Individuals and businesses often make energy-efficient choices and investments, whether to reduce their carbon footprint, save on their energy bills, cut fuel costs, take advantage of tax benefits, or all of the above. However, the up-front costs can be significant, which means large investments like a residential solar system or an electric vehicle are generally preceded by a strategic plan.
Before making the leap, you may need to perform a cost/benefit analysis, assess the potential return on investment, or make arrangements to save or obtain the necessary capital. And if you’re planning to make, or have already made, certain residential or commercial energy-efficient investments this year, you may be able to factor new and enhanced tax credits into your investment strategy.
The Inflation Reduction Act (the Act) included provisions to enhance the tax credits available for a residential energy-efficient property, such as solar tracking systems, solar panel power walls, and fixed solar panels. The Act also expanded the tax credit available for new electric vehicle purchases and expanded eligibility to include certain used electric vehicle purchases. The legislation also includes a credit that eligible individuals and businesses can claim against the cost of installing qualifying electric vehicle charging stations.
The Investment Tax Credit
The Act extended the Investment Tax Credit (ITC) to include qualified renewable energy property placed in service from January 1, 2022, through December 31, 2034. In addition to solar energy generation property, the ITC extension also applies to qualifying fuel cell, waste energy recovery, and geothermal property, as well as standalone energy storage technology. So taxpayers could benefit from a tax credit of up to 30% of the installation costs for energy-efficient home improvements running the gamut from solar panels, solar batteries, and heat pumps to electric vehicle charging stations.
Commercial projects may also be eligible for the ITC; however, they must meet strict labor, apprenticeship, project size, prevailing wage, and specific census tract requirements based on the location.
The Residential Solar Tax Credit
The Act increased the residential solar tax credit to 30% of the total installation cost of a residential solar photovoltaic (PV) system placed in service from January 1, 2022, through December 31, 2032. For homeowners, energy.gov estimates the credit could cut the installation cost for an average rooftop solar system by more than $7,500.
For systems installed in 2020 and 2021, the eligible tax credit remains at 26%, and the credit will drop back to 26% in 2033. In 2034, the credit will reduce to 22%; unless Congress renews it, the tax credit will expire in 2035.
The Nonbusiness Energy Property Tax Credit
Historically, individuals could take a tax credit, subject to a lifetime credit limit, of up to 10% of the amount paid to install nonbusiness energy property, such as energy-efficient doors or windows, placed in service before 2022. However, the Act increased the credit amount to up to 30% of the amount paid for qualifying property placed in service before January 1, 2033, and it limits the credit per taxpayer per year instead of by lifetime.
The Clean Vehicle Credit
The Clean Vehicle Credit is an enhanced version of the Electric Vehicle Credit. Eligible individuals may still claim a tax credit of up to $7,500 to purchase a qualifying new electric vehicle. Business owners may also be eligible for a tax credit of up to $7,500 for new commercial clean vehicles placed in service after 2022. In addition, starting January 1, 2023, individuals who purchase used electric vehicles may be eligible for a tax credit. Depending on their income, it could be up to $4,000 or 30% of the sales price, whichever is less.
The Act changed a number of credit qualifications and vehicle manufacturing requirements. For example, starting on August 17, 2022, the electric vehicle must receive final assembly in North America to qualify for the credit. In addition, the Act eliminated the manufacturer limitation for cars sold after December 31, 2022.
Beginning January 1, 2023, the manufacturer’s suggested retail price for vans, SUVs, and pickup trucks cannot exceed $80,000. For all other cars, the manufacturer’s suggested retail price cannot exceed $50,000.
For new electric vehicle purchases, the individual’s modified adjusted gross income cannot exceed $150,000 ($300,000 if married filing jointly, $225,000 if filing as head of household). For used electric vehicle purchases, the individual’s modified adjusted gross income cannot exceed $75,000 (150,000 if married filing jointly, $112,500 if filing as head of household).
The Alternative Fuel Vehicle Refueling Property Credit
The Act extends the credit for electric vehicle charging stations from those put into service prior to January 1, 2022, to those put into service before January 1, 2033. For residential installations, qualifying individuals may receive a tax credit of up to 30% of the cost, excluding permitting and inspection fees, up to $1,000.
For businesses, beginning January 1, 2023, electric vehicle charging stations installed through December 31, 2032, may be eligible for a credit of 30% of the cost or 6% in the case of property subject to depreciation (not to exceed $100,000). However, eligibility depends on the project’s ability to meet specific apprenticeship, prevailing wage, and census tract requirements.
The attorneys at Sassoon Cymrot Law, LLC advise clients on a range of individual and business tax issues. We help our clients create strategies to minimize their tax liability and maximize the tax credits and other tax benefits available to them. To learn more about how we can support your larger financial goals, contact us today.
