The Inflation Reduction Act: What does it mean for my business?

Article by Constellation

On August 16^th, 2022, President Joe Biden signed the Inflation Reduction Act (the “IRA”), a $739 billion spending package aimed to reduce inflation, lower healthcare costs, and spur development in the clean energy sector. The clean energy tax provisions of the legislation provide roughly $270 billion in funding, compared to a previous $20 billion package passed during the Obama administration. The legislation creates transferrable credits, expands the duration of eligibility for various credits, and provides significant incentives for union labor, electric vehicles (EVs), and investment in clean energy technology.

Eligible clean energy technologies include carbon capture and sequestration, existing nuclear units, clean fuels, hydrogen production, and advanced domestic manufacturing of solar and wind equipment. The act also includes significant spending for rural energy development, state and private forestry conservation, residential home efficiency rebates, and a methane fee for the oil and gas production and transport.

In this blog, we will walk through some of the aspects on the Inflation Reduction Act that could impact your organization and how you can take advantage of policies that are enacted.

Energy Efficient Commercial Building Deduction

The IRA includes savings opportunities for commercial buildings such as tax credits for building and deep energy retrofits. Currently, commercial building owners can permanently deduct $1.80 per square foot for certain energy-saving installations such as interior lighting systems, HVAC systems, or building envelopes. The IRA provisions entail updated efficiency requirements: qualifying taxpaying entities would need to increase efficiency relative to a reference building by 25%. Deductions would start at $0.50 per square foot and increase by $0.02 for each percentage point by which the efficiency improvement reduces energy and power costs, up to a maximum of $1.00 per square foot.  For projects that meet prevailing wage and registered apprenticeship requirements, the base amount deducted is $2.50 per square foot and increases by $0.10 for each percentage point up to a maximum of $5.00 per square foot.

Electric Vehicles (EV) and Clean Vehicles

The IRA also creates IRC Section 45W to provide a new credit for qualified commercial electric or clean vehicles acquired before January 1, 2033. To claim the credit, (1) the taxpayer must commence original use of the clean vehicle, (2) the taxpayer cannot acquire the clean vehicle for resale, (3) the clean vehicle must be produced by a qualified manufacturer and (4) the final assembly of the clean vehicle must occur in North America. The credit is the lesser of 30% of the base price of a qualifying clean or electric vehicle or the incremental cost of such a vehicle above the cost of a comparable conventional vehicle. The new credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for vehicles weighing over 14,000 pounds.

Alternative Fuel Refueling Property Credit

A tax credit is available through Dec. 31, 2032 for the cost of any qualified alternative fuel vehicle refueling property and bidirectional charging equipment installed by a business. The credit is equal to 30% of these costs, limited to $30,000, for businesses at each separate location with qualifying property.

For business property that is subject to depreciation, the credit would be extended at a rate of 6% (30% if prevailing wage and registered apprenticeship requirements were met), with the credit limit increased to $100,000.

The credit could also be claimed for electric charging stations for two- and three-wheeled vehicles that are used on public roads. Starting in 2023, charging or refueling property would only be eligible if it is placed in service within a low income or rural census tract.

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