A Valensi Rose Client Alert
The recently enacted Inflation Reduction Act of 2022 contains several new tax credits, as well as preexisting credits extended or modified by the Act, which individuals and small businesses should know about.
Feel free to contact us if you have questions about taking advantage of these.
Energy Property Credit
Previously, you were allowed a personal credit for certain nonbusiness energy property placed in service before January 1, 2022. The Act allows you to take this credit for such property placed in service before January 1, 2033.
The Act increases the credit for a tax year to 30% of the total of (a) the amount paid for qualified energy efficiency improvements installed during that year, and (b) the cost of residential energy property expenditures paid or incurred by you during that year.
The credit is further increased for amounts spent for a home energy audit, up to an additional $150.
The Act limits the allowable energy property credit to $1,200 per taxpayer per year, repealing the previous lifetime limitation.
There are annual limits of $600 in credits for residential energy property expenditures, windows, and skylights, and $250 for an exterior door ($500 for two or more exterior doors). A $2,000 annual limit applies for heat pumps, heat pump water heaters, and biomass stoves and boilers.
Residential Clean-Energy Credit
Before the enactment of the Act, you could take a personal tax credit, known as the residential energy efficient property (REEP) credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes before 2024.
The Act makes the credit available for property installed in years before 2035, and now includes expenditures for qualified battery storage.
New Energy Efficient Home Credit
Before the Act, a New Energy Efficient Home Credit (NEEHC) of $1,000 or $2,000, depending on the energy efficiency requirements the home met, was available to eligible contractors for qualified new energy efficient homes purchased by a homeowner before Jan. 1, 2022.
The Act makes this credit available through December 31, 2032. The amount of the credit is increased, and can be $500, $1,000, $2,500, or $5,000, depending on the home’s energy efficiency and whether its construction meets prevailing wage requirements.
Clean-Vehicle Credit
Prior to the Act, you could claim a credit for each new qualified plug-in electric motor vehicle (NQPEDMV) placed in service during the tax year.
The Act retitles this as the Clean Vehicle Credit and eliminates the limitation on the number of vehicles. The vehicle must be assembled in North America.
No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $300,000 for a joint return or surviving spouse, $225,000 for a head of household, or $150,000 for others.
In addition, no credit is allowed if the manufacturer's suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans, or SUVs.)
Finally, the way the credit is calculated is changed. The rules are complicated, but they place more emphasis on where the battery components are sourced.
Previously Owned Clean Vehicles
A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 is allowed a tax credit equal to the lesser of $4,000 or 30% of the vehicle's sale price. The maximum price per vehicle is $25,000.
No credit is allowed if the lesser of your modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household, or $75,000 for others.
Qualified Commercial Clean Vehicles
There is a new clean-vehicle credit for qualifying commercial vehicles acquired and placed in service after December 31, 2022.
The credit per vehicle is the lesser of:
- 15% of the vehicle's basis (30% for vehicles not powered by a gasoline or diesel engine), or
- the “incremental cost” of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine.
The maximum credit per vehicle is $7,500 for vehicles weighing less than 14,000 pounds, or $40,000 for heavier vehicles.
Payroll Tax Credit for Increasing Research Activities
Under prior law, a “qualified small business” (QSB) with qualifying research expenses could claim up to $250,000 of its credit as a payroll tax credit against the employer's share of Social Security tax.
Because some small businesses may not have a large enough income tax liability to take advantage of the research credit, QSBs may now apply an additional $250,000 in qualifying research expenses as a credit against the employer share of Medicare for tax years beginning after December 31, 2022.
The credit can't exceed the tax due for any calendar quarter, but unused amounts of the credit can be carried forward.
Incentives for Biodiesel, Renewable Diesel and Alternative Fuels
Previously, you could claim a credit for biodiesel and renewable diesel used in your trade or business or sold at retail on or before December 31, 2022.
Now you can claim a credit for such transactions through December 31, 2024.
You can now also claim a refund of excise tax for the use of
- biodiesel fuel mixtures for a purpose other than for which they were sold, or for resale of such mixtures, on or before December 31, 2024, and
- alternative fuel used in a motor vehicle or boat or plane, for a purpose other than for which they were sold or for resale of such alternative fuel mixtures, through December 31, 2024.
As you can see, these changes can be complex, so don’t hesitate to reach out to us if you have questions.