In an effort to protect taxpayers against the impending recession and economic downturn, the Inflation Reduction Act of 2022 (the Act) was signed and effective August 16, 2022. The Act includes new taxes and credits and over $80 billion allocated to the IRS. While much of the bill (especially the new taxes and IRS funding) is targeted to large corporations, there are new and enhanced energy credits which many taxpayers may benefit. This article highlights the credits that we think will be advantageous to you.
Nonbusiness Energy Property Credit
The Act increased the nonbusiness energy property credit from 10% to 30% of the amount paid for qualified expenses. The qualified energy efficiency improvements definition was also updated to include air sealing insulation in the definition of a building envelope component. In addition, it removed the requirement that expenditures must be made to the taxpayer’s principal residence—second homes can now earn the credit. The credit is further enhanced by increasing the annual limitation of $1,200 versus the previous $500 lifetime limitation. These updates apply to property placed in service between 2022 and 2032.
Residential Clean Energy Credit
The Residential Clean Energy Credit allows a tax credit for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes. The Act extends the credit through 2034 and updates the credit amounts to 26% through 2021, 30% for 2022-2032, 26% for 2033, and 22% for 2034. The Act also adds qualified battery storage technology to the list beginning in 2023.
Accelerated Cost Recovery for Green Building Property
IRS Code Sec. 179D provides an accelerated cost recovery deduction for energy efficient commercial building (EECB) property for the year placed in service. This deduction is enhanced under the Act. It lowers the EECB efficiency standard requirement for deduction benefits from 50% to 25%. It also modifies the formula for calculating the maximum deduction and eliminates the allowance of partial deductions. The enhancement provides more detailed criteria for the allocation of the deduction when EECB property is installed on/in government property. These changes are effective beginning in 2023.
New Energy Efficient Home Credit
The New Energy Efficient Home Credit is an existing credit available to eligible building contractors. The credit is now available for qualified new energy efficient homes acquired by a homeowner before January of 2033. For a home to qualify, the home has to meet specified energy saving requirements and the contractor must meet certain wage requirements. A home must be certified as a zero-energy ready home under the zero-energy home program of the Department of Energy to meet the energy saving requirement. Any laborers employed to work on the construction of the home must be paid fair wages as compared to the local average to meet the wage requirement. Credits are available from $500 to $5,000, depending on the requirements satisfied.
New Clean Vehicle Credit
The New Qualified Plug-in Electric Drive Motor Vehicle Credit (NQPEDMV) has been renamed the New Clean Vehicle Credit. A taxpayer can receive $3,750 for meeting the critical minerals requirement and $3,750 for meeting the battery component requirement. The definition of a new clean vehicle has a couple different requirements. First, the minimum battery capacity has to be 7 kilowatt hours. Second, the seller of the new clean vehicle is required to provide a report to the buyer and the IRS containing the name and taxpayer identification number of the buyer, the vehicle identification number (VIN), the battery capacity of the vehicle, the verification that the original use of the vehicle commences with the taxpayer, and the maximum clean vehicle credit allowable to the buyer with respect to the vehicle. The credit can only be claimed for vehicles made by a qualified manufacturer and only one clean vehicle credit is allowed per vehicle. The limitation on the number of vehicles eligible for the credit has been eliminated. A few examples of eligible vehicles are Tesla Model 3, Ford Mustang Mach-E, Jeep Grand Cherokee PHEV. This credit is effective from 2023 through 2031.
Credit for Previously Owned Clean Vehicles
The credit for previously owned clean vehicles is equal to the lesser of $4,000 or 30% of the vehicle’s sales price. The credit is available to married filing joint filers with modified adjusted gross income of $150,000 or less ($75,000 for singles) for the year of purchase and the preceding year. To qualify as a previously owned clean vehicle, the vehicle must be a vehicle that meets the new clean vehicle requirements and is at least 2 years old. This credit is effective from 2023 through 2032.
Credit for Qualified Commercial Clean Vehicles
The credit for qualified commercial clean vehicles is a new credit allowed for businesses. The credit amount per vehicle is the lesser of 15% of the vehicle’s cost basis (30% for vehicles not powered by a gasoline or diesel engine) or the “incremental cost” of the vehicle i.e., the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit is $7,500 for vehicles with a gross vehicle weight rating of less than 14,000 pounds or $40,000 for heavier vehicles. This credit is effective for vehicles placed in service between 2023 through 2032.
Alternative Fuel Vehicle Refueling Property Credit
The Alternative Fuel Vehicle Refueling Property Credit has been enhanced for qualifying property placed in service between 2023 and 2032. The credit is 6% of the property’s cost (30% if the taxpayer meets the wage and apprenticeship requirements) and is limited to $100,000. The credit now includes bidirectional charging equipment and is available for electric charging stations for two- and three-wheeled vehicles that are intended for use on public roads. Charging or refueling property will only be eligible for the credit if it is placed in service within a low-income or rural census tract. Qualified census tracts in South Dakota include, but are not limited to Jackson, Todd, and Ziebach counties. The credit applies to each single unit, not all such property at a location and is effective between 2023 and 2032.
As you can see, the Inflation Reduction Act of 2022 enhances and creates many new energy related tax credits that may be beneficial for you and your business. Many of the enhancements include time extension and easing of qualification requirements allowing more taxpayers to qualify for the credits. The new credits reflect where technology improvements and global conservation efforts are continuing to advance. Please contact your Ketel Thorstenson tax advisor for more information on how you can take advantage of these credits.