The recently enacted Inflation Reduction Act of 2022 (the “Act”) contains a wide range of new climate and energy-related tax incentives that are of interest to individuals and small businesses. The Act also extends and modifies some pre-existing tax credits. Here’s an overview of some of the provisions that could provide tax relief.
Nonbusiness Energy Property Tax Credit
Extension: The personal tax credit for specified nonbusiness energy property expenditures was scheduled to expire in 2022. Now, you may take the credit for energy-efficient property placed in service before January 1, 2033.
Increase: The Act increases the tax credit for a tax year to an amount equal to 30% of the sum of (a) the amount paid or incurred by you for qualified energy efficiency improvements installed during that year, and (b) the amount of the residential energy property expenditures paid or incurred by you during that year.
Annual limitation in lieu of lifetime limitation: The Act repeals the lifetime tax credit limitation and instead, limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for tax credits with respect to residential energy property expenditures, windows and skylights, and to $250 for any exterior door ($500 total for all exterior doors). 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.
Residential Clean Energy Tax Credit
Before the Act, you were allowed a personal tax credit, known as the Residential Energy Efficient Property (REEP) credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump and biomass fuel property installed in homes in years before 2024.
The Act now makes the tax credit available for qualifying products on property, installed in years before 2035. The Act also makes the credit available for qualified battery storage technology expenditures.
New Energy Efficient Home Credit
Before the Act, a New Energy Efficient Home Credit (NEEHC) was available to eligible contractors for qualified new energy-efficient homes acquired by a homeowner before January 1, 2022. A home had to satisfy specified energy-saving requirements to qualify for the tax credit. The credit was either $1,000 or $2,000, depending on which energy efficiency requirements the home satisfied.
The Act makes the credit available for qualified new energy-efficient homes acquired before January 1, 2033. The amount of the tax credit has increased and can be $500, $1,000, $2,500 or $5,000, depending on which energy efficiency requirements the home satisfies and whether the construction of the home meets prevailing wage requirements.
New Clean Vehicle Tax Credit
Before the enactment of the Act, you could claim a tax credit for each new qualified plug-in electric drive motor vehicle (NQPEDMV) placed in service during the tax year.
The Act, among other things, retitles the NQPEDMV tax credit as the Clean Vehicle Tax Credit and eliminates the limitation on the number of vehicles eligible for the credit. Also, the final assembly of the vehicle must take place in North America.
No tax credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $300,000 for a joint return or surviving spouse, $225,000 for a head of household or $150,000 for others. In addition, no credit is allowed if the manufacturer's suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans or SUVs).
Finally, the way the tax credit is calculated is changing. The rules are complicated, but they place more emphasis on where the battery components (and critical minerals used in the battery) are sourced.
Credit for Previously Owned Clean Vehicles
A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle's sale price. No tax credit is allowed if your modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household or $75,000 for others. In addition, the maximum price per vehicle is $25,000.
New Tax Credit for Qualified Commercial Clean Vehicles
There is a new qualified commercial clean vehicle tax credit for qualified vehicles acquired and placed in service after December 31, 2022.
The tax credit per vehicle is the lesser of: (1) 15% of the vehicle's basis (30% for vehicles not powered by a gasoline or diesel engine) or (2) the "incremental cost" of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles.
Much More to Come
The Act is a sweeping piece of legislation that affects many sectors of U.S. business, as well as most citizens. Additional information, guidance and regulations related to its numerous, far-reaching provisions are inevitable. Anyone seeking further updates and additional information regarding the Inflation Reduction Act should contact Dannible & McKee, LLP.
