Carbon offsets allow you to counteract your carbon footprint to fight climate change and create a greener, healthier world. And while the primary focus is sustainability and carbon reduction, what about the practical side for savvy taxpayers. Are carbon offsets tax deductible?
Individuals and businesses can purchase offset credits as a one-time solution to neutralize carbon emissions for things like air travel. Or they can sign up for a monthly offset program to balance their carbon dioxide (CO2) production throughout the year due to vehicle, public transit, air travel, and home energy use.
Depending on the number of carbon credits you’re purchasing to offset greenhouse gas emissions, writing off carbon offsets on your taxes may be a benefit.
This guide explores whether carbon offsets are tax deductible and what other tax benefits might be available for other pro-environment actions. Keep reading to learn more.
What Are Tax Deductions and Tax Credits?
According to the Internal Revenue Service (IRS), tax credits and deductions allow you to reduce the taxes you owe in two ways:
- Tax deductions: Tax deductions can reduce the amount of your income before calculating the income tax you owe.
- Tax credits: Tax credits can increase your tax refund or reduce the amount of tax you owe after calculating your taxes. And some tax credits can give you a refund even if you’re lucky enough not to owe any taxes.
Note: This article is for informational purposes based on current tax laws. It is not intended as tax, legal, or financial advice and should not be relied on as such. Always consult a licensed and accredited tax professional before acting on any of the information provided.
Are Tax Deductions and Tax Credits Available for Both Individuals and Businesses?
Individuals, businesses, and self-employed entities can claim certain tax deductions and credits based on eligibility.
For example, contractors can use Form 8908 (Energy Efficient Home Credit) to claim a tax credit for each qualified energy-efficient home they sell or lease. Likewise, individuals can use Form 5695 (Residential Energy Credit) to claim a credit for eligible renewable energy investments they made for their home.
What Are Carbon Offsets?
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When an individual or business purchases a carbon offset, they buy a certificate representing the reduction of one metric ton of carbon dioxide or a CO2 equivalent gas. According to the United Nations, these greenhouse gasses (GHG) are the primary cause of climate change, and every ton of reduced emissions creates one carbon offset.
Project managers and developers can sell these carbon offsets to finance their projects, allowing them to continue benefiting the environment. Purchasing carbon offsets enables businesses and individuals to support climate action projects such as:
- Energy projects
- Deforestation restoration projects
- Ecosystem, forestry, and forest management projects
- Voluntary emission reduction projects
- Methane capture projects
These programs are part of the voluntary carbon market. These voluntary carbon offsets (VCOs) allow businesses and individuals to offset GHG emissions from fossil fuels, home energy use, transit, and air travel.
Are All Carbon Offset Providers the Same?
Buying your carbon offsets from a reputable provider like Terrapass is essential. At Terrapass, we emphasize quality, transparency, and the highest standards for our programs to ensure our offsets make a difference.
Each project we support is carefully monitored to ensure emissions reductions are verified. And our portfolio audits allow us to confirm that our projects actively restore balance to the natural world.
Every Terrapass offset purchase is also verified by nonprofit independent third parties so that we can guarantee maximum accountability and transparency.
Projects without these quality standards may sell carbon offsets for less, but there’s no guarantee that the offsets are legitimate. In other words, companies that do not use reliable verification, portfolio audits, and transparency may be funding projects selling offsets that do not factually represent the reduction of one metric ton of carbon dioxide or a CO2 equivalent gas.
Is Purchasing Carbon Offsets Tax Deductible?
It’s a common question among businesses and individuals: “Are carbon offsets tax deductible?”
Tax professionals already help taxpayers find deductions for other sustainability-related expenses, so you’d imagine that carbon credits have similar qualifications. And they do, although it’s not as straightforward as claiming deductions and credits for other green expenses.
Are Carbon Offsets Tax Deductible for Individuals?
At the time of this writing, the IRS has no tax rules explicitly addressing the tax treatment of carbon offsets purchased by individuals. Therefore, any potential tax deduction for funding a carbon offset project would be based on the charitable contributions deduction.
According to the IRS, to receive a deduction for a charitable contribution, the organization you donate to must be a qualified organization (or a 501(c)3). You also can’t receive a benefit for the contribution to be eligible. Finally, you must itemize deductions on your tax return instead of taking the standard deduction.
In 2019, only about 13% of Americans itemized their deductions. As Krystal Pino, CPA, told CNET, “It’s hard to reach the [itemized deduction] threshold, unless you have significant charitable deductions.”
In short, purchasing carbon offsets won’t be a factor come tax time for most Americans. In addition, carbon offsets purchased from for-profit organizations are not tax deductible, and eligible nonprofit carbon offsets are limited.
How Do I Claim a Carbon Offset as an Individual?
If you donated to a 501(c)3 and choose to itemize deductions, you must submit a Schedule A (Form 1040) with your tax return. You can get help from a tax prep professional to ensure this is done correctly. Professionals can also help you identify what you can claim on your Schedule A to get the most from your deductions.
Are There Any Other Tax Credits for Individuals for Going Green?
Individuals can claim multiple tax credits for their investments in going green to protect the environment. For example, the residential property energy credit incentivizes taxpayers to make their properties energy efficient.
All eligible expenditures must be paid or incurred during the taxable year. According to the IRS, qualifying properties include:
- Solar electric property
- Solar water heaters
- Geothermal heat pumps
- Small wind turbines
- Fuel cell property
- Qualified biomass fuel property
The following improvement projects and expenditures may also qualify for the residential energy property credit:
- Energy-efficient exterior skylights, windows, and doors
- Some solar roofing tiles and shingles
- Insulation
- Energy-efficient air conditioning and heating systems
- Water heaters (natural gas, propane, or oil)
Many of these qualifying expenditures fall under the realm of green remodeling, which is an increasingly popular method of carbon footprint reduction.
Are Carbon Offsets Tax Deductible for Businesses?
The tax treatment of VCOs varies according to the facts and circumstances of each business. It is not well-defined by tax law at the time of this writing, but the following sections of the tax code offer a place for companies to begin:
- Section 162(a) allows businesses to claim deductions for “ordinary and necessary expenses paid or incurred during the taxable year”. The business would need to prove that the purchase of VCOs is “ordinary and necessary”.
- Section 263 allows businesses to claim deductions for capitalizable expenses. The business would need to prove that the purchase of VCOs provides a long-term benefit and may be, therefore, a “capitalizable expense.”
Businesses that invest in VCOs through a nonprofit entity as part of their sustainability efforts may also treat their purchase as charitable contributions. However, if the purchase of VCOs is arguably “ordinary and necessary,” the argument may be made that the expense should be claimed under Section 162 instead.
Are There Any Other Carbon-Related Tax Incentives for Businesses?
In 2008, the IRS introduced Section 45Q into the tax code. Under Section 45Q, a business may file Form 8933 (Carbon Oxide Sequestration Credit) to claim a credit for CO2 storage, utilization, capture, and disposal.
Eligible Section 45Q projects may involve legal contracts with multiple parties for the capture, utilization, or disposal of carbon oxides. A tax professional may be able to help businesses decide on an appropriate relationship with an external carbon sequestration project as an alternative approach to offsetting some or all of their carbon footprint.
Are Carbon Offsets Tax Deductible in Canada?
As part of Canada’s 2030 Emissions Reduction Plan to support a clean economy, the country launched a Greenhouse Gas Offset Credit System in 2022. The system is designed to incentivize businesses, communities, and industries to invest in protecting the environment and reducing pollution.
Verified carbon offsets can be sold and used by other businesses and individuals who are interested in voluntary climate targets or commitments.
Another part of Canada’s 2030 Emissions Reduction Plan is the Carbon pollution pricing system. Under this system, each territory and province can tax carbon pollution at its own rate or default to the federal government’s standards.
While tax law and code vary from country to country, Canada’s individual and business taxpayers face a similar situation to those in the United States in that the treatment of VCOs is not well-defined and varies according to facts and circumstances. Here are the shared similarities:
- Carbon capture tax credit for businesses
- Charitable tax credits for businesses and individuals who purchase VCOs from nonprofit entities
For more information, please consult a tax professional specializing in Canadian tax law.
Ready to Offset Your Carbon Footprint?
Unfortunately, current tax law doesn’t allow you to deduct your purchases of most carbon offsets from your tax bill. However, individuals, businesses, and self-employed entities have access to other credits and deductions for their efforts in leading a clean, green life, from property upgrades to electric vehicles.
When you buy carbon offsets from a reputable source like Terrapass, you’re reducing your impact on the environment and playing an essential role in fighting climate change. We’ll help you calculate your carbon footprint, purchase carbon offset products, and fund carefully selected carbon reduction products to counteract your daily carbon use.
You can also review our project overview to learn more about the efforts you’re supporting when you purchase carbon offsets through Terrapass.
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