The Inflation Reduction Act of 2022 (The Act) includes numerous provisions relating to the climate and energy sector. Generally, The Act incentivizes more environmentally conscious behavior by providing credits or grants to help defer the cost of making green energy improvements.
The provisions also discourage decisions that are less environmentally sound through the renewal or increase of various excise and superfund taxes. Here are a few ways The Act will impact businesses or homeowners when it comes to carbon emission reductions.
Businesses and Carbon Emission Reductions
The provision of The Act that most directly speaks to carbon emission reduction is the extension and modification of the Credit for Carbon Sequestration. In essence, this credit is available to qualified facilities that have installed carbon capture equipment based on the tonnage captured. While this credit has been around since 2018, the length of time these credits are available, and the rate of payment, have both increased. There are significant hurdles to clear to be eligible for this credit, but it can mean substantial credits for those facilities that capture the maximum 75 million metric tons.
Electricity-generating facilities must capture a minimum of 18,750 metric tons of qualified carbon oxides to be eligible, but those that do are eligible for $36 per ton captured—or $675,000 per year at minimum. These amounts can be increased for any qualifying facility that satisfies the new prevailing wage and apprenticeship requirements.
Other, more accessible credits include those for solar and wind facilities in certain low-income communities, and the expanded and extended provisions of the energy credit. The energy credit has historically included solar, geothermal, fuel cell, microturbine, co-generation (heat and electricity), small wind, and waste energy recovery technologies, but now adds energy storage technology, biogas properties, and microgrid controllers.
There is also a substantial increase in the benefit that may be achieved through targeted accelerated cost recovery provisions. These are available to business taxpayers who make improvements to the energy efficiency of the building envelope, HVAC systems, and interior lighting systems of property they own. The old credit was based on a square footage model, capped at $1.88 per square foot (after inflationary adjustment), but The Act introduces a new calculation methodology that evaluates the percentage of improvement; and with maximum improvements coupled with meeting the prevailing wage and apprenticeship requirements, that credit can grow up to $5 per square foot.
Homeowners and Carbon Emission Reductions
There are several extended, modified, and increased credit opportunities for individuals.
Some of these are available to homeowners who make qualified energy-efficiency improvements. They also expand the scope of residential energy property expenditures to include residents that are not the primary residents and do away with the lifetime limitation in favor of an annual limitation calculated on a per-taxpayer, per-year basis. This figure varies depending on which type of property has been purchased.
The Act has also expanded and extended the credit available to individuals for residential energy efficient property (REEP), which historically included solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass property. Now, it also includes battery storage technology expenditures.
Taxpayers can also benefit from the New Energy Efficient Home Credit, which is a tiered credit based on the level of energy savings achieved—up to $5,000. There is also the renamed Clean Vehicle Credit, which offers taxpayers up to $7,500 for any new electric vehicle, the final assembly of which occurred in North America and that meets the critical minerals and battery component criteria. There is also a new credit up to $4,000 for used vehicles. Learn more about tax credits for EVs in a previous PYA Insight.
Changes relating to climate and energy may have a lasting impact on your home or business. Our tax professionals are ready to help you explore strategic areas of opportunity found in The Act.
If you would like to speak with a PYA tax professional about any aspect of the Inflation Reduction Act of 2022 or need guidance related to this or any business advisory or tax planning and strategy matter, one of our executive contacts would be happy to assist. You may email them below, or call (800) 270-9629.
To learn about possible tax implications regarding the Inflation Reduction Act, join our webinar on the topic.
For more information on the Inflation Reduction Act, view our article “Understanding the Inflation Reduction Act—A PYA Overview.”