tax credit if you choose a hybrid vehicle. Not all hybrids on the market are eligible, but you can use the credit for both passenger vehicles as well as delivery vehicles. The IRS maintains a full list of commercial vehicles eligible for the tax credit.

There are also tax credits and deductions available for making your office more energy efficient. Whether you build a new building entirely, engineering the building to use a minimum of energy, or you upgrade your existing space, by adding energy efficient appliances or improving the building's structure, there are a number of different deductions and credits available. More information about the credit for commercial buildings is available from the IRS website.

In particular, improving lighting can be one of the best tax deductions for a small business. Because you can change out lighting relatively easily, compared to other retro-fitting, and it can have a clear and immediate impact on your energy usage, especially in a well-lit retail space or office, it can offer a good return on your investment. There are some limits, including a maximum deduction of $1.80 per square foot of building.

Using Renewable Energy

By using renewable energy, your business is eligible for tax deductions. If you find yourself in a position to provide some of your own energy, however, even as simply as by adding solar panels to your office's roof, you may qualify for a tax credit. More energy-related tax credits are available to manufacturing facilities and other specific types of businesses.

Helping Other People Go Green

Depending on your business, you may be able to claim tax deductions and credits for helping your customers make more sustainable choices. For instance, if you are a contractor building homes, you're eligible for a $2,000 tax credit for every energy efficient home you build, as long as it meets certain standards set forth in the Energy Policy Act of 2005. Deductions are also available for contractors building commercial space, as well as for the manufacturers creating energy efficient appliances for those green buildings.

Because of the variety of tax deductions and credits available, it's worth checking in with any industry associations that you're a member of, to make sure that you don't miss an opportunity.

Making Green Decisions

You have the opportunity to make sustainable business choices every day. While there isn't a specific tax incentive for choosing an Energy Star-rated printer over a less efficient model, you can still write off the purchase of a printer, no matter which model you choose. It may not have the same result as other tax incentives for going green, but it's important to remember as you're completing your tax return. It doesn't hurt that many of your green decisions, tax deductible or not, can help your bottom line, if only by reducing your electricity bill. You may also be eligible for rebates, loans and grants from your utility company and local government by improving your energy efficiency.

If possible, it is often best to take advantage of tax credits, rather than deductions. Because tax credits are dollar-for-dollar reductions of your total tax burden, they can be more valuable than deductions. However, they can be correspondingly harder to qualify for. In contrast, tax deductions lower your total taxable income: while a $100 tax credit lowers your tax bill by a full $100, a $100 tax deduction may only lower your tax bill by about $10.

Other business tasks related to the environment may also be deductible on your taxes. The costs to clean up haazardous wastes, including petroleum, are just one set of expenses that may be eligible as tax deductions. You must have approval from you state environmental agency to claim the deduction.

Getting Your Tax Deductions

Many state and local governments also offer tax incentives for businesses going green or offering green products. In the state of Nevada, for instance, businesses constructing new buildings that earn at least a Silver certification under the LEED Green Building Rating System are eligible for anywhere from a 25 percent to a 35 percent reduction of property taxes payable each year for up to ten years. Exactly what tax incentives are available differ by state, although there is one database that provides an in-depth list of opportunities: the Database of State Incentives for Renewables & Efficiency. You can search for opportunities by state.

Some specific deductions and credits require paperwork beyond your tax return and receipts. For instance, if you're claiming the Advanced Energy Manufacturing Tax Credit for a manufacturing business working on clean energy projects, you will be subject to review by the U.S. Department of Energy, as well as the IRS. You may be eligible for more deductions depending on the nature of your business. If you operate out of a home office, for instance, you may have access to additional opportunities for green tax incentives.

Because these opportunities can change from year to year, it's worthwhile to discuss your options with your CPA, preferably as early in the year as possible, so that you can plan ahead for your taxes. Not only can a CPA be instrumental in preparing your taxes, but he may also be able to direct you to specific tax deductions that you are eligible for and help you plan how to get the most benefit from them.