By Garnet Borch
Being in good relationship with the natural world means considering our environmental impact, and a part of that work is reducing the carbon footprint of our buildings. But as business owners know, it can be hard to access the capital needed to invest in energy-efficiency upgrades. Fortunately, our energy audit team is here to explain a pair of incentives that can help you:
- Write off the entire cost of installing a solar array (or other upgrades) using the Class 43.2 Accelerated Capital Cost Allowance
- Receive a 15% tax credit on a solar installation, or 30% tax credit on a geothermal installation, using the new Clean Electricity Investment Tax Credit
- Cover the upfront costs of solar and other upgrades with a low-interest, up-to-20-year loan through the Clean Energy Improvement Program (CEIP)
These incentive programs are new, creatively structured, and a bit complicated. Let’s dive in.
What is Class 43.2 Accelerated Capital Cost Allowance?
Capital cost allowances are used by businesses to write off the cost of equipment, property or buildings over time. Usually, businesses can write-off 5-30% of the cost of the asset each year, depending on which class that property falls under. For Class 43.2 (which includes solar and other renewables), you can write off 100% in 2023! The net effect of this incentive is that you could save about 23% (or whatever your corporate tax rate is) on the cost of installing solar. We’ll go through an example, but your main takeaway from this article should be: there’s a tax thing called Capital Cost Allowance Class 43.1 & 43.2, it could save you about a quarter of the cost of a GSHP or solar PV system and you should talk to your accountant about it!
Let’s say you have a business that makes $1M in profits and has $700K in expenses. The net profit you would pay tax on is $300K. If your business invests in a 100kW solar array that costs $240K, you can use this accelerated capital cost allowance to write off the entire installation cost in the first year, bringing your taxable income down to $60K!
If your corporate tax rate is 23%, you would pay $69K in taxes. But if you made use of the incentive, your taxes drop down to $13,800!
Without any incentives, commercial solar PV arrays typically pay for themselves in about 13 years. With a 23% discount, it would pay off in 10 years.
What is the Clean Electricity Investment Tax Credit?
This incentive is similar to the capital cost allowance in that it’s related to your taxes and can apply to solar, geothermal and other clean-energy projects. However, the way the tax benefit is applied is different.
The Clean Electricity Investment Tax Credit gives you a 15% refundable tax credit for solar installations and a 30% refundable tax credit for geothermal exchange systems, which can be used to decrease the amount of taxes you pay at the end of the year.
Let’s use the previous example to illustrate how this could work. The solar installation costs $240K, so 15% of that is a credit of $36K to subtract from your taxes.
If you’re able to fully utilize both of these tax incentives, the cost of your solar array could be reduced by about 38%!
If you don’t have cash on hand to make the upfront investment, there’s another incentive that can help with that!
What is the Clean Energy Improvement Program?
Released last year, this incentive is our own local version of Property Assessed Clean Energy programs that have been around in the US since around 2008 and have had incredible success.
CEIP can provide a low-interest loan to cover up to 90% of the installed cost of solar PV and 100% of the cost of many other energy-efficiency upgrades such as HVAC, lighting, or windows. The loan repayment is linked to your property tax, which means that it will show up as a line item on your tax bill and will be transferred to the new owner should you sell the building. The loan can be paid back over 20 years, and the interest rate is about 5% (inclusive of all administrative fees).
Let’s take that previous example and apply the CEIP loan to 90% of the installed cost: that would be about $171,000. When you install this solar array, you’d pay 10% of the installed cost and at the end of the year you would get a tax credit of about 23% of the installed cost, leaving you 13% net positive in Year 1, with a loan that would pay itself off in 13 years!
CEIP makes a lot of sense for businesses that have planned renovations, would like to decrease their emissions and don’t have the cash on hand to make those things happen. To qualify for CEIP, businesses must get an ASHRAE Level 2 energy audit and apply for funding for at least three of the recommended upgrades. The cost of the audit can be included in the financing and is a good starting point in any case, as it can help you understand what energy efficiency upgrades would be the most cost-effective and best help reduce your carbon footprint.
Let’s say you use all three: the Accelerated Capital Cost Allowance, the Clean Electricity Investment Tax Credit and CEIP. Here’s how the process might look in the first year:
- Get an ASHRAE Level 2 audit done and apply for CEIP
- Install solar and at least two other upgrades
- Claim the incentives on your taxes
- Your cash flow will go up (by 23% the cost of the solar array plus whatever savings on your energy bills)
In following years:
- You will be paying off the CEIP loan using savings on your energy bills
- Your property value will go up with the infrastructure upgrades
- Your building will be more comfortable with reduced energy loss
- Your environmental impact will be lessened!
You can find out more about Class 43.1 and 43.2 Capital Cost Allowance in this technical guide, the Clean Energy Investment Tax Credit directly from the federal budget announcement, and CEIP here. There are multiple other incentive programs out there, and we keep an up-to-date list on our website. If you’d like more information about ASHRAE Level 2 energy audits, contact us. We’d be happy to answer your questions!