Inflation Reduction Act of 2022 Part 2

Series - Part 2 of 3

The recently enacted Inflation Reduction Act of 2022 (IRA) contains several new environment-related tax credits that may be of interest to individuals and small businesses. The IRA also extends and modifies some preexisting credits. This is the second installment of a three-part series on the IRA’s tax credits. The first installment was a summary of the key provisions in the IRA. The third part will provide more details on the clean vehicle tax credits which replace the electric vehicle tax credit.

The new and expanded energy related tax credits are generally effective after 2022 and can result in a much higher tax credit for a qualified purchase next year compared to this year. The White House has created a new webpage www.cleanenergy.gov that illustrates some of the increased tax credits next year.

Extension, Increase, and Modifications of Nonbusiness Energy Property Credit

Before the enactment of the IRA, you were allowed a personal credit for specified nonbusiness energy property expenditures. The credit applied only to property placed in service before January 1, 2022. Now you may take the credit for energy-efficient property placed in service before January 1, 2033.

Increased credit. The IRA increases the 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. The credit is further increased for amounts spent for a home energy audit. The amount of the increase due to a home energy audit can't exceed $150.

Annual limitation in lieu of lifetime limitation. The IRA also repeals the lifetime credit limitation, and instead limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door ($500 total for all exterior doors). Notwithstanding these limitations, 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.

Extension and Modification of Residential Clean-Energy Credit

Before the enactment of the IRA, 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.

Prior to IRA changes, the credit was 26% of the cost to install qualifying systems in your home. The credit amount was scheduled to decrease to 23% in 2023 and then expire in 2024. Under the IRA, the credit amount increases to 30% from 2022 to 2032. It then decreases to 26% for 2033 and 22% for 2034. The credit will then expire after 2034.

The IRA also makes the credit available for qualified battery storage technology expenditures.

Extension, Increase, and Modifications of New Energy Efficient Home Credit

Before the enactment of the IRA a New Energy Efficient Home Credit (NEEHC) was available to eligible contractors for qualified new energy efficient homes acquired by a homeowner before Jan. 1, 2022. A home had to satisfy specified energy saving requirements to qualify for the credit. The credit was either $1,000 or $2,000, depending on which energy efficiency requirements the home satisfied.

The IRA makes the credit available for qualified new energy efficient homes acquired before January 1, 2033. The amount of the credit is 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.

Product identification number requirement

The IRA prohibits a credit with respect to any item of specified energy efficient home improvement property placed in service after December 31, 2024, unless:

(A) such item is produced by a qualified manufacturer, and

(B) the taxpayer includes the qualified product identification number of such item on the tax return for the taxable year.

New Clean-Vehicle Credit

Before the enactment of the IRA, a credit could be claimed for each new qualified plug-in electric drive motor vehicle (NQPEDMV) placed in service during the tax year. The IRA, among other things, retitles the NQPEDMV credit as the Clean Vehicle Credit and eliminates the limitation on the number of vehicles eligible for the credit. However, final assembly of the vehicle must take place in North America.

No 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 calculation of the credit is changing. The rules are complicated, but there is 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 credit is allowed if the lesser of 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 Credit for Qualified Commercial Clean Vehicles

There is a new qualified commercial clean-vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The 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.

Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities

Under pre-Inflation Reduction Act law, a "qualified small business" (QSB) with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer's share of Social Security tax. Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit, for tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can't exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.

Extension of Incentives for Biodiesel, Renewable Diesel, and Alternative Fuels

Under pre-IRA law, a credit could be claimed for sales and use of biodiesel and renewable diesel used in a trade or business or sold at retail and placed in the fuel tank of the buyer for such use and sales on or before December 31, 2022. Now, a credit is permitted for sales and use of biodiesel and renewable diesel fuel, biodiesel fuel mixtures, alternative fuel, and alternative fuel mixtures on or before December 31, 2024.

You're also now allowed to claim a refund of excise tax for use of 1) biodiesel fuel mixtures for a purpose other than for which they were sold or for resale of such mixtures on or before December 31, 2024, and 2) alternative fuel as that used in a motor vehicle or motorboat or as aviation fuel, for a purpose other than for which they were sold or for resale of such alternative fuel mixtures on or before December 31, 2024.