Tax incentives to help you go green in 2023
February 28, 2023
Jennifer Smith, CPA/PFS
Senior Tax Manager
Environmental sustainability and working to combat climate change are top of mind for many individuals and organizations heading into 2023. Fortunately, on August 16, 2022, President Biden signed the inflation reduction act (IRA) into law, introducing many tax incentives related to environmental sustainability. The IRA is the most aggressive action aimed at tackling the climate crisis in American history. Although there are other elements to the IRA, such as selected revenue raisers and enhancements to current tax laws, the majority of the act is dedicated to increasing incentives for green energy. From solar energy to clean vehicle credits, below are a few of the environmental tax credits/deductions to consider taking advantage of in 2023.
The Residential Property Credits
Oftentimes making environmentally conscience enhancements to your home can be costly and daunting. To incentivize homeowners to make green improvements, the IRA enhanced and extended two different residential property tax credits. The first being the residential energy property credit. This credit was previously set to expire at the end of 2021 but is now extended through 2032. It is available to individuals who install energy-efficient home improvements to the envelopes of their home (such as windows, doors, roof and insulation). Although this credit previously existed, it was quite restricted as there was a $500 lifetime limit on the credit. However, the IRA significantly enhanced this by increasing it to a $1,200 annual limit beginning in 2023, to incentivize homeowners to continually make environmental improvements each year to their home.
The other credit available for residential property owners looking to go green is the residential energy-efficient property credit. This credit previously expired at the end of 2021, but the IRA extended it through 2034. Homeowners can claim this credit for energy-efficient improvements to their properties, such as solar electric, solar water heating, small wind energy and geothermal heat pump. If you plan on making energy improvements to your home, plan to do so before 2032 to receive the highest credit value (30% of the qualified installation costs) because in 2033, the credit value drops to 26%, and in 2034, the credit will be worth only 22% before expiring completely.
Energy Efficient Home Credit and Section 179D Deduction
The 45L credit, also known as the energy efficient home credit, was another existing credit that the IRA enhanced and extended through 2032. Unlike the previous two credits for residential property owners, this credit is only available for developers of energy-efficient single-family or multi-family dwellings. The enhancements to this credit include increasing the max credit available to $5,000 per unit and allowing mid-rise and high-rise projects to be eligible for the credit.
Similarly, the IRA enhanced the section 179D deduction – a tax deduction for building owners who construct new or renovate existing energy-efficient buildings. Enhancements include increasing the max deduction amount from $1.80/sq. ft. to $5.00/sq. ft. and allowing all tax-exempt entities such as churches and nonprofit hospitals to transfer the deduction to the contractor, architect or engineer of the project. Previously, government agencies were the only entities allowed to transfer the deduction.
Clean Vehicle Credits
Also renewed and introduced via the IRA are some tax credits aimed at encouraging the use of clean-energy vehicles. The IRA increased the new clean vehicle credit’s modified adjusted gross income (MAGI) threshold as well as extended the credit through 2032. Now taxpayers with a MAGI of $300,000 (married filed jointly (MFJ)) or $150,000 (single) can claim up to $7,500 if they purchase a new energy-efficient vehicle with an MSRP greater than $55,000 (or $80,000 if the vehicle is a van, pickup or SUV).
Note that a vehicle purchased after August 16, 2022, must abide by the final assembly requirement, meaning the vehicle’s final assembly must have occurred in North America to be eligible for the credit.
In addition to extending the existing new clean vehicle credit, the IRA also established a credit for used clean-energy vehicles. This new credit is available for taxpayers with a MAGI under $150,000 (MFJ) or $75,000 (single) who purchased a clean-energy vehicle with a model year at least two years earlier than the calendar year it was purchased in. However, the sales price cannot exceed $25,000 and eligible taxpayers cannot be a dependent. So, if a brand-new electric vehicle isn’t necessarily in your future, maybe a used one is.
Lastly, in the category of clean vehicle credits, the IRA created a commercial clean vehicle credit for up to 30% of the vehicle’s cost – not to exceed $7,500 or $40,000 if the gross vehicle weight is greater than 14,000 lbs. The vehicle must have a battery capacity of no less than 15 kWh (or 7 kWh if it weighs less than 14,000 lbs.) and be charged by an external electricity source to be eligible for the credit. Mobile machinery and qualified fuel cell vehicles are also eligible for this credit. However, only vehicles made by qualified manufacturers with written agreements and provide periodic reports to the U.S. Treasury, qualify for the credit.
These incentives are just a few of the environmentally focused provisions created or enhanced by the Inflation Reduction Act. These provisions provide many opportunities to go green in 2023.