Howard M. Wagner, CPA, Scott Tarney, Crowe Horwath LLP (4-28-2009)
"Going green" is no longer just a matter of improving a company's image or fostering good community relations. In many cases it's also a matter of good economic sense. Most top managers today recognize the significant financial and strategic benefits that come with managing operations in a way that minimizes long-term environmental impact.
For a variety of reasons - including cost savings, customer expectations, competitive advantage, and logistical considerations - more and more companies are devoting time and resources to the effort to reduce waste, restrict or clean up emissions, decrease energy consumption, increase recycling, and shift to alternative energy sources such as wind, solar, and biofuel.
If you are engaged in any program of this nature, there is a good chance your company is eligible to receive some type of incentive - probably several - from federal, state, or local governments. These incentives might take the form of property tax abatements, sales tax exemptions, income tax credits, discretionary grants, low-interest financing, or one or more of many other available incentive programs.
In many cases, companies are already undertaking these efforts for competitive or strategic reasons. As such, it simply makes sense for companies to structure such programs in a way that makes them eligible for any available incentives. The tax benefit, when combined with cost savings, competitive advantage, and the prestige of a green label, can help make sustainability more financially feasible.
Activities That Qualify for Incentives
What types of activities might be eligible for incentives? Literally hundreds of programs can qualify for advantageous tax treatment. Examples include:
•Installing pollution control equipment;
•Investing in energy-efficient buildings or components;
•Manufacturing products from recycled materials;
•Investing in systems to capture items from a company's waste stream for recycling or use by others;
•Undertaking environmental remediation activities;
•Adapting manufacturing or other processes to use alternate energy sources such as solar, wind, geothermal wind, and biomass; and
•Producing alternative fuels for vehicles or using alternative fuels to power a company's own fleet.
The types of incentives offered to encourage such activities represent just about every type of government sponsored tax benefit imaginable, including investment-, production-, or consumption-based income tax credits; accelerated depreciation for certain capital expenses; property tax reductions or abatements; and exemptions from state or local sales taxes for the purchase of relevant equipment or components. What's more, the virtually endless list of incentives is constantly changing as some expire and others are added.
At the federal level, many sustainability incentives are fairly well-publicized.
High-profile examples include fuel credits for producers, sellers, and users of alcohol-based or biodiesel fuels in vehicles. Tax credits related to energy-efficient building design and construction are also fairly well-known, at least within their industries and in certain geographic regions. Examples include tax credits for installing equipment that uses solar energy to generate electricity or to heat or cool a structure.
Businesses are also eligible for an immediate deduction of expenses attributable to qualified energy-saving improvements to certain commercial buildings. The requirements for such incentives are, necessarily, detailed and technical in nature, but compliance is usually well worth the effort. In many cases, cost- and energy-saving equipment that makes long-term economic sense can be even more beneficial simply if it meets the requirements of the various incentive programs.
The array of federal incentives continues to expand regularly. The most prominent example occurred when the Emergency Economic Stabilization Act of 2008 was expanded to incorporate an entire section named the Energy Improvement and Extension Act of 2008. This legislation, signed into law in early October 2008, extended several important incentives that were due to expire and introduced a new program to encourage the design and development of pollution control systems, alternative energy systems, and processes to capture excess energy from a manufacturing process.
The final legislation devotes nearly 150 pages of text to the extension, modification, and creation of new energy and emissions-related incentives. These range from tax credits for electricity produced from marine renewable resources, wind power, and geothermal heat pump systems to incentives for carbon dioxide sequestration, biodiesel and other alternative fuels, plug-in electric drive motor vehicles, idling reduction units for heavy trucks, alternative fuel vehicle-refueling facilities, energy-efficient commercial buildings and residences, and many more. The act also provides for accelerated depreciation for purchases of equipment used to collect, distribute, or recycle a variety of commodities.1
State and Local Incentives
Compared to federal incentives, many state and local government incentives are less well-known. For example, many states have enacted some form of legislation to provide incentives related to alternative energy use or energy efficiency. Some states provide a direct subsidy based on the amount of kilowatt hours of energy generated by the use of alternative fuel sources. Corporate income tax benefits might also be offered, either in the form of a credit or through the immediate expensing of a cost rather than depreciating it as a capital investment.
Arkansas, Kentucky, New Jersey, Tennessee, and Virginia offer significant state income tax credits (from 10 to 50 percent) for the purchase of equipment that is used to gather, process, or manufacture products out of postconsumer waste. Many states also offer sales tax exemptions or reduced property tax rates for purchasing and using recycling equipment.
State sales tax, income tax, and property tax benefits are also available for pollution control facilities and related equipment in many areas. For example, Arizona, Georgia, and Oregon offer tax credits for the purchase of such equipment, while West Virginia allows taxpayers to expense the total amount paid or incurred during the tax year for the acquisition, construction, or development of water or air pollution control facilities.
Many states offer incentives for brownfield remediation and development in the form of income tax credits or outright grants for environmental remediation activities.
Some also offer credits to investors in projects on redeveloped land. As a general rule, the remediation activities need to be approved by the U.S. Environmental
Protection Agency (EPA), a state environmental agency, or both.
Governments at both the state and local levels sometimes offer outright grants that can be used to build new manufacturing, distribution, or research facilities in specific communities, or to expand or retrofit existing facilities in order to make them more energy-efficient and sustainable. Property tax abatements are another popular type of discretionary incentive. Many communities offer more complex incentives, such as tax increment financing, which can be used to finance land acquisition, improve infrastructure, renovate buildings, and acquire machinery and equipment.
Not all incentives relate to the installation of facilities and equipment. Some of the most often overlooked incentives are training subsidies and grants, which can help companies defray the startup costs of a new location or a sustainability-related expansion or upgrade.
An Organized, Disciplined Approach
With so many incentives available for such a diverse array of activities, how can the tax or finance officer be sure his or her company is taking full advantage of available incentives? Since many of these incentives have pre-certification requirements, it is important to ensure that sustainability initiatives are designed from the outset to take advantage of these incentives rather than attempting to qualify after an initiative is in process and it is too late.
An organized, disciplined approach is needed as part of an organizationwide strategic commitment to sustainability. By taking three important steps, a finance or tax executive can begin to establish such an environment.
1. Become Familiar With What Is Out There.
Even a few minutes of effort online will give you an appreciation of the virtually endless list of incentives available for green initiatives. Various Web sites operated by the U.S. Department of Energy and the EPA are a good place to start. A number of privately operated Web sites also offer listings and links to dozens of recycling incentives at all levels of government.
2. Improve Communication.
In many companies, engineers, facility managers, compliance officers, and others in the operations end of the business are implementing a wide range of sustainability-related programs. Unless the tax and finance departments are made aware of these efforts, however, the available incentives could go uncollected because of required pre-certification processes. Conversely, unless the finance and tax officers alert the operations and engineering groups to the importance of seeking out and qualifying for such incentives upfront, the engineers have no basis for incorporating incentive opportunities into their decision-making processes.
Part of the problem is that the various departments speak different languages - at least in terms of their professional dialogue and priorities. This problem can be overcome only through a concerted effort and a strong, deliberate, and visible commitment from the senior executive levels of the company to open up the lines of communication.
Another challenge for many finance and tax professionals is simply ensuring that they are involved with the corporate sustainability effort so they can add value. The tax or finance department should be represented on any internal working group that addresses decisions related to sustainability, site determination, or expansion.
3. Get Qualified, Professional Advice.
As even a cursory review of the available incentives illustrates, it's virtually impossible for a finance or tax executive to get a complete grasp of the entire range of incentives that might be applicable to a company. Even companies with large and efficient finance and tax departments can benefit from the services of an objective and independent adviser with specific knowledge of tax incentives at the federal, state, and local levels.
In most cases, an adviser performs a comprehensive review of the potentially applicable sustainability incentives and helps the company identify unclaimed benefits for completed projects. Often the adviser can also help the organization prepare the necessary certifications for incentives and advise how to structure and implement sustainability initiatives for the maximum possible future benefit.
Take Full Advantage
As companies re-evaluate their sustainable business practices in light of volatile energy costs and changing customer demands, it is important that they take advantage of all available tax incentives and other government support programs. Such initiatives represent an opportunity for the corporate tax department to provide direct, bottom-line benefits to the organization by ensuring that sustainability efforts achieve the maximum return on investment.
Howard Wagner is an executive with Crowe Horwath LLP in the Louisville, Ky., office. He can be reached at 502.420.4567 or firstname.lastname@example.org.
Scott Tarney is an executive with Crowe Horwath LLP in the Columbus, Ohio, office. He can be reached at 614.469.4001 or email@example.com.
1Final text of amended H.R. 1424 (pp. 113-261).
Originally published in MidMarket Advantage, a publication of Crowe Horwath LLP. Reprinted with permission.