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How are environmental taxes calculated?
Current ESG tax credits and initiatives
What are the benefits of an ESG tax strategy?
Opportunities for accountants in green taxes
To encourage individuals and businesses to make environmentally friendly choices, the IRS offers Environmental, Social, and Governance (ESG) tax incentives that promote sustainable practices and discourages activities that harm the environment though what’s known as a “green tax.”
Accountants play a critical role in helping their clients navigate ESG tax credits and green taxes. That’s why it’s important to understand the complexities of these initiatives and how making eco-friendly choices can maximize tax savings.
From staying informed on ESG trends and regulations to identifying green tax breaks, more and more businesses are turning to accountants for ESG reporting and compliance. Whether it is evaluating ESG opportunities, flagging potential audit risks, or assessing ESG related disclosures, many accounting firms are now incorporating ESG offerings into their repertoire.
Let’s take a holistic look at ESG tax credits and how accountants can take advantage of an opportunity to guide clients on their green tax journey.
What are green taxes?
Green taxes, also known as environmental taxes, are fiscal policy measures designed to promote sustainable behavior and discourage activities that harm the environment. These taxes aim to shift economic activity toward environmentally friendly alternatives.
How are environmental taxes calculated?
The calculation of environmental taxes varies depending on the jurisdiction and the specific environmental impact being targeted. Common methods include taxing emissions, waste generation, and energy consumption. The goal is to create a correlation between the tax burden and the environmental harm caused by a given activity or business practice. Governments may also employ market-based mechanisms such as carbon pricing to incentivize the reduction of greenhouse gas emissions.
In the U.S., the IRS uses Form 6627 to calculate the environmental tax on:
petroleum,
ozone-depleting chemicals (ODCs),
imported products that used ODCs as materials in the manufacture or production of the product,
the floor stocks tax on ODCs,
taxable chemicals and the applicable rates, and
taxable imported chemicals substances and the applicable rates.
Similarly, excise taxes are taxes imposed on certain goods, services, and activities from importers, manufacturers, retailers, and consumers, and vary depending on the specific tax. Effective July 1, 2022, the Infrastructure Investment and Jobs Act reinstated the Section 4661 excise tax on chemicals (other than ODCs) and the Section 4671 tax on imported chemical substances.
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For more information on claiming green tax credits, see our guide to environmental IRS forms.
Current ESG tax credits and initiatives
The rise of ESG considerations has resulted in a variety of tax credits and incentives aimed at promoting sustainable practices. Accountants should be well-versed in these initiatives to assist clients in optimizing their tax strategies.
The IRS organizes ESG tax credits into categories in alignment with the largest sources of greenhouse gases (GHGs) by sector:
Power generation and consumption
Transportation
Industrial production and processes
Real estate
Some prominent ESG tax credits and initiatives include:
What are the benefits of an ESG tax strategy?
Environmental, Social, and Governance (ESG) factors can help identify and manage risks, and are used by investors, shareholders, consumers, and governing bodies to evaluate and measure the sustainability and societal impact of an investment in a business.
Companies that effectively incorporate ESG into their business strategy are better equipped to navigate challenges and mitigate potential negative impacts on their operations—not to mention a potential edge with investors and consumers.
From a tax perspective, aligning ESG considerations with a company’s tax strategy can have potential benefits, including:
Tax incentives for sustainable practices. The IRS offers tax incentives and credits to businesses that adopt environmentally friendly practices. Implementing ESG measures, such as energy efficiency improvements or the use of renewable energy sources, may save companies money through a variety of tax breaks.
Risk mitigation. Adopting ESG practices can help mitigate certain risks associated with environmental and social issues. Proactively addressing these risks may prevent potential legal and regulatory challenges, which could have tax implications.
Enhanced reputation and brand value. Companies with strong ESG practices often enjoy a positive reputation, which can contribute to brand value. A positive public image may influence consumer choices and potentially improve profitability.
Access to green financing. Companies focusing on environmental sustainability may have better access to green financing options. Green bonds and other sustainable financing instruments could offer favorable terms, and the interest on such financing may have tax advantages.
Tax deductions for charitable contributions. If a company is actively involved in social initiatives or makes charitable contributions aligned with its ESG goals, these donations may be eligible for tax deductions.
Employee engagement and tax benefits. ESG strategies that prioritize employee well-being and diversity may contribute to a positive workplace culture. Employee benefits and well-being programs can have tax advantages, and a satisfied and engaged workforce can enhance overall productivity.
Long-term cost savings. Implementing ESG practices that focus on resource efficiency, waste reduction, and sustainable supply chain management can result in long-term cost savings. Reduced operational costs can improve revenue.
Compliance with evolving tax regulations. As green tax regulations evolve, some jurisdictions may introduce tax incentives or penalties related to ESG factors. Staying ahead of changes in ESG legislation and aligning with emerging ESG-related tax considerations can position a company favorably.
As ESG grows in importance, accounting firms should consider expanding their services to provide more support in this area. By offering support on a green tax strategy, accountants can provide clients with data, assurance, and ESG-related tax optimization strategies to help them stay competitive and compliant.
ESG tax reporting and audits
As ESG considerations become integral to corporate reporting, accountants have an opportunity to assist clients in ESG tax reporting and audits. This involves tracking and validating ESG-related data, preparing for audits, and aligning financial reporting with ESG metrics.
Let’s take a deeper look at the ESG reporting and compliance services accountants can offer to their clients:
Assist clients in the compilation and verification of ESG data for reporting purposes.
Ensure compliance with emerging ESG reporting standards and frameworks, such as the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB).
Identify ESG-related tax incentives.
Assess tax implications of ESG investments.
Provide clients with advice on structuring ESG investments to optimize tax outcomes.
Identify opportunities to align your clients’ tax strategies with their ESG goals for a holistic approach to financial and environmental sustainability.
Conduct risk assessments related to ESG factors, considering potential regulatory changes, reputational risks, and financial implications.
Integrate ESG due diligence into financial audits, ensuring a comprehensive understanding of a company’s ESG performance.
Advocate for transparent and comprehensive ESG disclosures, enabling stakeholders to make informed decisions about a company’s sustainability practices.
Assist in the development of robust internal controls for accurate ESG data collection and reporting.
Adopting an ESG tax strategy goes beyond just environmental stewardship; it is an opportunity to align business with consumer expectations, regulatory trends, and long-term sustainability.
Accountants can guide clients in understanding the benefits of a green tax strategy, including enhanced brand reputation, access to capital, reduced operational costs, and alignment with regulatory frameworks.
Opportunities for accountants in green taxes
As green tax considerations become more and more integral to business operations, ESG reporting and audits will continue to gain prominence. Accountants play a crucial role in ensuring accurate and transparent ESG reporting and helping businesses demonstrate their commitment to sustainability.
To capitalize on these opportunities, accountants must stay abreast of changing ESG regulations and emerging initiatives. Thomson Reuters Checkpoint Edge, a cutting-edge tax research tool informed by 680+ highly-qualified editors and outside practitioners, is an invaluable tool in keeping up to date on ESG tax implications for individuals and businesses.
Additionally, Thomson Reuters ESG solutions, including Checkpoint ESG Toolkit, helps equip tax, corporate, risk, and legal professionals to navigate environmental-related tax credits and incentives while ensuring compliance.
As green tax credits continue to evolve, forward-looking accountants can provide meaningful guidance and support—and that helps shape a sustainable financial future for us all.
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Simplify complex ESG tax and finance issues with ESG solutions from Thomson Reuters.
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