Now is the time to start investing in a green transformation. The Inflation Reduction Act of 2022 signed by President Biden in August includes a range of new tax rules on new “green” energy provisions. These new “green” energy provisions are intended to combat climate change and improve energy efficiency while incentivizing domestic manufacturing of green energy equipment and electric vehicles.
The financial benefits in the Act will incentivize small business owners to transform their vehicle fleets to cleaner energy options. The new Act also extends and modifies some preexisting credits for home energy efficiency improvements.
Here are six benefits small business owners can expect from the Inflation Reduction Act in the coming years.
- New clean-vehicle credit — Some of the most important green energy provisions of the Act are the expanded and modified electric vehicle (EV) credits. The Act introduces credits of up to $7,500 on the purchase of a new EV and a cap on the cost of qualifying vehicles equal to $55,000 for cars and $80,000 for trucks, vans and SUVs. The Act also introduces income limitations like many other tax credits, meaning that eligibility for the credit is cut off for individuals earning more than $150,000 and married couples earning more than $300,000 each year.
- Used clean-vehicle credit — In a further attempt to make EVs more attractive to a broader range of consumers, the Act adds a new credit of up to $4,000 or 30% of the cost for purchases of used EVs costing up to $25,000 beginning January 1, 2023. Prior EV credits were available only for new vehicle purchases. This credit has a lower income limitation and is available only for taxpayers earning $75,000 for single filers or $150,000 for married couples.
- New credit for qualified commercial clean vehicles — There is a new qualified commercial clean-vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles. The credit is for vehicles not powered by a gasoline or diesel engine.
- Clean energy credits for businesses and investors — Like the residential credits, the Act brings the credit back to 30% for corresponding business investments in solar and other renewable energy technologies. It also expands the credit to include energy storage technologies. For projects in 2025 and beyond, the current 30% investment tax credit is replaced by a new two-tier production and investment tax credit that continues to incentivize clean energy investments with up to a 30% credit while also requiring that projects meet prevailing wage and apprenticeship standards and source materials from within the U.S.
- Increase in qualified small business payroll tax credit for increasing research activities — Under pre-Inflation Reduction Act law, a “qualified small business” with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax. Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit, for tax years beginning after December 31, 2022, qualified small businesses may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
- Extension of incentives for biodiesel, renewable diesel and alternative fuels — Small businesses are now permitted to claim a credit for sales and use of biodiesel and renewable diesel fuel, biodiesel fuel mixtures, alternative fuel and alternative fuel mixtures on or before December 31, 2024. You are also now allowed to claim a refund of excise tax for 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 as that used in a motor vehicle or motorboat or as aviation fuel, for a purpose other than for which they were sold or for resale of such alternative fuel mixtures on or before December 31, 2024.
There are many other benefits within the Inflation Reduction Act that will also benefit residential owners, such as energy efficiency improvements, home energy audits and rebates for purchasing energy-efficient appliances.
Many of these new green benefits will not be broadly available until the second half of 2023 or later, according to experts. We will need to wait until the Energy Department issues rules governing these programs and how states will administer the rebates to consumers. Talk to your tax professional to make sure you can maximize your financial incentives for going green under the Inflation Reduction Act as you transform your small business.
EDGAR RAFAEL OLIVO is a bilingual business educator, economic advisor, and contributor for several media outlets. He’s a nonprofit executive who is passionate about education. He is certified in finance and data analytics and holds a business degree from Arizona State University.
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