The Inflation Reduction Act of 2022, which became law on August 16, 2022, contains various tax incentives for your business to become more environmentally friendly. Some incentives build upon what’s in place for 2022. Others are brand new starting in 2023. Some tax breaks are designed for large businesses that can invest in building factories to accelerate U.S. manufacturing of solar panels, wind turbines, batteries, and critical minerals processing or retool existing auto manufacturing facilities to manufacture clean vehicles. But some tax breaks can be used by small businesses. The rules can be complicated, and IRS guidance is needed to flesh out some details. Nonetheless, becoming aware now of changes beginning next year can help you decide on your actions for the rest of 2022 as well as plan ahead.
1. Deduction for an energy-efficient commercial building
This deduction isn’t new, but starting in 2023 it’s been enhanced. For buildings placed in service in 2022 that meet certain energy efficiency standards, there’s a deduction of $1.88 per square foot (or a partial deduction of 63¢ per square foot in some situations). For a building placed in service after 2022, the deduction increases to up to $5 per square foot. To qualify in 2023, you must satisfy certain conditions, including:
- A reduction in energy costs for the building as a result of your efforts must be at least 25%; a 50% reduction nets the maximum deduction.
- Meeting prevailing wage rates during construction and satisfy apprenticeship program requirements.
- Obtaining certification by a qualified architect or engineer of the building’s energy savings
If additional energy upgrades are performed, it’s possible to claim the deduction every four years (three years for certain buildings).
2. Tax credit for buying a clean vehicle
The tax credit for buying clean vehicles in 2023 replaces the 2022 credits for plug-in electric powered vehicles and alternative fuel cell vehicles. The newly-named credit applies to plug-in electric vehicles, hybrids, and fuel cell vehicles. The maximum credit amount remains unchanged at $7,500, but other rules apply starting in 2023:
- The credit is figured on both a “critical mineral” component and a battery capacity component.
- The 200,000 per manufacturer limit no longer applies (it only applies through December 31, 2022). This means that Tesla, GM, and Toyota vehicles that passed the 200,000 mark may again qualify for the credit for purchases in 2023 and beyond.
- There’s a cap on the cost of qualifying vehicles: $80,000 for SUVs, light trucks, and vans; $55,000 for sedans and other vehicles.
- There’s an income cap on eligible taxpayers: $300,000 for joint filers; $225,000 for heads of households; and $50,000 for all other filers. Thus, if an S corporation with a single shareholder buys a clean vehicle and passes it through to the shareholder, the income limit applies to that shareholder.
Also starting in 2023 is a credit for pre-owned clean vehicles. There’s a cap on the cost of the used vehicle and income limits on purchasers that are different from those for new vehicles.
Note: There’s a “final assembly requirement” effective August 16, 2022, which mandates that the final assembly of the vehicle take place in North America. The Department of Energy has a list of vehicles that may meet the final assembly requirement.
3. Tax credit for buying a clean commercial vehicle
Starting in 2023, businesses may qualify for a new tax credit for buying a clean commercial vehicle, such as a school bus or cement truck. EVs are required to have a battery with 15 kWh of capacity. The maximum credit is the 30% of the vehicle’s cost, for a top credit of $40,000. You’ll have to report the VIN on your tax return. Other conditions apply.
4. Tax credit for a charging station
The alternative fuel refueling property credit will apply to charging stations placed in service beginning in 2023.
- If the station is installed in a residence and only for personal use, the credit is limited to the lesser of 30% of the cost or $1,000.
- If the station is installed at a business location, the credit is the lesser of 6% of cost or $100,000.
Some things to note:
- The credit doesn’t cover permitting or inspection.
- Workers must be paid the prevailing wage and apprenticeship requirements must be met.
- The charging station must be within a low-income area.
5. Tax credit for switching to solar power
There’s a business energy investment tax credit of 6% to 30% (depending on the project) for the cost of installing solar power that generates electricity, regulates a building’s temperature, or provides hot water for the building. It applies to the cost of solar panels and related equipment, batteries and other energy storage equipment (if charged at least 75% by renewable energy), and related equipment. Sales tax, installation, and some indirect labor costs can qualify for the credit. You can learn more here.
Conclusion
Meet with your CPA or other tax adviser to determine whether to take advantage of incentives this year or plan for 2023. Be sure you budget accordingly and take the tax rewards into account for estimated tax purposes.
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