Understanding the Clean Energy Tax Breaks in the Inflation Reduction Act

Powering Your Wallet: Understanding the Clean Energy Tax Breaks in the Inflation Reduction Act

Clean Energy Tax Breaks | Rea CPA

The Inflation Reduction Act of 2022 provides numerous tax credits for clean energy initiatives. While too voluminous to list each credit and requirement, below are some programs that may benefit taxpayers who are interested in clean energy.

Investment Tax Credit (ITC) and Production Tax Credit (PTC)

Through the Investment Tax Credit and Production Tax Credit, taxpayers may deduct a percentage of the expense of renewable energy systems for federal tax purposes. These credits are available to business entities. Currently, the Inflation Reduction Act has an Investment Tax Credit of 30 percent and a Production Tax Credit of $0.0275/kWh (2023 value), as long as projects meet prevailing wage and apprenticeship requirements. Additional changes will occur for projects starting after December 31, 2024.

Eligible projects for these credits include investments in solar, wind, geothermal, microturbines, and biomass energy systems as outlined under the following IRS tax code sections:

  • Section 45 electricity produced from certain renewable sources (PTC)
  • Section 45Y clean electricity production tax credit (PTC)
  • Section 48 energy credit (ITC)
  • Section 48E clean electricity investment credit (ITC)

Energy Communities Tax Credit Bonus

An additional bonus credit of 10 percent is eligible for taxpayers located in communities who have encountered economic hardship due to the closing of a coal-related energy source. These areas have been determined by economic factors that meet certain requirements. A large portion of Ohio falls under one of the following three categories eligible for the bonus credit:

  1. Brownfield Sites
  2. Metropolitan and non-metropolitan areas based on unemployment rated and census tracks where a coal mine was closed after 1999
  3. Metropolitan and non-metropolitan areas based on unemployment-rated and census tracks where a coal-fired generator was closed after 2009

Residential Clean Energy Credit

As outlined by the IRS, the Residential Clean Energy Credit equals 30 percent of the costs of new, qualified clean energy property for the taxpayer’s primary residence installed anytime from 2022 through 2033. The credit is nonrefundable, but taxpayers can carry forward any excess unused credit and apply it against taxes in future years. The credit has no annual or lifetime dollar limit except for credit limits for fuel cell property.
Qualified expenses include the costs of new (not used) clean energy property and associated costs including labor, assembly installation, and connection of the property to the residences. Types of clean energy include:

  • Solar electric panels
  • Solar water heaters
  • Wind turbines
  • Geothermal heat pumps
  • Fuel cells
  • Battery storage technology (beginning in 2023)

The Inflation Reduction Act offers taxpayers a myriad tax credits and bonus tax credits for switching to clean energy sources. Each tax credit and program requires that numerous qualifications and criteria are met in order to claim the credit. Talk with your Rea tax advisor before investing in any project to ensure proper compliance and guidance.

By Dustin Sheppard (Wooster Office)