The Inflation Reduction Act (IRA) of 2022 extends and significantly expands key tax credits and incentives for projects that invest in clean energy and efficiency improvements. Most of these changes apply beginning in 2023.
The benefits come with strings attached. To maximize credits, projects must meet domestic based production and prevailing wage and apprenticeship requirements. Additional credits are also given to projects in low-income or energy communities.
Below is a summary of key changes as it relates to “green” initiatives to keep on your radar in the upcoming year.
Direct Pay: entities will now be able to make an election to receive a cash payment for the credit. This allows tax-exempt entities to participate in the project benefits. There are 12 credits (credits in bold) under the IRA that may elect direct pay.
Credit Transferability: ability to directly transfer or sell credits to unrelated third parties.
Wind, Solar, Geothermal, Hydropower Projects – material changes to the PTC and ITC
- Production Tax Credit (PTC) (45A): is a cents per kWH credit available for electricity produced at qualified facilities, including re-instating solar facilities.
- Investment Tax Credit (ITC) (48): The IRA expands the ITC to include a broader technology investment project base. The ITC has a base credit rate of 6% and bonus credit rate of up to 30% (5 times base credit) for projects that meet the prevailing wage and apprenticeship guidelines.
Both credits have a 10% bonus (up to 20% in some cases) if they meet “domestic content” requirements: the project component costs are 40% attributable to US manufacture or production, or if the project is located in low-income or energy communities.
New or Extended Credits
- Carbon Oxide Sequestration Credit(45Q)
- Zero-Emission Nuclear Power Production Credit (45U)
- Production of Clean Hydrogen Credit (45V)
- Alternative Vehicle Refueling Property Credit (30C)
- Advanced Energy Project Credit (48C)
- Advanced Manufacturing Production Credit (45X)
- Clean Electricity Production Credit (45Y)
- Clean Electricity Investment Credit (48E)
- Clean Fuel Production Credit (45Z)
- Biodiesel, Renewable Diesel and Alternative Diesel; Second Generation Biofuel; Sustainable Aviation Fuel Credit (40, 40A, 40B)
- Bonus Depreciation for Facilities, Qualified Property and Energy Storage Technology
Small Business/Residential Credits
- Residential Clean Energy Credit (25D): extends and increases the credit for residential energy efficiency property used for eligible technology (such as solar, geothermal, small wind) to 30% and adds a new credit for battery storage technology expenditures.
- Energy Efficient Home Credit (45L): reinstates and increases the credit for contractors that construct residential homes that meet certain energy saving criteria.
- Nonbusiness Energy Property Tax Credit (25C): extends and expands the credit for nonbusiness energy property costs to 30%, capped at $1,200 depending on property and prevailing wage paid.
- Clean Vehicle Credit (30D): amends the tax credit for plug in EVs to apply to new clean vehicles. The maximum credit is $7,500, if all applicable criteria is met. There is a limitation based on taxpayer AGI (MFJ $300,000, S $150,000) and vehicle cost ($55,000 cars, $80,000 trucks and SUVs).
- Previously Owned Clean Vehicles (25E): creates a new credit for the lessor of $4,000 or 30% of sale price for used EVs and fuel cell vehicles. Limited by taxpayer AGI (MFJ $150,000, S $75,000) and vehicle cost ($25,000).
- Purchase of Qualified Commercial Vehicles Credit (45W): new credit for the lessor of 15% of the vehicle’s cost, or the incremental cost of a similar gasoline or diesel-powered vehicle. Maximum credit is $7,500 for vehicles with a GVW < 14,000 or $40,000 for heavier vehicles.
Efficient Commercial Buildings Deduction (179D): increased deduction amount for an expanded qualified project base with previously in-place limitation reductions.
The Inflation Reduction Act is a long-term plan that lowers energy cost, increases cleaner production, and reduces carbon emissions by an estimated 40% by 2030. The IRS is currently in the process of developing a framework for implementation of these credits and incentives.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.