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Taxpayers that are preparing their 2023 returns are encountering a host of new and modified credits related to “green energy.” The Inflation Reduction Act of 2022 added some new credits, and modified others, mostly to make them more generous.
Green energy tax credit for individuals
New and modified green energy tax credits for individuals fall into two broad categories:
• Tax credits for clean vehicles, and
• Tax credits for home improvements.
Clean vehicle credits for individuals
Individual taxpayers may be able to claim three credits related to clean vehicles:
• The new clean vehicle credit,
• The used clean vehicle credit, and
• The alternative fuel refueling property credit.
The used clean vehicle credit is new, but the new clean vehicle credit and the alternative fuel refueling property credit for 2023 are both modified versions of older credits.
Clean vehicles are qualified electric and fuel cell vehicles. Among other requirements, the vehicle must have four wheels, it must be made by a manufacturer, and it must be used predominantly in the United States. A qualified electric vehicle must have a battery with a capacity of at least seven kilowatt hours.
The alternative fuel refueling property credit applies to property that stores or dispenses clean fuel or recharges electric vehicles. This is one of the few green credits that the IRA made more restrictive, as now qualified property must be installed in an eligible census tract (a low-income or non-urban area).
Residential credits for individuals
Individuals who make energy-related home improvements may qualify for two credits:
• The energy efficient home improvement credit, and
• The residential clean energy credit.
Both of these credits are substantially modified versions of older credits.
The energy efficient home improvement credit applies to qualified energy efficiency improvements (building envelope improvements), qualified residential energy property (specified types of energy equipment), and home energy audits. The credit applies only to existing homes.
The residential clean energy credit applies to solar water heating, solar electric, fuel cell, small wind energy, and geothermal heat pump property, as well as battery storage technology. The credit applies to both new and existing homes.
Green energy incentives for businesses
The general business credit for 2023 includes several new or modified credits related to green energy. These can be divided into three broad categories:
• Clean vehicle credits,
• Credits for cleaner energy, and
• Credits for energy-related products
Form 3800, General Business Credit, has also been substantially redesigned for 2023.
Business credits for clean vehicles
A new credit for commercial clean vehicles applies to electric and fuel cell vehicles and mobile machinery. The maximum credit is $40,000, reduced to $7,500 for vehicles under 14,000 pounds.
The general business credit also includes the new clean vehicle credit and the alternative fuel refueling property credits discussed in the Individuals section above, to the extent those credits are attributable to depreciable property.
Business credits for cleaner energy
The most significant credits for cleaner energy are still the renewable electricity production credit and the energy investment credit. However, both of these credits are significantly modified and expanded for 2022 and 2023.
Reduction in the base credit rates for both credits too effect in 2022. However, the effective credit rate may be as high as 50%, thanks to multipliers and adders for qualified facilities or projects that satisfy prevailing wage and apprenticeship requirements and/or domestic content tests, or are located in energy communities.
New or modified credits are also available for producing clean hydrogen, sequestering carbon, and producing electricity from certain nuclear facilities.
Business credits for energy related products
Businesses may claim credit for producing:
• new energy efficient homes, or
• a wide variety of energy-related components.
The new energy efficient home credit applies to a contractor that produces a new energy efficient home and sells it for use as the buyer’s principal residence. The credit is a modified version of an older credit. Starting in 2022, the credit became more generous, and also expanded to include homes in multi-family buildings.
The advanced manufacturing production credit applies to a wide variety of components that are related to clean energy, ranging from fasteners to battery components. The amount of the credit varies according to the component.
Monetized business credits
Finally, several of these energy-related business credits may be monetized as follows:
• Applicable entities (generally tax-exempt organizations and government entities) may elect to treat applicable credits as federal tax payments, which effectively makes the credits refundable.
• Taxpayers that are not applicable entities may elect to sell any portion of an eligible credit to an unrelated buyer.
These elections can increase the value of a credit for an applicable entity, or allow other taxpayers to accelerate the financial benefit of their energy-related productions or investments.
