Posted by Jeffrey Feingold on 12.14.23

Going green is one of the hottest topics today. With efforts around the globe to reduce greenhouse gas emissions, businesses are looking for ways to adapt their products and create new ones that will meet the needs.  Adopting cleaner energy sources and upgrading plants and equipment is an expensive proposition for most companies. The cost can impact operations, investment strategies, financial reporting, and project funding.  Going green has been viewed by many as the way to pull us out of economic problems, to create new jobs, to compete in a global market, and to save the planet. This has led the U.S. government to offer expanded tax credits for green building and green technology.

Tax Incentives for green building and green technology

While there are a number of tax incentives at various levels of government for stimulating the infrastructure, research, start-up capital for green industries, and energy rebates for those who upgrade their plants, this article will deal with the federal R&D credits available to those in the green technology fields. Many states have followed suit and credited similar tax credits, but those will not be discussed in this article.

What are the rewards of R&D Tax Credits?

The R&D tax credit is a bottom-line, dollar for dollar reduction of taxes.  It is not a deduction from taxable income. This is a very lucrative incentive for businesses.  This is a major way that businesses can recover some of their costs in this industry. Look at these advantages:

• It can represent a significant financial advantage to businesses, allowing both reduced tax liability and cash back for reinvestment or other needs.
• R&D tax credits can be claimed for open tax years (usually 3-4 years), and often for some prior "closed" tax years.
• If you can't use the credit this year, it can be carried forward for future tax years up to 20 years.
• Companies that claim the R&D Tax Credit see immediate earnings-per-share benefits.
• Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.

The result is often hundreds of thousands of dollars for a business.

What activities qualify for the R&D Tax Credits?

All of these industries and many more can qualify:

• Geothermal Electricity
• Biofuel
• Solar technology
• Wind energy
•  Smart Grid development
•  Mobile Power

The definition of who qualifies has become clearer over time and has expanded.  No longer is this credit just for those with labs and new patented products.  The tax credit also applies to processes and methods used.  These do not have to be new to the industry, only new to your company. A simple four-part test helps to determine qualified R&D activity:

1. Do you create or try to create a product, process, technique, formula or invention to improve performance, functionality, reliability or cost
2. Is this activity technical in nature?  (related to one of the sciences)
3. Does this activity seek to eliminate technical uncertainty? (This can be uncertainty as to technological feasibility. It does not have to mean the potential of failure to succeed.  The uncertainty can also relate to the nature of the design elements.
4. Does this activity follow a process of experimentation? 

Whether you are upgrading your company to be green or are developing new products and processes that are green, look closely at the R&D tax credits.  They can make a huge difference in your bottom line. Consult your CPA, tax department, or call a company like Tax Point Advisors to see if you qualify.