By: Lisa Dang
Small business and start-up companies incur a variety of costs to operate their businesses. However, no matter the size of a business, energy consumption ranks among the top five business expenses. The primary use of energy includes operating vehicles, heating and cooling, and operating equipment. The ability to cut down on fixed costs such as utilities may significantly improve cash flow. According to the U.S. Energy Information Administration (EIA), the average monthly utility bill for commercial buildings is $650 per month with the northeast region averaging a higher cost of $727 per month. The cost of electricity and natural gas is only expected to rise in the coming years and remain volatile. Whether your company has been in operation for years or is beginning to get off the ground, managing and saving on energy costs is not only beneficial for the business but also for the environment. With the recent enactment of the Inflation Reduction Act (IRA), small businesses are incentivized to deploy clean energy technology to reap significant cost-saving benefits.
I. The inflation reduction act
The Inflation Reduction Act (IRA) is a landmark piece of legislation, representing the largest climate and energy spending package in U.S History.[3] The IRA mandates a nationwide reduction of carbon emissions of roughly 40% by 2030 and includes an investment of $369 billion in energy and security climate change programs. Here is how the IRA can help your business reduce energy costs and foster a cleaner environment.
1. The Deploying Solar
Small businesses and start-up companies can reap significant tax breaks from purchasing and deploying solar energy systems. The IRA expanded the Federal Tax Credit for Solar Photovoltaics (PV) systems. There are two available solar tax credit options available for businesses:
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- Investment tax credit (ITC): provides a tax credit that allows businesses to deduct a percentage of the cost of installing a solar energy system from their federal income tax liability
- Production Tax Credit (PTC): provides a per kilowatt-hour (kWh) tax credit based on the amount of electricity generated and sold by qualified energy projects
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Under the IRA, the ITC enables business owners to receive a one-time 30% tax credit for PV system installation. In contrast, the solar PTC can be claimed every year over the 10-year credit period at the current rate of 2.6 cents/kWh for commercial projects (adjusted for inflation). The size of the system must be under 1 megawatt (MW) to claim an ITC or PTC, and project owners cannot claim both credits for the same property. Projects may qualify for additional bonus credits of 10% if located in a low-income area.
It is important to note that these tax credits are only available for solar systems placed in service from 2022 or later and begin construction before 2033. These credits are designed to phase out after 2032, thus it is critical that small businesses begin strategizing how to support the deployment of solar technology sooner rather than later.
A. Which is Better for My Business: ITC or PTC?
The decision to choose an ITC or PTC depends on multiple variables. Start-up companies or small businesses that may be cash-strapped may benefit from opting for the ITC, providing upfront credit against the capital expense used to install the solar systems. In most cases, the ITC is a great option for small businesses that require only a small PV system to help save money on energy bills. In contrast, larger-scale PV projects should opt for the PTC because they provide an attractive cash flow since credits are earned over time. Ultimately, PTCs and ITCs provide competitive incentives and cash flow opportunities for many small businesses and start-up companies.
B. What if My Business Does Not Have the Capital to Invest in Solar Technology?
In cases where your business does not have the capital to invest and own a solar system, it is still possible to reap significant cost-saving benefits on utilities through power purchasing agreements (PPA). For many businesses, entering into a third-party PPA is the best option to help reduce energy costs with little to no startup investment associated with the solar installation. A solar PPA is a financing agreement in which a third-party developer purchases the solar system, installs it on your workplace building, and charges a reduced fee for the electricity generated. While your business may not claim the tax credit under a PPA, the developer may claim the tax credit and may use that tax credit to help lower your monthly payment.
2. Electric Vehicles
For the first time in the U.S., the IRA provides a tax credit for businesses purchasing qualified electric vehicles (EVs). The credit is up to $7,500 for new EVs and the vehicle must be used for business purposes, not for resale, and primarily used in the U.S.
For a vehicle to qualify for the tax credit, the vehicle must:
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- Have an external charging source
- Have a gross vehicle weight rating of less than 14,000 lbs
- Be made by a qualified manufacturer
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If you are unsure whether your vehicle will qualify for a tax credit, the Department of Energy has made it easy by simply entering your vehicle identification number (VIN). Check it out here.
II. Conclusion
All businesses must factor in the cost of utilities and energy consumption. With energy prices rising and fluctuating at unpredictable rates, the switch to solar energy can save small businesses and start-up companies significant money. Now, more than ever, businesses are incentivized to go green with the recent enactment of the Inflation Reduction Act. Businesses that take advantage of the solar opportunities and EV tax credits are situated to not only save money but help save the environment.
This post has been reproduced and updated with the author’s permission. It was originally authored on January 31, 2023 and can be found here.
Lisa Dang, at the time of this post, is a 3L at Penn State–Dickinson Law. Dang hails from Richmond, Virginia, and graduated from the College of William and Mary with a BS in Neuroscience and Philosophy. Before coming to law school, Dang worked as a Research Assistant in the division of Hematology, Oncology & Palliative Care at Virginia Commonwealth University. Dang has a wide-range of interests and has been exploring many different classes and areas of law. In between work and school, Dang plays competitive Ultimate Frisbee.
Sources:
The Endangered Species Act, 16 U.S.C. § 1531 et seq.
Id. § 1532.
https://www.federalregister.gov/documents/2022/03/11/2022-05134/civil-penalties-2022-inflation-adjustments-for-civil-monetary-penalties
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Open banking offers several potential benefits to entrepreneurs and small businesses. Open banking can help with lending. Major banks denied 72% of small business loan applications in 2019. Open banking allows entrepreneurs and small business owners easily apply and potentially receive loans. Open banking allows applicants to submit electronic financial information, such as proof of income and payroll data for underwriting purposes. This process is much easier than the traditional loan application, where proof of financial information is difficult to access. Therefore, competition for loans increases while costs are low. Open banking would particularly help entrepreneurs and small businesses with little to no history of credit. Such assistance can promote financial inclusion to traditionally unrepresented entrepreneurs and business owners.
Anthony Francioso, at the time of this post, is a rising third-year student at Penn State Dickinson Law. Anthony is from Hamilton, New Jersey, and a graduate of Dickinson College, where he was a member of the baseball team. He is also an Articles Editor for the Dickinson Law Review.
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Lauren Stahl, at the time of this post, is a rising 2L at Penn State Dickinson Law. Formerly a medical researcher at the National Institutes of Health and Penn State College of Medicine, Lauren has interests in health care law and business transactional law. Lauren currently serves as Secretary of the Health Law Society, Philanthropy Chair of the Women’s Law Caucus, and a Research Assistant for Professor Prince.
