Energy Tax Incentives in the Inflation Reduction Act
The move towards renewable energy took a giant stride forward when the Inflation Reduction Act was recently signed into law. Although promised to help fight the potential effects of inflation, it is also incentivizing the integration of clean energy for years to come. The initiatives contained in the legislation focus on two primary areas, including electrification for vehicles and household appliances and renewable energy alternatives for heating and cooling systems. Most energy provisions are achieved with tax incentives plus other benefits like rebates, grants, and low-interest loans. There are opportunities for both business and individual taxpayers to benefit. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
Individual Energy Incentives
Home improvements and investments in clean energy are about to get less expensive for many homeowners.
Homeowners who purchase rooftop solar systems, heat pumps, high-efficiency home use batteries, and small wind energy systems can take a 30 percent Residential Clean Energy tax credit from 2023 through 2032. At that point, it starts to phase out until it expires completely after 2034.
Separately, the Energy Efficient Home Improvement Credit has an annual limit of $1,200 for qualifying energy-efficient residential projects. Individual projects often have lower annual limits; for example, $250 for an exterior door or $600 for exterior windows and skylights. Heat pumps, biomass stoves, and boilers have a higher annual limit of $2,000.
Homeowners can also get a tax credit for installing a home charger for EVs through 2032.
Several changes are coming to how tax credits and rebates work for electric vehicles.
- $3,750-$7,500 Credit: New electric vehicles placed in service before 2033 that cost less than $55,000 MSRP for cars ($80,000 for trucks and SUVs) and meet certain assembly requirements are eligible.
- $4,000 or 30% Tax Credit: Used electric vehicles up to $25,000 with a minimum seven-kilowatt battery; used EVs must be more than two years old and the tax credit can only be used once per vehicle.
Consumers may not need to wait until they file their tax return to claim the credit. Starting in 2024, new EV purchasers can take the credit as an instant rebate at the dealership.
The new EV tax credit applies to taxpayers earning less than $150,000 or $300,000 for single and married filing jointly, respectively. The used EV tax credit applies to taxpayers earning less than $75,000 or $150,000 for single and married filing jointly, respectively.
Written agreements to buy an EV prior to August 16, 2022, don’t fall under the new rules. Vehicles purchased and delivered between August 16, 2022, and December 31, 2022, aside from the final assembly requirement, applies to the rules in effect before the enactment of the Inflation Reduction Act for the EV credit (including those involving the manufacturing caps on vehicles sold). New critical materials, battery components, and sourcing requirements are introduced starting in 2023 and phased in over the next several years. They will ultimately make up half the total credit amount for new EVs.
Business Energy Incentives
Businesses can benefit from electrifying their vehicle fleets, too. The Section 45W commercial EV credit is the lesser of 30 percent of the sales price or the vehicle’s incremental cost, defined as the difference in price between an EV and a comparable internal combustion engine vehicle. The tax credits max out at either $7,500 or $40,000; the higher tax credit kicks in if a vehicle weighs more than 14,000 pounds. Battery and critical mineral sourcing requirements don’t apply to commercial EVs.
There are also several production and investment tax credits, PTCs, and ITCs, respectively, to spur innovation and investment in clean energy on the business side. Highlights are:
- A two-tiered tax credit system where 20 percent of the credit is the base and the other 80 percent is based on meeting prevailing wage and apprenticeship requirements
- Expanded Sections 45 and 48 PTCs and ITCs are available for wind projects that begin before the end of 2024 (Section 45) and those placed in service after 2025 (Section 45Y). Onshore and offshore projects can qualify.
- Other PTCs for solar, geothermal, biomass, and other renewable energy projects that begin construction before 2025 are also available. Tax credits for solar projects were reinstated.
- Solar projects that begin construction before 2025 can elect to take the PTC instead of the ITC, allowing for a more immediate tax break.
- There are new production tax credits for qualified clean hydrogen facilities, advanced manufacturing, and zero-emission nuclear power plants.
- Other tax credits have been expanded and extended, including biodiesel and renewable fuel, alternative fuel, advanced manufacturing, and carbon capture and storage.
S-corporations or partnerships can elect to transfer certain energy tax credits in any tax year to a third party, effectively monetizing the credit.
Funds are also being set aside for grants and loans, so small businesses have other ways of paying for clean energy projects, including:
- $250 million: improving land access for farmers and ranchers
- $291 million: producing, transporting, or storing sustainable aviation fuel and technologies
- $837.5 million: improving energy or water efficiency and climate resilience for affordable housing
- $2 billion: producing hybrid and electric vehicles and hydrogen fuel cell vehicles
- $3 billion: building new or renovated auto manufacturing facilities for low- or no-emission vehicles
- $5 billion: repurposing or replacing certain energy infrastructure
Finally, the R&D credit is doubled when it’s used to offset payroll taxes. And Sections 179D and 45L energy efficient tax incentives have been expanded.
We’re here to help
The long-term approach to clean energy tax incentives should help individuals and businesses plan. Unlike many tax benefit packages that expire or phase out quickly, the ‘carrot’ method of rewarding investments in renewable energy is hoped to spur unprecedented growth in a more sustainable power supply. If you have questions about the information outlined above or need assistance with a tax or accounting issue, JLK Rosenberger can help. For additional information, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.