Environmental issues are playing an ever-increasing role in decisions made by lawmakers and business leaders. Initiatives that might, at one time, have been centered on public relations are now critical to long-term success, as both investors and consumers make it clear that they expect the companies they support to take a proactive approach to sustainable growth.
The Inflation Reduction Act of 2022 includes numerous tax incentives for renewable energy, electric vehicles and clean energy investments. Many of these incentives are further enhanced for businesses that pay prevailing wages based on information published by the U.S. Department of Labor and that fulfill apprenticeship requirements.
In addition to expanded credits and incentives, the IRA also provides a Direct Pay election and a Credit Transfer provision, allowing eligible entities to monetize certain credits more effectively than under pre-IRA law.
While any business that engages or invests in clean energy can benefit from these incentives, they can be especially lucrative for the real estate and construction industries. Businesses that plan around these clean energy credits and incentives have significant opportunities to reduce their tax liability with these new provisions.
Considerations for Business Leaders
Investing in green energy can be a smart move — for the environment, your organization's ESG initiatives and the company's bottom line. Each incentive comes with unique requirements, limitations and deadlines, so it's essential to take care that you understand and meet the applicable requirements before making clean energy investments.
If you believe you might benefit from one of these tax incentives, connect with an experienced advisor. A trusted partner can help you evaluate whether one or more of these clean energy tax credits could be the right fit for you and estimate the potential tax benefit. It is also essential to ensure you are taking a defensible, well-documented stance in terms of these new credits.
Summary of Renewable Energy Tax Credits
Below is a summary of some of the tax incentives included in the Act and what business and financial leaders can do to take advantage of them. Many of these tax incentives are extensions or expansions of existing credits, while others are entirely new business credits.
Renewable Electricity Production Tax Credit (PTC)
The PTC provides a tax credit for the sale of each kilowatt hour (kWh) of electricity generated by certain types of renewable energy projects, including wind, closed-loop biomass, geothermal energy, open-loop biomass, landfill gas, trash, qualified hydropower, and marine and hydrokinetic energy projects. The credit amount is adjusted annually for inflation. For calendar year 2023, the credit amount is up to 2.8 cents per kWh for facilities placed in service before Jan. 1, 2022, or up to 2.75 cents per kWH for facilities placed in service after Dec. 31, 2021.
Investment Tax Credit (ITC): —Energy Credit
The ITC refers to several specific business credit components, including the rehabilitation credit, the energy credit, the qualifying advanced coal project credit, the qualifying gasification project credit, the qualifying advanced energy project credit, the advanced manufacturing investment credit and the clean electricity investment credit. Among these credit components, one that pertains to clean energy is the energy credit (sometimes called the energy investment credit). The energy credit provides up to a 30% tax credit for installing designated renewable energy generation equipment for business use, including solar energy, solar illumination, geothermal energy, geothermal heat pump equipment, qualified fuel cell, qualified small wind energy property, qualified microturbine property and other renewable energy technologies.
Business Credit for Commercial Clean Vehicles
Organizations that purchase qualified commercial clean vehicles may be eligible for a new tax credit, worth up to $7,500 for electric vehicles weighing less than 14,000 pounds, or up to $40,000 for vehicles weighing 14,000 pounds or greater. Mobile machinery and qualified commercial fuel cell vehicles are also eligible for this credit.
Clean Fuel Production Credit
This new business credit applies to clean fuel produced by a business at a qualifying facility after 2024 and sold before 2028 for a qualifying purpose. The credit per gallon base amount is $0.20 for non-aviation fuel and $0.35 for aviation fuel. When wage and apprenticeship requirements are met, higher amounts are available at $1.00 per gallon for non-aviation fuel and $1.75 per gallon for aviation fuel.
ITC — Clean Electricity Investment Credit (CEIC)
Another of the ITC components that pertains to clean energy is the CEIC. The new CEIC applies to emission-free electricity generation and storage facilities placed in service for business use after Dec. 31, 2024. The base credit rate is 6% of the qualified investment, which can increase to 30% for qualified facilities or energy storage technology if: (a) in the case of a qualified facility, the qualified facility has a maximum net output of less than one megawatt; (b) construction of the property begins before Jan. 29, 2023; or (c) the prevailing wage requirements are met, and apprenticeship requirements are met with respect to construction of the property.
Alternative Fuel Vehicle Refueling Property
Taxpayers who place qualified alternative fuel vehicle refueling property in service before Jan. 1, 2032, are eligible for this credit. It's based on 6% of the cost of qualifying property (30% if prevailing wages and registered apprenticeship requirements are met), with the credit limit set at $100,000 per item of depreciable (business use) refueling property and $1,000 per item of non-depreciable refueling property. Qualifying property includes refueling equipment for alternative fuels (e.g., ethanol, natural gas, etc.) or bidirectional charging equipment, and can be claimed for electric charging stations for two- and three-wheeled vehicles intended for use on public roads. Starting in 2023, charging or refueling property will only be eligible if placed in service within a low-income or rural census tract.
New Energy Efficient Home Credit
This credit is available to eligible contractors who build qualified new energy-efficient homes sold before Jan. 1, 2033. Contractors must obtain a certification from a third party to verify the energy efficiency requirements in order to claim the credit. For homes acquired after 2021, a $2,500 credit is available for new homes (including single-family and manufactured homes) that meet specific Energy Star efficiency standards, and a $5,000 credit is available for new homes certified as zero-energy-ready homes. Multifamily dwellings up to three stories that meet certain Energy Star efficiency standards are eligible for a $500 credit per unit, with a $1,000 per unit credit available for eligible zero-energy-ready multifamily dwellings. The credits for multifamily dwelling units will be increased to $2,500 and $5,000, respectively, if the taxpayer ensures that the laborers and mechanics employed in the construction process satisfy prevailing wage requirements.
Commercial Buildings Energy-Efficiency Tax Deduction
This tax deduction, known as 179D, incentivizes commercial property owners and designers to create and construct or renovate energy-efficient commercial buildings. Eligible improvements include those to the HVAC, hot water systems, interior building lighting and the building envelope. The maximum tax deduction is $5.36 per square foot for 2023, and $5.65 per square foot for 2024. Taxpayers are eligible for the deduction once every three years per qualifying structure.
Direct Pay Election
The Direct Pay Election allows eligible entities to receive certain tax credits as direct payments from the IRS, essentially as refundable credits. This is particularly beneficial for entities with no or limited income tax liability. Eligibility for the Direct Pay Election varies by credit and is often available only to tax-exempt organizations or state and local governments. Credits subject to the Direct Pay Election include the PTC, the ITC-Energy Credit, the Clean Fuel Production Credit, the ITC-CEIC, the Alternative Fuel Vehicle Refueling Property Credit and several others.
Credit Transfer
The Credit Transfer Election allows eligible entities (generally, taxable entities only) to transfer certain tax credits to other taxpayers. This election enables such entities that may not be able to fully utilize a tax credit, perhaps due to insufficient tax liability, to sell the credit to another entity that can use it. Both the seller (the original credit recipient) and the buyer (the entity to which the credit is transferred) can benefit. The seller can monetize its tax credits, while the buyer can use the purchased credits to reduce their tax liability. Credits subject to the Credit Transfer Election include the PTC, the ITC Energy Credit, the Commercial Clean Vehicle Credit, the Clean Fuel Production Credit, the ITC-CEIC, the Alternative Fuel Vehicle Refueling Property Credit and several others.
Next Steps
If you’d like to learn more or to talk with someone about clean-energy tax incentives for your business, connect with a CBIZ professional.
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