2023 Marcum Year-End Tax Guide

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insurance company. Now, with the IRA, the developer can technically “transfer” the ITC to another taxpayer (Typically a large C Corporation) and retain ownership of the clean energy project for themselves. Another key provision of the IRA was the creation of a “Direct Pay” option for certain taxpayers (mainly non-profits and other tax-exempt entities such as state and local governments) that can claim the Investment Tax Credit, which becomes refundable at the entity level. These provisions will allow certain taxpayers that previously could not claim the government incentives to now claim them through a “refundable” tax credit on the tax return once it is filed. The IRS has been very busy issuing guidance on many portions of the Inflation Reduction Act over the past year. In November 2022, the IRS published guidance on the wage and apprenticeship requirements affecting projects over 1 megawatt of production. In February 2023, the IRS published guidance on the energy community and low-income community bonus credits. In May 2023, the IRS issued guidance on domestic content bonus credits. Furthermore, in June 2023, the IRS published initial guidance on the transferability of the ITC, with more guidance coming later this year. ELECTRIC VEHICLE CREDITS Also included in the IRA was the expansion and creation of 9 tax credits for electric vehicles. Most of the subsidies aim to reduce emissions from road travel,

predominately by subsidizing electric vehicles (EVs) and EV infrastructure. Tax credits are also available for alternative fuels like biodiesel and hydrogen technology. However, claiming and utilizing the EV credits has been challenging over the past year. First, there is an income limitation to using the EV credits ($300,000 MFJ and $150,000 single taxpayer). If you can clear the income hurdle, the $7,500 EV credit may not be fully available to you. In December 2022, the IRS issued guidance forcing auto manufacturers to source critical components such as minerals and battery components from US sources or countries where the US has a fair-trade agreement to meet certain domestic requirements to be eligible for the full $7,500 tax credit. The ITC is cut to 50% or $3,750 if a manufacturer fails this domestic requirement test. The IRS has published a list of eligible makes and models that qualify for the full $7,500 EV credit. RESIDENTIAL AND COMMERCIAL INCENTIVES The IRA has something in it for everyone. Effective 1/1/23, two tax credits are focused on homeowners. The non-business energy credit (Section 25D) creates a 30% tax credit for installing solar panels, geothermal heat pumps, and small wind turbines. The second credit is the energy efficiency improvement credit (Section 25C), which creates a 30% tax credit for various home improvement projects such as windows and doors, electric

furnaces or heat pumps, insulation, and electric appliances. The annual cap on this credit is $1,200. Commercial building owners and multi-family owners also are benefiting from the Inflation Reduction Act. The IRA expanded the Section 179D deduction by significantly increasing the deduction per square foot for qualified improvements made to the commercial building. Owners of new multi-family buildings can qualify for an expanded Section 45L credit for meeting energy efficiency standards under the IRA. THE PROGRESS AND HURDLES OF THE IRA’S FIRST YEAR One year after its inception, the Inflation Reduction Act (IRA) has left a tangible imprint on the U.S. clean energy landscape. Through the introduction and expansion of 22 tax credits, the IRA has catalyzed the launch of over 200 major clean energy projects, created 70,000 jobs, and potentially set the nation on a course to slash emissions by nearly half by 2035. While the legislation has undeniably accelerated the country’s transition to a greener future, it hasn’t been without challenges, especially in the electric vehicle sector, where tax credit eligibility complexities persist. Nonetheless, from utility giants to homeowners, the IRA has broadened opportunities for a more sustainable, energy-efficient future. The upcoming years will be crucial in determining if the momentum generated by the IRA continues and if the U.S. can successfully meet its ambitious environmental goals.

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