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The physical effects of climate change, including extreme weather events or the financial impacts of a climate transition, such as carbon penalties and taxes, are particularly disruptive to small businesses, which have fewer options for hedging uncertainty and risk.
Moreover, regulators and capital markets are pushing businesses to steer their choices toward sustainability. But this has created some measures of “greenflation” – inflation caused by efforts to comply with climate objectives.
But some of the climate provisions in the Inflation Reduction Act offer small businesses a way to de-risk their climate change vulnerabilities.
“The sustainability agenda drives innovation that can lower prices on various items and incentivize new business ventures and job creation,” says Ben Preston, a senior policy researcher at RAND Corp.
Here are four ways you can climate-proof your business and bolster profits.
Related: Do You Qualify For These Green Tax Breaks? Tips from a Top Accountant.
Take advantage of tax credits
The act provides tax incentives on purchases of electric vehicles, solar panels, and wind turbines. For example, there’s a $7,500 tax credit for new EVs and a federal tax credit of 30 percent (or up to $1,000) on charging equipment. Eligibility is targeted to the lower-end of the market for U.S.-made vehicles: The credit is limited to new cars costing up to $55,000; used cars with a price tag of up to $25,000; and SUVs, trucks, and vans up to $80,000. For commercial EVs, the credits range from $7,500 to $40,000, depending on vehicle weight.
Retrofit outdated facilities
New funding for research and development in renewable energy technologies can also be used to retrofit facilities to be more energy efficient or expand operations. The new law offers building owners and lessees that bring commercial buildings up to a specific energy-efficient standard a tax deduction of $5 per square foot. The deduction applies to both the cost of constructing new commercial buildings as well as the cost of retrofitting older buildings.
Reduce supply chain risks
Some incentives encourage startups and small businesses to adopt sustainable supply chain practices such as reducing waste and energy consumption, sourcing from local suppliers, and using eco-friendly packaging. Specifically, the law increases small businesses’ refundable research and development tax credit to $500,000 from $250,000. Also significant: Small businesses can use that credit to reduce payroll taxes and other expenses.
Boost alternative energy sources
Preston notes there are two types of sustainable businesses: Those that operate sustainably and those that produce goods and services that help other companies to be sustainable. The law seeks to broaden American businesses in sustainable technologies such as solar, wind, carbon capture, and hydrogen by offering targeted tax incentives aimed at manufacturing U.S.-sourced materials for batteries, solar and wind parts, and technologies like carbon capture systems and electrolyzers to make hydrogen.
In addition, the law creates a new Clean Energy and Sustainability Accelerator that will underwrite state and local institutions that support clean energy and the use of distributed zero-emission technologies like heat pumps and solar and EV charging facilities. The accelerator plans to prioritize over half of its investments for disadvantaged communities.
With consumers steering demand toward more sustainable products and businesses, entrepreneurs and investors are prioritizing sustainable projects and companies helping to green the economy. A combination of tax breaks and government spending can help small businesses take advantage of the new opportunities – and potentially boost revenues and profits.
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