The Inflation Reduction Act of 2022 (IRA) contained a number of tax incentives to encourage investments in alternative energy sources and energy-saving technologies. Although many of these incentives are focused on utilities and other energy sector businesses, several provisions could benefit non-energy businesses and individual taxpayers. Here are four energy-related Internal Revenue Code (IRC) tax provisions that could be applicable to many businesses.

Clean Vehicle Credits

There are two ways a business might be able to claim a tax credit when purchasing or leasing an all-electric, plug-in hybrid, or fuel cell electric vehicle:

• Clean Vehicle Credit (IRC Section 30D). The IRA extended the individual clean vehicle tax credit through 2032 and expanded it to include pre-owned vehicles as well. This nonrefundable credit can be worth up to $7,500, provided the vehicle meets various requirements related to battery capacity, weight, suggested retail price, and use of certain critical minerals and battery components. Individual buyers are subject to income limits (a maximum adjusted gross income of $300,000 for couples and $150,000 for single filers). If a partnership or S corporation purchases the vehicle, those income limits apply to the individual partners or shareholders.
• Commercial Clean Vehicle Credit (IRC Section 45W). This provision offers a tax credit of up to $40,000 for businesses that buy a qualified commercial clean vehicle. The maximum credit is $7,500 for vehicles weighing less than 14,000 pounds (such as cars, vans, SUVs, and light trucks) and $40,000 for larger vehicles such as trucks and buses. The credit is equal to 30 percent of a company’s basis for all-electric or fuel cell electric vehicles and 15 percent of basis for plug-in hybrid vehicles that are partially powered by a gasoline or diesel engine. The commercial clean vehicle credit is not subject to the income limits, price caps, or certain other restrictions that apply to the Clean Vehicle Credit for individuals.

If a business or individual leases a qualifying clean vehicle (rather than purchasing it outright), it is the leasing company that receives the tax credit. Many dealers will adjust the lease terms to pass the benefits on to the lessee.

Note that conventional hybrids—that is, those that do not have plug-in capabilities—do not qualify for either the individual or commercial clean vehicle credit. The IRS recently issued an updated fact sheet with more information on these credits (https://www.irs.gov/pub/taxpros/fs-2024-26.pdf).

Alternative Fuel Vehicle Refueling Property Credit (IRC Section 30C)

This credit is available to companies and individuals that install qualified vehicle recharging or clean-burning fuel refueling facilities. The credit is limited to property placed in service in eligible census tracts, which include low-income communities and non-urban locations. The Department of Energy has published a map of eligible locations (https://experience.arcgis.com/experience/3f67d5e82dc64d1589714d5499196d4f/page/Page/).

For businesses, the base credit is equal to 6 percent of the depreciable property’s cost, but it increases to 30 percent if the business meets prevailing wage and apprenticeship requirements, up to a maximum credit of $100,000 for each item. For consumers who install charging equipment at their principal residence in an eligible census tract, the credit is equal to 30 percent of the cost, up to a maximum credit of $1,000.

Energy Investment Credit (IRC Section 48)

The IRA expanded the tax credit for businesses that invest in qualified clean electricity property such as solar electricity generating equipment. It also updated the types of energy properties eligible for the credit to include solar, geothermal, small wind turbines, fuel cell, biogas, energy storage (batteries), and combined heat and power generating systems.

For systems under 1 megawatt in capacity, the credit is equal to 30 percent of the system’s cost. For larger systems, the base amount of the credit is 6 percent of the cost, but it can increase to 30 percent if prevailing wage and apprenticeship requirements are met. There are also bonuses for facilities in designated low-income communities and property that meets certain domestic content requirements.

The application process for the Section 48 credit is quite complex with strict deadlines for submitting technical documents and placing the equipment in service. Any business considering such a project should consult qualified tax and engineering professionals immediately.

Energy-Efficient Building Deductions

The IRA updated two provisions of the tax code that encourage the construction or renovation of energy-efficient buildings:

• Energy-Efficient Commercial Buildings Deduction (IRC Section 179D). The IRA expanded tax deductions for making energy efficiency improvements to the building envelope, interior lighting, hot water, or HVAC systems in new or existing commercial buildings. It also expanded eligibility by allowing nonprofits and other tax-exempt organizations to allocate their deductions to their systems’ designers or contractors. The amount of the deduction (from 50 cents to $1 per square foot) depends on the actual increase in efficiency, as measured against specific professional and industry standards and certified by a qualified engineer. The maximum amount increases five-fold if prevailing wage and apprenticeship requirements are met.
• New Energy-Efficient Home Credit (IRC Section 45L). Eligible contractors who build or substantially reconstruct qualified energy-efficient homes or apartments may be able to claim tax credits up to $5,000 per home. For homes that meet Energy Star standards the credit is $2,500 for single-family homes or $500 per unit for multifamily buildings. For homes that meet the Department of Energy’s Zero Energy Ready Home requirements the credit is $5,000 for single-family homes or $1,000 per unit for multifamily buildings.

IRS Publication 5886 (https://www.irs.gov/pub/irs-pdf/p5886.pdf) offers an overview of these and other energy-related tax incentives. Please reach out to Holbrook & Manter with any questions you may have.