December 20, 2022
By Jennifer Galstad-Lee, Senior Manager, Tax
From electric vehicles to solar panels, “going green” can offer both environmental and financial benefits. With global conflicts and increased gas prices, now may be the time to explore reducing your carbon footprint to better the Earth and save you money. In addition, with more emphasis on environmental, social and governance (ESG) standards, you’re likely more cognizant of organizational social practices and the impacts on your community. The opportunities to benefit from environmentally friendly practices are better than ever before.
Clean vehicle tax credits
Fully electric vehicles have come a long way since they first came to the modern market – now offering sportier models, more efficient batteries, and faster charge times – allowing you to travel farther on one single charge. These “go-green” vehicles don’t use gas-powered engines, allowing you to save potentially thousands of dollars each year on gas alone. And with the Infrastructure Investment and Jobs Act allocation of $7.5 billion to states and local governments to help increase public charging station availability nationwide, consumers should find it easier to adopt energy efficient cars.
In addition, you may qualify for a tax credit. Though there were some changes to the credit from the Inflation Reduction Act of 2022, the maximum amount of the credit remains $7,500. To claim the credit, several criteria must be met, such as the vehicle must draw propulsion energy from a battery with at least five kilowatt hours of capacity, and your income must fall under a certain threshold (i.e., $150,000 for single filers, $300,000 for joint filers and $225,000 for heads of households). And for new vehicles sold after Aug. 16, 2022, only vehicles whose final assembly is in North America will qualify.
The IRS provides guidance for the vehicles eligible for the EV credit prior to Aug 16, 2022 on their website here. The Inflation Reduction Act (IRA) made changes such as a new final assembly requirement and income limitation. The Department of Energy provides a list of model year 22 and early model year 2023 electric vehicles that meet the final assembly requirement. Please be sure to check the eligibility with the Vehicle Identification Number using the VIN decoder to confirm.
The IRA also extended the previously expired tax credit for EV chargers. The tax credit for EV chargers (officially referred to as the Alternative Refueling Property Credit) has been extended for ten years, through Dec 31, 2032. The tax credit for a residential EV charger is up to 30% of the hardware and installation costs for EV chargers installed in the taxpayer’s home after December 31, 2021. This is a one-time, nonrefundable tax credit for a maximum of $1,000. The credit is claimed on Form 8911, Alternative Fuel Vehicle Refueling Property Credit.
There is also a new 30% credit, up to a $4,000 maximum, for taxpayers who buy a qualifying used “clean vehicle” after 2022 and before 2032. To qualify, however, your modified adjusted gross income must be under a certain threshold (i.e., under $75,000 for single filers, $150,000 for joint filers and $112,500 for heads of household).
Note that there are also price caps that apply to both the new and used vehicle credits. For new cars, the credit is not allowed for cars with a manufacturer’s suggested retail price over $55,000 or for vans, SUVs or pickup trucks with a manufacturer’s suggested retail price over $80,000. The sales price for any used vehicle must be $25,000 or less.
Residential energy efficient property credits
Installing equipment such as solar panels, solar hot water heaters, certain wind turbines and fuel cells may be an effective way for you to lower your utility bill and potentially save on your taxes. The Inflation Reduction Act of 2022 expanded on the tax incentives.
- Projects that began construction before 2025 (2035 if geothermal property) and are placed in service after 2021 are eligible for a 30% credit. There is no longer a phase-out provision in place.
- For projects placed in service in 2021 or earlier, prior rules remain in place, and the credit is reduced to 26%. And for projects placed in service after 2024, a similar credit remains with a few new stipulations.
- You’ll need to have the manufacturer’s statement that certifies that the components meet the requirements.
In addition to federal tax credits, state programs for renewable energy and energy efficiency, which exist across a wide range of technology types, are also available and can offer significant tax saving opportunities. Regardless of potential tax credits, improvements that add to the value of your home and prolong its useful life can get added to the basis of your home. With housing prices soaring, you may need that increased basis to decrease a potential taxable gain later.
Energy provisions for businesses
There are also many incentives to encourage businesses to decrease their carbon footprint and become more environmentally sustainable. When certain criteria are met, businesses may be able to claim tax credits for items such as:
- Electricity produced from certain renewable sources (including geothermal, solar and wind facilities)
- Energy efficient home improvements (for eligible contractors and manufactured home manufacturers)
- Carbon oxide sequestration
- Zero-emission nuclear power production
- Alternate fuels
Environment, social and governance (ESG) investing
ESG standards are a way to evaluate how a company addresses employees, suppliers, customers, and the communities where the business operates. ESG criteria help investors with investment decisions, understanding the growing global need to be more socially conscious. ESG investing may also reduce tax liabilities for companies/investors via certain credits or deductions such as:
- Low-income housing credit
- Historic rehabilitation tax credit
- New markets tax credit
While an environmentally friendly outlook is always a good idea, there is no better time to think about the tax advantages of green investments. Contact your CPA for more information, contact the GRF tax team to discuss the tax benefits of “going green,” or contact me at the info below.