President Biden passed the Inflation Reduction Act of 2022 (“the Act”) and, as part of it, introduced, expanded, or renewed many green energy incentives. This article will discuss a few of the Act’s features that we feel will be of most interest to our clients and business partners.

New and enhanced Electric Vehicle (EV) credits are a key component of the Act and potentially also the most time sensitive with provisions that go into effect immediately.  While an Electric Vehicle tax credit equaling $7,500 has existed for many years, its availability has been limited in recent years due to a restriction that prevented credit eligibility once a manufacturer sold 200,000 electric vehicles.  

Changes to Restrictions

Effective in 2023, that manufacturer’s sales cap has been removed thus creating opportunity for many taxpayers to claim the credit, at least those with modified adjusted gross income of $150,000 (if filing single or married filing separate), $225,000 (if filing as head of household) or $300,000 (if filing jointly). Taxpayers that have interest in purchasing an EV but with income in excess of those thresholds have until the end of 2022 to purchase a vehicle without being subject to these limitations. Worth noting, however, is that a company purchasing an EV with a valid business purpose would not be subject to these income thresholds. Otherwise, the rules are very similar. 

North America Assembly Requirements – Effective immediately

The US Department of Energy provided a list of vehicles that may potentially be eligible for the credit. This list is also helpful in understanding whether a vehicle’s final assembly occurred within North America as that is a new requirement for claiming the credit that is effective immediately. As a note of caution, having a presence on this list does not guarantee a particular vehicle was assembled in North America as most vehicle manufacturers have offshore factories in addition to those in North America. To ensure eligibility, the Department of Treasury and Department of Energy recommends running the Vehicle Identification Number through the United States Department of Transportation’s VIN Decoder.

Additional Upcoming Restrictions

In 2023, there will be a few additional restrictions going into place:

• Maximum MSRP: Credit will not be available for any truck, SUV, or van with an MSRP of greater than $80,000 or any regular car with an MSRP greater than $55,000. 

• Critical Mineral and Battery Component Requirement: a certain percentage of the minerals in the EV battery and a certain percentage of the battery components must be manufactured in North America or a country with which the US has a free trade agreement.

Automotive research leaders expect that it will be near impossible for a Taxpayer to receive the full credit when these battery requirements take effect in 2023.

New Clean Vehicle Credits

Additionally, in 2023, there will be:

• Up to $4,000 EV Credit on pre-owned vehicles that cost no more than $25,000. These will not be subject to the North America production requirement. Restrictions that do exist, however:

• Model year must be at least two years earlier than calendar year 

• Tighter MAGI limitations apply ($150,000 MFJ, $75,000 single or MFS, $125,000 HoH)

• Energy Efficient Commercial Vehicles weighing over 14,000 pounds could be eligible for a credit up to $40,000.

The green incentives were not all geared to vehicles. Several extensions and enhancements to real estate credits will be going into effect.   

Commercial & Residential Credits for Solar and Other Renewable Sources

The 30% tax credit for adding solar panels, wind turbines or another renewable sources that has been available in recent years has been extended out through 2032 at the full 30% rate before phasing down in 2033 and 2034. It’s available on both commercial and residential properties including vacation homes, which is new.

Residential Energy Efficient Improvement Tax Credit

The Residential Energy Efficient Improvement tax credit that many taxpayers have taken advantage of in the past is getting significantly revamped in 2023. The $500 lifetime limitation that many taxpayers fully utilized long ago has been removed and replaced with an annual $1,200 credit. The credit is equal to 30% of the cost of the property and is subject to certain subcategory restrictions such as $500 for doors, $600 for windows, $600 for energy equipment, and $150 for home energy audits. Heat pumps and biomass stoves are a separate category of energy efficient improvements subject to a $2,000 limit.

Section 45L Energy Efficient Home Builders Credit

Many residential developers are familiar with the IRC section 45L New Energy Efficient Home Credit that has provided savings up to $2,000 per dwelling unit for energy efficiency in both single family and multi-family homes. Originally set to expire at the end of 2021, the credit has been extended through 2022 in its same form and then enhanced beginning in 2023 such that the per unit credit could be $2,500 or $5,000 depending on the level of efficiency. 

Multifamily dwelling units could be eligible for a credit ranging from $500 to $5,000 depending upon energy efficiency savings and whether prevailing wage requirements are met.

Section 179D Energy Efficient Commercial Building Deduction

The Energy Efficient Commercial Buildings Deduction has also seen a myriad of changes, some favorable, some not. While the baseline energy savings target has been reduced from 50% to 25% in order to potentially receive the deduction, so too has the base amount per square foot - from $1.88 to $.50 per square foot. The amount per square foot would increase in $.02 increments to a maximum of $1.00 per square foot for each percentage point increase between 25% and 50%. 

If the building owner or designer meets a prevailing wage requirement and an apprenticeship requirement, the deduction could increase all the way to $5 per square foot if there is 50% energy savings ($2.50 with 25% energy savings).

There are additional changes to the standard against which energy efficiency is measured, the lookback period, and the ability for all tax-exempt entities, not just government entities, to allocate credits to the building designer.

Energy efficient incentives were not the only tax provisions from the Act.  

Research Credit for Small Businesses

Since 2015, certain qualified small businesses that do not generate an income tax liability sufficient to utilize R&D credits to which they have been entitled have instead been able to offset up to $250,000 of payroll taxes with the credits. That $250,000 of payroll taxes is now increasing to $500,000 of payroll tax credits that may be offset.

Passthrough Loss Limitations

One of the revenue raisers within this bill was the two-year extension of the excess business loss limitation through 2028. Effectively it limits the amount of loss that owners of partnerships or S-Corporations can deduct in a given year. Hopefully, business will remain strong and clients won’t find themselves in a position where this provision even matters.

There were several additional tax provisions, both energy-related and not, beyond those listed here. For information on those topics or if you have questions on anything contained within this summary, please feel free to reach out to the partner on your account.