Tax concerns: clean energy and climate action

One of the topics on all of our minds is our environment, and for the tax professional, tax matters related to the ESG—Environmental, Sustainability, Government—discussion. ESG, as the movement is known, are the aspects considered when companies invest in environmental, social, and corporate governance policies.

Legislation is playing a role in this. The Inflation Reduction Act of 2022 (Act) was visioned to encourage clean energy solutions, manufacturing, and innovation. Through a series of grants, loans, rebates, and incentives, the Act is incentivizing American workers and businesses to do the following:

• Create good-paying, high-quality jobs.
• Target investments to cut localized pollution from port operations, heavy duty trucks, and transportation infrastructure.
• Provide loans to support Tribal investment in energy-related projects and electrify Tribal homes with clean energy.
• Guarantee loans to projects that retool, repower, repurpose, or replace energy infrastructure that have ceased operation, such as a coal mine or coal-fired power plant that closed or was economically reliant on the extraction, processing, transport, or storage of coal, oil, or natural gas.
• Make targeted, tailored investments in rural America to improve electricity service, expand access to affordable clean energy, advance climate-smart agriculture and forestry practices, and support agriculture-based biofuels.

In addition, tax incentives are a primary tool in the Act to encourage energy innovation. The Act:

• Extends and modifies the Production Tax Credit and Investment Tax Credit for renewable energy.
• Provides $27 billion of financing for clean energy and climate projects that reduce greenhouse gas emissions, primarily in low-income and disadvantaged communities.
• Provides $40 billion for loan guarantees for innovative clean energy technologies, including renewable energy systems, carbon capture, nuclear energy, and critical minerals processing, manufacturing, and recycling.

Impact to your clients

So what’s the impact to your clients who are small business owners?

• “Make it in America” is a new provision offering tax credits for the use of American-made equipment for clean energy production.
• Bonus credits are available for businesses that pay workers a prevailing wage and use registered apprenticeship programs.

For individual taxpayers, household savings are available:

• A maximum of 30% or $1,200 tax credits for energy efficient home improvements, including windows, doors, insulation, and other related items.
• Rebates for residential energy retrofits for appliances, including heat pumps, cooktops, and electrical upgrades.
• Tax credits of 30% for rooftop solar, batteries, and geothermal heat pumps.
• Up to $7,500 tax credits for the purchasing new clean vehicles, or up to $4,000 for used clean vehicles with some limitations.

For larger companies that design, manufacture, and install clean energy and climate smart infrastructure and products, the straight line between this Act and benefits are apparent. Companies who are not strictly aligned in these operations can still take a stance and benefit from environmental issues.

The larger ESG discussion

Now back to the ESG discussion. Another benefit to small businesses is that they may attract more sustainability-focused customers and employees. The Act’s incentives are aiding the movement toward companies taking on ESG. In fact, the Act provides a great source of fuel for companies to tackle the “environmental” aspect in ESG.

The ESG framework has become a tool to measure a company’s business practices and performance on sustainability and ethical issues.

Environmental	Social	Governance
Energy usage and efficiency	Equal employment opportunity	Ethical business practices
Climate change strategy	Employee Benefits	Avoiding conflicts of interest
Waste reduction	Fair pay and living wages	Compliance
Greenhouse gas emissions	Workplace health and safety	Rick management
Carbon footprint reduction	Community engagement	Accounting integrity and transparency

Bringing it to your practice

How do you deal with ESG in your firm? There is help available; companies such as Sustain Life and Atrius have evolved that can assess an organization’s business practice and performance on sustainability and ethical issues. And notably, companies such as PepsiCo, Inc,, Cisco Systems Inc, Verizon, and Apple report their ESG scores. ESG can also measure risks and opportunities in the ESG space.

Taxpayers at the individual and corporate level are more often wanting to decide to use their purchasing power to spend and invest with organizations that align with their ideals. The ready availability of how well a company has road mapped their ESG framework allows for the stratification of principles, or aligning a company’s ESG initiatives to its core business principles. Tax savings and credits provide an even better package to align your ideals and principles with like-minded companies.

As you continue to provide your client advisory services and tax planning, consider ESG to be part of the conversation. You don’t have to be a tree hugger to see the savings and tax incentives, let alone doing great things for our environment.

Editor’s note: This article was also published in the CPA Practice Advisor.