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Clean Energy Tax Credits in the Inflation Reduction Act

Dec 7, 2022

The Inflation Reduction Act allocates over $300 billion to expand and extend existing energy-related tax credits and introduces several new tax credits related to clean electricity, fuel, manufacturing, and vehicles. Here are some of the key clean energy-related tax credits in the Act.

Clean Vehicle Tax Credit

Previously named the "plug-in electric vehicle credit," the Clean Vehicle Credit applies to any clean vehicle, including hydrogen and fuel-cell vehicles, and is extended through 2032. The 200,000-vehicle cap for manufacturers has also been lifted, and tax credits are available for both new and used energy-efficient vehicles.

New Electric Vehicle Tax Credit

Individuals who purchase new energy-efficient vehicles like plug-in hybrids, electric cars, and hydrogen fuel cell vehicles are eligible for a tax credit worth up to $7,500.

Some limitations apply to the consumers and vehicles, including:

  • Married couples with modified gross income exceeding $300,000 (or $150,000 for individual filers) do not qualify for the new vehicle credit.
  • Individuals do not qualify for the tax credit if their SUV, pickup truck, or van costs more than $80,000. The limit for other vehicles is $55,000.
  • Limitations apply in regard to where the vehicle was manufactured and where the vehicle's components were sourced. The goal is to accelerate the manufacturing of clean vehicles and the development of domestic supply chains in the U.S. This will likely limit the tax break's availability right now as automotive companies adjust their operations.

Used Electric Vehicle Tax Credit

Buyers of used clean energy vehicles may qualify for a tax credit of $4,000 or 30% of the vehicle's sale price, whichever is less.

Limits on the used vehicle tax credit include:

  • Married couples with modified adjusted gross income exceeding $150,000 ($75,000 for individual filers) do not qualify for the credit.
  • The vehicle sale price cannot exceed $25,000, and the car model must be at least two years old.
  • Buyers only qualify for the credit if it is the first sale of the used vehicle and may only claim the credit once every three years.

Residential Clean Energy Tax Credits

Solar Panels and Wind Energy

Homeowners may receive a tax credit toward the installation cost of equipment to harness renewable energy such as solar, geothermal, wind, and biomass fuel. Costs of installing energy-efficient equipment incurred from the beginning of 2022 through the end of 2032 will qualify for a 30% tax break. The credit is also expanded to include battery storage technology, applying to battery expenditures made beginning in 2023.

Home Efficiency Projects

The Inflation Reduction Act offers a 30% tax credit toward the cost of installing energy-efficient exterior doors, windows, water heaters, skylights, and other items. Installations must meet specific efficiency criteria to be eligible for the credit, which varies by item.

There are annual caps for specific items, such as $500 for doors. In addition, consumers may get up to $2,000 per year for installing certain electric or natural gas water heaters, electric or natural gas heat pumps, and biomass boilers or stoves.

Home Energy Rebates

The Inflation Reduction Act established two energy rebate programs to be administered by state energy offices using parameters set by the U.S. Department of Energy. The grants are worth $8.8 billion in total, and the benefits for consumers will vary based on their energy savings and income level.

HOMES rebate program: Homeowners who cut their home energy consumption using efficiency retrofits such as insulation and HVAC installations are eligible for 50% of the cost of the projects (up to a certain dollar amount).

Consumers who cut their energy consumption by 20% are eligible for a maximum rebate of $2,000 or half the retrofit cost (whichever is less). The threshold rises to $4,000 for consumers who cut their energy use by at least 35%. The rebates for lower-income individuals (those whose income is 80% or less of an area's median income) are double: up to $4,000 and $8,000.

High-efficiency electric home rebate program: The high-efficiency electric home rebate program offers up to $14,000 in rebates for consumers who purchase energy-efficient electric appliances and non-appliance upgrades.

Households with income below 80% of the area median may claim a rebate for the full cost of their upgrades (up to $14,000). Those that fall between 80% to 150% of the area median income may be eligible for rebates of 50% of their costs (up to $14,000). Households earning over 150% of an area's median income do not qualify for the rebates.

Note: Consumers may not claim a high-efficiency and HOMES rebate for the same project, but they may be able to get a tax credit and rebate for the same project.

IRC Sec. 179D Deduction

The IRC Sec. 179D deduction allows taxpayers to claim a deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings. The Act increases the IRC Sec. 179D tax deduction from $1.88 per square foot for 2022 to $5 per square foot.

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Donald N. Hoffman

Donald Hoffman is Partner-in-Charge of the firm's Maryland office. His expertise includes accounting, tax planning, business consulting, strategic planning, business succession, buy/sell agreements, and estate planning.

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