2022 tax planning after the Inflation Reduction Act

September 12, 2022 9:00 AM

The Inflation Reduction Act extended many green energy and energy efficiency tax breaks already in the Tax Code and created a number of new tax breaks as well. The legislation also imposes a number of new requirements to obtain the largest possible tax break, such as requirements to pay prevailing wages and offer apprenticeship programs, requirements to use domestic content, and requirements to operate in low-income or otherwise distressed communities.

Many tax breaks previously in the Tax Code were extended through 2022, while many of the new requirements to receive the maximum tax breaks do not come into play until 2023 or later. This creates a potential last opportunity to take advantage of some of these tax breaks before the new requirements come into play.

Clean Vehicle Credit

Obtaining the tax credit for an electric vehicle could prove difficult for a while at least. The new credit imposes vehicle price limits, purchaser income limits, and vehicle domestic sourcing tests to be met to qualify for the credit. It is estimated that most electric vehicles will not qualify under these requirements until manufacturers can come up with alternative sourcing for critical minerals and battery components or alternative minerals.

However, these requirements do not generally become effective until Jan. 1, 2023, or later if it takes longer for the IRS to come up with proposed regulations. Importantly, the legislation provides a transition rule: If a taxpayer has purchased or entered into a written binding contract to purchase a new qualified plug-in electric drive motor vehicle after Dec. 31, 2021, and before Aug. 16, 2022 (the date of enactment of the Inflation Reduction Act), and placed the vehicle in service after Aug. 16, 2022, the taxpayer may elect to treat such vehicle as having been placed in service on Aug. 15, 2022. Therefore, none of the new provisions for Clean Vehicle Credit apply, not even the requirement, effective as of Aug. 16, 2022, that the vehicle be assembled in North America. However, it also means that the 200,000-vehicle limit per manufacturer, which the Inflation Act eliminates starting in 2023, would still apply. Given the rise in gas prices this year and the shortage of available cars to meet the demand, there could be a lot of taxpayers who have had qualifying contracts to purchase vehicles for some time and are still waiting for delivery. The transition rule may not help, however, for Tesla or General Motors vehicles.

Energy Efficient Home Improvement Credit

The changes made by the Inflation Act to the renamed Energy Efficient Home Improvement Credit for exterior home improvements and certain qualified energy property are mostly good news. The old $500 lifetime credit has been replaced by a $1,200 annual credit and it has been extended through 2032. All of these changes are effective starting after Dec. 31, 2022.

However, if you have made qualifying improvements in 2022 and have not already used up your $500 lifetime credit, the act has also extended the old rules through 2022. Taxpayers may, therefore, now potentially qualify for the old credit for 2022.

Residential Clean Energy Credit

Michael Nagle/Bloomberg

The changes made by the Inflation Act to the renamed Residential Energy Efficient Property Credit are effective starting in 2022 and are also generally good news for taxpayers. Instead of a 26% credit for solar or small wind installations in 2022, it is now a 30% credit. Biomass fuel property was dropped from this credit after 2021, but the other qualifying property such as solar electric, solar hot water, and small wind installations still qualify, and the 30% credit now extends through Dec. 31, 2032.

The Alternative Fuel Refueling Property Credit

Beautiful evening scene in rural Kentucky

The Inflation Act extended the Alternative Fuel Refueling Property Credit retroactively to all of 2022 and through 2032. However, starting in 2023, the credit will be limited to property located in a rural or low-income census tract. Although there appears to be some debate about the intent of Congress, it appears that this location limit may apply to individual installations as well as business installations. Individuals can still, however, qualify for the $1,000 credit for an installation placed in service in 2022.

Energy Efficient Commercial Building Tax Deduction

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The previous Code Sec. 179D deduction for energy efficient commercial buildings remains in effect for 2022. The new requirements for the deduction do not go into effect until 2023, but neither do the much higher deduction limits. Contractors will have to decide if it is better to push ahead and go for the lower deduction limits free of restrictions or go for the higher deduction limits with the restrictions.

Credit for Energy-Efficient Homes

David Paul Morris/Bloomberg

The previous Code Sec. 45L credit for energy efficient homes was also extended through 2022. Builders will once again have to compare the credit available without the new restrictions for projects placed in service in 2022 to the higher potential credits in 2023 and beyond if the new restrictions can be met.

Extended Energy Credits

Chris Ratcliffe/Bloomberg

The Biodiesel, Renewable Diesel, and Alternative Fuel Credits in Code Secs. 40A, 6426 and 6427 were extended retroactively to fuel sold or used after Dec. 31, 2021. The Inflation Act calls for the Secretary of the Treasury to issue guidance with respect to claiming these retroactive credits, which claims are to be submitted within 180 days of the enactment of the Inflation Act, which appears to be by Feb. 12, 2023.

The Code Sec. 40 Second Generation Biofuel Producer Credit was also retroactively extended to fuel sold or used after Dec. 31, 2021.

The Code Sec. 45 Production Tax Credit was extended to apply to facilities placed in service after Dec. 31, 2021. The phase-down for wind projects will not apply if construction began before the end of 2021 and the project is placed in service in 2022. Solar projects are permitted to elect either the Production Tax Credit or the Investment Tax Credit. However, some of the new restrictive provisions for domestic content and location in energy communities do not apply until 2023, creating a window to claim the credit in 2022 without some of the restrictions. Projects must be under construction no later than 60 days after the Secretary of the Treasury issues guidance on the prevailing wage and apprenticeship programs to avoid being subject to those requirements.

Similarly, the Code Sec. 48 Investment Tax Credit applies to property placed in service after Dec. 31, 2021, without the old phase-down, and the domestic content and location in energy community restrictions do not apply until 2023.

The Code Sec. 45Q Credit for Carbon Dioxide Sequestration also presents an opportunity to begin construction before the prevailing wage and apprenticeship requirements apply.

Summary

Next year will bring not only extended tax credits but a variety of new energy-related credits helpful not only to the energy industry but also to help individuals and businesses become more energy-efficient. The credits will generally be around for a sufficient length of time to facilitate long-term planning.

Not-for-profit entities and businesses without sufficient taxable income to utilize the credits may qualify for direct payments (to not-for-profits) or the ability to sell the credits to someone who can utilize them, converting a nonrefundable credit into a refundable credit.

The requirements with respect to prevailing wages, apprenticeship programs, domestic content, and distressed communities complicate the ability to qualify for the maximum credits but are designed to promote other societal goals. The transition year of 2022, however, provides some unique opportunities to try to take advantage of extended credits before some of the related requirements kick in.