Summary of Selected Energy Tax Credits and Deductions of the Inflation Reduction Act
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the Act) after its passage by both the Senate and House. The Act includes the following key provisions regarding energy tax credits that may impact tax obligations for businesses and business owners.
Extension, Increase, and Modifications of New Energy Efficient Home Credit
The Act expands the New Energy Efficient Home Credit (45L credit) for energy efficient homes acquired before January 1, 2033. The amount of the credit has been increased, and can be $500, $1,000, $2,500, or $5,000 depending on which energy efficient requirements the home satisfies and whether the construction of the home meets the meets the prevailing wage requirements discussed below.
A dwelling unit qualifies for the credit if it’s certified as a zero energy ready home under the zero energy ready home program of the Department of Energy as in effect on January 1, 2023, and it satisfies the Energy Star requirements in place based up the type of home (single or multi-family) and acquisition date.
What are the prevailing wage requirements?
For any qualified residence, the taxpayer must ensure that any laborers and mechanics employed by the taxpayer or any contractors and/or subcontractors in the construction of the residence are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which the residence is located as most recently determined by the Secretary of Labor.
These provisions generally apply to dwelling units acquired after December 31, 2022.
New Clean Vehicle Credit
This credit was previously known as the New Qualified Plug-In Electric Drive Motor Vehicle Credit. It has been retitled the Clean Vehicle Credit. The Act introduces a $4,000 tax credit for the purchase of used electric vehicles (EVs) and updates the $7,500 credit for new vehicles with a major change: There are now caps on the price of new vehicles that qualify for that credit. The caps imposed are $55,000 for electric cars and $80,000 for SUVs and pickup trucks.
The legislation requires that, as of August 17, 2022, electric vehicles (EVs) undergo final assembly in North America in order to qualify for the new-vehicle incentive. The Act also provides manufacturing incentives to encourage onshoring of supply chains for critical minerals and batteries.
Starting January 1, 2023, consumers may be eligible for a tax credit for used or previously owned cars and businesses may qualify for a new commercial clean-vehicle credit. Buyers and dealers should check the vehicle identification number on an EV to determine whether it qualifies for the clean vehicle credit. The credit won’t be allowed for any tax year if the lesser of the modified adjusted gross income of the taxpayer for the current or preceding year exceeds: $300,000 for taxpayers filing joint returns or surviving spouses, $225,000 for heads of household, or $150,000 for other taxpayers.
A taxpayer who acquires a new clean vehicle can elect, on or before the purchase date, to transfer the clean vehicle credit to the dealer who sold the car in return for payment of the credit amount. Making the election cannot limit the use or value of any other dealer or manufacturer incentive to buy the car, nor can the availability or use of the incentive limit the ability of the taxpayer to make the election.
Transition rule. A taxpayer who, after December 31, 2021, and before the date of enactment of the Act, purchased or entered into a written binding contract to purchase, an EV and placed the EV in service on or after the date of enactment, may elect to treat the EV as being placed in service before the date of enactment of the Act.
Accelerated Cost Recovery for Green Building Property
Prior laws provided an accelerated cost recovery deduction (179D deduction) for energy efficient commercial building (EECB) property for the year placed in service. The Act lowers the minimum EECB efficiency standard required for deduction benefits from a 50% reduction in total annual energy and power costs to a 25% reduction.
The Act modifies the formula for calculating the maximum deduction and eliminates the allowance of partial deductions. Additionally, the Act updates the rules for determining what non-IRS standards/methods are incorporated for application to a taxpayer for any year and provides more detailed criteria for the allocation of the deduction when EECB property is installed on/in “tax- exempt” (replacing “government”) property.
The Act establishes an election for a new alternative deduction for energy efficient building retrofit (Retrofit) property which is taken in the year of qualifying final certification. The alternative deduction requires a qualified retrofit plan, and it looks to percentage reductions in energy use intensity rather than total annual energy and power costs. The alternative deduction cannot exceed the aggregate adjusted basis of Retrofit property placed in service pursuant to the plan.
These provisions, except for the alternative deduction for Retrofit property, apply to tax years beginning after December 31, 2022. The provisions of Code Sec. 179D for the alternative deduction apply to property placed in service after December 31, 2022, if such property is placed in service pursuant to qualified retrofit plan established after December 31, 2022.
Extension, Increase, and Modifications of Nonbusiness Energy Property Credit
Under the Act, taxpayers may take the credit for energy-efficient property placed in service before January 1, 2033. The Act increases the credit for a tax year to an amount equal to 30% of the sum of (a) the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during that year, and (b) the amount of the residential energy property expenditures paid or incurred by the taxpayer during that year. The credit is further increased for amounts spent for a home energy audit. The amount of the increase due to a home energy audit can’t exceed $150.
The Act substantially revises the definition of residential energy property expenditures, including the repeal of the requirement that the expenditures must be made with respect to the taxpayer’s principal residence.
The Act repeals the lifetime credit limitation, and instead limits the credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors). Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
What is a home energy audit?
An inspection and written report for a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer’s principal residence which (a) identifies the most significant and cost-effective energy efficiency improvements for a such dwelling unit, including an estimate of the energy and cost savings with respect to each such improvement, and (b) is conducted and prepared by a home energy auditor that meets the certification or other requirements specified by IRS.
The Act bars a credit with respect to any item of specified property placed in service after December 31, 2024, unless the item is produced by a qualified manufacturer, and the taxpayer includes the qualified product identification number of the item on the return of tax for the tax year.
These provisions generally apply to property placed in service after December 31, 2022.
We will continue to provide information on the tax and business implications of the Act as well as other new or changing tax legislation that may impact you and your business.
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The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.