In August 2022, the Inflation Reduction Act (IRA) was signed into law. This Act incorporates several provisions related to energy tax credits that modify and extend the benefits. Below is a summary of some of the most significant changes included in the IRA. If you have any questions on qualifications or impact to your specific tax situation, please reach out to us.
Vehicle Related Tax Credits
There is a credit for clean vehicles, including electric vehicles, plug-in hybrids, and hydrogen fuel cell vehicles. The maximum credit for a new vehicle is $7,500, subject to vehicle cost ($80,000 for SUVs, vans and pick-up trucks, or $55,000 for all other vehicles) and income limitations ($150,000 modified adjusted gross income (AGI) for single taxpayers and $300,000 modified AGI for married filing joint taxpayers).
Under prior law, there was a manufacturer limit that caused Tesla and GM vehicles to not qualify for the credit in recent years. Starting in 2023, that manufacturer limit has been removed, with other limitations in place related to the sourcing of minerals included in the vehicle as well as final assembly requirements. These are requirements that the dealer/manufacturer will need to monitor to inform consumers as to the vehicles that will qualify for the tax credit. It is possible for the taxpayer to transfer the credit to the dealer to reduce the original purchase price of the vehicle.
In addition, there is a previously owned clean vehicle tax credit, requiring similar material sourcing/assembly requirements, with a maximum credit of $4,000 starting in 2023. These purchases will need to be made directly from the dealership (third-party sales will not qualify). For previously owned clean vehicles the purchase price must be less than $25,000 and the vehicle must be at least two years old.
There is also a new commercial electric vehicle tax credit for business vehicles below 14,000 lbs. with a battery capacity of at least seven kilowatt-hours and vehicles above 14,000 lbs. with a battery capacity of at least fifteen kilowatts. The tax credit amount is equal to the lesser of 1) 15% of the vehicle purchase price for plug in vehicles, 2) 30% of the vehicle purchase price for electric vehicles and fuel cell electric vehicles 3) the incremental cost of the vehicle compared to an equivalent internal combustion engine vehicle. The credit cannot exceed $7,500 for vehicles under 14,000 lbs. and $40,000, per vehicle, for vehicles above 14,000 lbs. This credit is available beginning on January 1, 2023.
Finally, with regards to charging stations, there is a tax credit available up to $100,000 for a business entity, or $1,000 for an individual that purchases and installs a charging station.
These credits are available through 2032.
Residential Building Energy Tax Credits
Credit for Residential Clean Energy (Section 25D) – This is an energy tax credit available for residential properties that relates to upgrades for solar, wind, geothermal, and biomass fuel. This credit is available for projects started before the end of 2032, as a 30% credit, and then phases down to a 26% credit for projects started in 2033, and then a 22% credit for projects started in 2034.
Credit for Energy Efficiency Home Improvement (Section 25C) – The prior residential energy tax credit had a lifetime maximum credit of $500 per taxpayer. The lifetime maximum has been removed, and now there is an annual maximum credit of $1,200 per taxpayer. This provision expires after 2032.
High Efficiency Electric Home Rebate Program – This program has income limitations for qualification, but can provide a rebate up to $14,000 per household for improvements to heat pumps, water heaters, electric stoves, electric panels & wiring, and home insulation/sealant. The income limitations are based on your location and you can qualify for 100% of the benefit if your annual income is less than 80% of the area median income, or 50% of the benefit if your annual income is between 81% and 150% of the area median income. As an example, as of December 2022 the area median income for Rockville, MD is $140,500.
Energy Efficient Home Credit (Section 45L) – The 45L credit is a residential home credit available for a homebuilder. The 45L credit was previously a $2,000 credit per dwelling unit; however, contingent upon prevailing wage stipulations, will now be a $5,000 credit per dwelling unit. This credit is available through the end of 2032.
Commercial Building Energy Tax Credits
Energy Investment Tax Credit (Section 48) & New Clean Electricity Investment Tax Credit (Section 48E) – These are energy tax credits available for commercial properties that relate to various upgrades including solar, wind, geothermal, and fuel cell property. These credits will phase out the later of 2032 or when emission targets are achieved.
Commercial Buildings Energy Efficiency Tax Deduction (Section 179D) – The 179D deduction has historically been a credit for commercial buildings under 3 stories that meet certain energy efficiency levels. The prior maximum deduction had been $1.88 per square foot, but under the IRA the maximum deduction is now $5 per square foot (subject to requirements for prevailing wages in order to maximize the deduction). Generally, the building owner will qualify for and claim this deduction, however, in the case of governmental or tax-exempt entities that don’t benefit from the deduction, it is possible for the designer of the building to request that the tax-exempt entity assign the deduction to the designer to use in the year the property is placed into service.
In closing, these are some of the adjustments to the more common energy credits that were changed by the Inflation Reduction Act – but it is important to remember that most of these credits have additional rules for qualification and the process to claim the credit. Please consult with your us as you start investigating different options so we can assist you as you explore future purchases that may have energy credit incentives available.
Our tax specialists are available for these topics as well as others. Please contact our team or Sean Smetana at 240.364.2703 for more information.