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Clean Energy Tax Incentives in the Franchise Space

Franchises may be able to take advantage of new clean energy credits under the Inflation Reduction Act. Read on to learn more about the opportunities.
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Franchises have become an integral part of the business world, offering opportunities for entrepreneurs to operate businesses under an established brand. Ultimately, being a franchise owner offers the advantages of built-in brand recognition, training and support, access to resources, and a network of fellow franchisees. What’s more, with the enactment of the Inflation Reduction Act (IRA), those in the franchise space may now have the opportunity to take advantage of new clean energy credits. Many franchise agreements require the franchisee to maintain certain brand standards when it comes to their business’s buildings and operations. In addition to being beneficial from a marketing perspective, depending on the ownership structure of franchises, owners may actually be requiring clean energy involvement given the indirect or direct impacts of the SEC’s proposed reporting rules.

The IRA has both extended and altered existing credits, deductions, and incentives. Some of the most relevant opportunities for franchises include the Section 48 investment tax credit (ITC), electric vehicle (EV)-related credits, and the §179D deduction. Further, the IRA implemented “transferability”—credits can now essentially be sold to third parties. Therefore, franchises that may find themselves in a current or future year loss position may still be able to benefit from these credit and deduction provisions if they transfer the credits and receive cash in exchange. Although there will likely be a discount on the sale price, taxpayers may prefer to recognize the benefit of the proceeds in the current year instead of waiting for a year of income to utilize a credit carryforward. See more on transferability rules in our FORsights™ article, “New IRS Elective Pay & Transferability Guidance.”

The ITC generally allows taxpayers to get a 6% base tax credit, which can be increased to 30% if the prevailing wage and apprenticeship requirements are met. The credit can be further increased to 50% if the domestic content and energy community bonus credit requirements are met. There is a defined listing of eligible clean energy property for this credit. For example, if franchise businesses have flat roofs or unused space in parking lots, solar panels could be implemented into the brand standard design of franchise buildings. Further, many solar panels would benefit from battery storage solutions for the resulting energy production, which also would qualify for the ITC. If the franchise is making capital improvements across the board, these businesses could implement dynamic glass or specific heating or cooling systems that would allow for a credit as well.

EVs and the related charging stations also may be eligible for a variety of credits. If the franchise requires a fleet of vehicles, replacing traditional gas vehicles with EVs might allow for up to a 30% credit for these vehicles (subject to some limitations and requirements). Further, if these vehicles or the customer’s vehicles would benefit from a charging station, the §30C Alternative Fuel Vehicle Refueling Property Credit may apply, assuming this property is located within a non-urban or low-income area. As an example in the market, one restaurant franchise is partnering with a provider of EV charging solutions to start adding EV charging “Oasis Parks” to some of its locations across the United States. The franchisor envisions these parks to include canopies with multiple ports, picnic tables, Wi-Fi, restrooms, green space, and playgrounds.

In addition, franchises in the restaurant, gas station, and big-box store space have each recently publicized significant initiatives to incorporate EV charging and other clean energy initiatives as they adopt more sustainable practices. For instance, plans are in place for a fully electric restaurant prototype which relies mainly on renewable energy sources. Along with EV charging stations, the same restaurant plans to utilize electric cooking tools instead of gas-powered ones, install rooftop solar panels, and fit locations with energy-efficient heat pump water heaters.

The §179D deduction also may be an option for those entities that would benefit from the resulting tax deduction. With up to a $5 per square foot deduction now possible, improving the energy efficiency of a franchise’s buildings could result in substantial savings. Note that certain standards must be met and certifications required in order to qualify. A cost-benefit analysis may be wise for taxpayers considering both the §179D deduction and a cost segregation study. Professionals at FORVIS can assist in assessing return on investment for both opportunities.

Of course, there are many other credits, grants, rebates, and incentives that may be available to franchises related to clean energy and the IRA. While the ITC, EV credits, and §179D are perhaps the most common, FORVIS can help evaluate the full listing of your franchise’s opportunities.

If you have any questions or need assistance, please reach out to a professional at FORVIS.

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