What you should know about the Inflation Reduction Act
From energysage…
Key takeaways
In August 2022, the United States passed the Inflation Reduction Act, the country’s largest investment in climate change.
This bill increases the investment tax credit to 30 percent for residential solar systems for the next 10 years. Standalone storage systems are also eligible for the ITC starting in 2023.
If you install a heat pump or a heat pump water heater, starting in 2023, you could receive a tax credit of up to $2,000 and a significant rebate (depending on your income and the rebates already available in your state).
Used EVs are now eligible for tax credits. The updated tax credit for new EVs could benefit or hurt you depending on your income, the manufacturer’s production and sourcing, and the cost of your vehicle – if you want to buy a new EV soon, you should evaluate the best time to do so accordingly.
What is the Inflation Reduction Act?
The Inflation Reduction Act (IRA) is the amended version of the Build Back Better Act, which Congress first introduced in fall 2021. The bill serves as a companion reconciliation bill to the Infrastructure Investment and Jobs Act, signed into law by President Biden in November 2021. Essentially, this means that the bill only relates to tax, spending, and debt, allowing it to pass with a simple majority in the Senate rather than the three-fifths majority that’s typically required.
Importantly, the IRA authorizes $369 billion in spending towards clean energy and climate action, representing the largest investment in climate change in United States history. In addition to energy, the bill also includes a budget for lowering the deficit and reducing the cost of prescription drugs – but we’ll only focus on the aspects of clean energy in this article.
Clean energy incentives impacted by the bill
The Inflation Reduction Act improves and alters a number of existing and new clean energy incentives, including tax credits and rebates. We’ll get into more detail later on, but here’s a list of some of the technologies supported by each of the different incentives:
Investment tax credit (30%)
Residential solar
Commercial solar
Solar for nonprofits
Standalone storage
Wind
Production tax credit ($0.026/kWh)
Commercial solar
Wind
Energy Efficient Home Improvement Credit (up to $1,200 annually, except for heat pumps)
Heat pump water heaters
Heat pumps for space heating
Air sealing materials or systems
Home energy audits
Upgrades to your electrical supply if needed for energy efficiency projects
Clean Vehicle Tax Credit ($7,500 for new vehicles, $4,000 for used vehicles, with restrictions)
New EVs
Used EVs
New hydrogen fuel-cell vehicles
Used hydrogen fuel-cell vehicles
High-Efficiency Electric Home Rebates (dependent on household income and possibly available state rebates)
Heat pump water heaters
Heat pumps for space heating
Stoves, cooktops, ranges, ovens, or heat pump clothes dryers
Insulation, air sealing, and ventilation
Upgrades to your electrical panel and service
Electrical wiring
How will the Inflation Reduction Act support electrification?
If you’re interested in electrifying all or part of your home, business, or nonprofit, you’re in luck. The IRA will make going electric much more affordable, allowing you to reap the long-term savings benefits associated with electrification more easily. We’ll explain how the IRA impacts some of the key components of electrification:
Residential solar
If you’ve been thinking about installing solar at your home, you probably know about the investment tax credit (ITC). This major federal incentive allows you to deduct a percentage of your solar system’s cost from your federal taxes, assuming you have enough tax liability. Before the IRA passed, the ITC was 26 percent and was supposed to drop to 22 percent at the end of 2022 and then disappear altogether for residential systems in 2024.
Now with the IRA, all systems installed in 2022 (including those installed before the bill passed) are eligible for a 30 percent tax credit. Here’s the new ITC structure under the IRA:
2022-2032: 30%
2033: 26%
2034: 22%
2035: the ITC disappears for residential systems
Commercial solar
Commercial solar systems are a bit more complicated than residential systems in the IRA. Similar to residential systems, the ITC for commercial solar was 26 percent and poised to drop to 22 percent in 2023. In 2024, commercial systems would’ve been eligible for a 10 percent tax credit. Under the IRA, commercial solar projects qualify for a 30 percent ITC until 2025. Starting in 2025, the continuation of the ITC for commercial systems will depend on whether the solar and electric sectors meet the U.S Department of Treasury’s goals of reaching a 75 percent reduction in emissions below 2022 levels.
Things get a bit more confusing if a commercial solar system is over 1 megawatt (MW) in capacity. The Department of Treasury is currently trying to define metrics around prevailing wage and apprenticeship requirements to support projects using union labor. When these metrics are defined, after 60 days, commercial projects over 1 MW will receive a six percent base credit. The remaining 24 percent relies on the project meeting the necessary labor requirements.
On top of the 30 percent credit, a commercial project can also be eligible for additional credits if it meets certain criteria:
10% if 40% of the manufactured components were produced in the U.S.
10% if the project is located in an energy community, meaning it has brownfield sites or coal plant closures.
10% if the project is less than 5 MW in capacity and is located in a low-income community or tribal land.
20% if the project is less than 5 MW and is installed as part of a low-income residential building project or economic benefit system.
These additions could be particularly important for community solar projects, which tend to be less than 5 MW in size. Ultimately, if the cost to build a community solar project decreases, subscribers likely won’t have to pay as much for the energy it produces, benefiting renters and others who can’t install solar on their properties.
Under the IRA, commercial solar systems can now choose the production tax credit (PTC) instead of the ITC, which was available for wind projects but not solar until now. The PTC compensates system owners based on production (on a dollar per kilowatt-hour, kWh basis) instead of the system’s upfront cost. This credit will be especially attractive to owners of projects that produce a lot of energy but are relatively inexpensive to build (like large, utility-scale projects). The PTC is currently set at $0.026/kWh but rises with inflation.
Starting in 2023, the IRA also allows tax credits for the PTC and ITC to be transferred, which means that projects will now have more flexibility in terms of financing. Financing will no longer be limited to companies with enough tax liability, enabling individuals to help finance large solar projects.
Solar for nonprofits
Generally, to claim the ITC, you have to have enough tax liability (though the credit will roll over as long as the ITC is in effect). However, the IRA now includes a direct payment option for tax-exempt entities (importantly, homeowners and for-profit businesses are not eligible for a direct pay option). Before the IRA, if a nonprofit wanted to go solar, they’d typically have to partner with a company with tax liability for the installation to be affordable.
Starting in 2024, projects that don’t meet specific domestic manufacturing requirements (which aren’t yet defined) will only be eligible for a percentage of the full 30 percent direct pay option. Here’s what they’ll be eligible for:
2024: 90% of the full ITC
2025: 85% of the full ITC
2026: ineligible for the ITC
Energy storage
Currently, for storage (aka battery) systems to qualify for the ITC, they need to be paired with solar and have to be powered by solar at least 75 percent of the time for five years. However, starting in 2023, all residential storage systems (regardless of whether they’re paired with solar) will be eligible for the full 30 percent tax credit as long as they’re over 3 kWh in size.
Commercial storage projects must be larger than 5 kWh in size and are subject to the same prevailing wage and apprenticeship requirements as commercial solar projects to receive the full 30 percent ITC. As with commercial solar, the ITC for commercial storage is only guaranteed until 2025. There’s no direct payment option for tax-exempt entities for commercial storage.
Heat pump water heaters
The IRA revives the old Nonbusiness Energy Property Credit, which originally expired in 2022. This means that through 2022, you’ll be able to receive a one-time credit up of to $300 for your heat pump water heater – however, if you’ve already used this $300 on other qualifying systems (like central AC, a natural gas furnace, etc.), you won’t be able to use it now.
Starting in 2023, the Energy Efficiency Home Improvement Credit will replace the Nonbusiness Energy Property Credit. This will allow you to deduct 30 percent of the system costs (including labor) from your taxes, up to $2,000 – an annual credit instead of a one-time credit that will last until 2033.
In addition, your heat pump water heater could be eligible for up to $1,750 in state-administered High-Efficiency Electric Home Rebates. However, this might depend on the rebates already available in your state. The federal government has not yet announced if you’ll be able to receive both federal and state rebates, but it’s possible you could as long as the federal government doesn’t fund your state’s program. Your eligibility for the full amount will also depend on the following income requirements:
Fully eligible: your household income is less than 80 percent of your state’s median household income.
Eligible for 50 percent of the rebates: your household income is 80 to 150 percent of your state’s median income.
Ineligible: your household income is over 150 percent of your state’s median income.
Heat pumps for space heating & cooling
Like with heat pump water heaters, you can receive a one-time $300 tax credit on electric heat pumps through 2022 if you haven’t already received this tax credit for other eligible upgrades. In 2023, you’ll qualify for the same 30 percent tax credit, up to $2,000 – but, importantly, you’ll want to install your heat pump water heater and heat pump space heating & cooling system in different years if you want the full amount for each system.
Electric heat pumps used for space heating and cooling will be able to receive up to $8,000 in state-administered rebates. Again, this will depend on the same factors as heat pump water heaters – you might be limited based on your income and if your state already has a rebate program.
Efficient appliances
If you’re looking to install an electric stove, cooktop, range, oven, or heat pump clothes dryer, you could be eligible for an $840 state-administered rebate. Again, this will depend on the same income and state requirements previously discussed.
Energy efficiency & electrical upgrades
While there’s a slight exemption for heat pump water heaters and electric heat pumps, the Energy Efficiency Home Improvement Credit (which starts in 2023) generally limits you to $1,200 in annual tax credits. This can apply to various upgrades, including:
$600 for air sealing materials or systems
$150 for a home energy audit
$600 for upgrading your electrical supply if required for efficiency projects
Until 2023, under the Nonbusiness Energy Property Credit, you may be eligible for a tax credit of up to $500. However, this is again a one-time credit, so if you’ve already used it, you won’t be able to use it again. Additionally, if you’ve already used $300 towards a heat pump water heater or an electric heat pump, you’ll only be able to receive $200.
The IRA may also enable you to take advantage of a series of other rebates dependent upon your income and possibly the rebates already available in your state, as we discussed above. You could be eligible for the following rebates:
$1,600 for insulation, air sealing, and ventilation
$4,000 for upgrades to your electrical panel and service
$2,500 for electrical wiring
Electric vehicles
Electric vehicle (EV) incentives are a bit trickier than those we’ve laid out so far. First, the new incentives won’t benefit everyone hoping to purchase an EV – you may end up paying more for your EV than before the IRA’s passage. Also, it’s important to note that while we’re focusing on EVs, the details we discuss below also apply to hydrogen fuel-cell vehicles.
As soon as President Biden signed the IRA into law, it made several EVs ineligible for the electric vehicle tax credit. All EVs sold in the U.S. must now be assembled in North America to qualify. If you’d like to see which vehicles still qualify, check out this list.
Starting in 2023, tax credit eligibility will change even more for EVs. However, the IRA includes a transition rule that allows customers to create a “written binding contract for purchase” before the new tax credit structure goes into effect. This allows you to take advantage of the old tax credit even if they get your vehicle afterward. So, if you want to buy an EV and think you’ll benefit more from the tax credit as it stands today (i.e., you make a considerable amount of money and/or are buying an expensive EV), be sure to write this contract before the end of the year!
New vehicles will still be eligible for the current $7,500 tax credit (through 2032) – but, there will no longer be a vehicle cap, meaning companies that have already exceeded their 200,000 vehicle cap (like Tesla) will be eligible again. In order to receive the $7,500 you must meet income requirements and the vehicle must meet cost requirements, as follows:
Income:
Joint tax return less than $300,000
Head of household tax return less than $225,000
Single taxpayer return less than $150,000
Vehicle cost aka manufacturer’s suggested retail price (MSRP):
Vans, SUVs, and pickup trucks less than $80,000
Cars less than $55,000
Starting in 2024, at least 40 percent of the materials used in your new EV’s battery must come from the U.S. or one of our trade allies – in 2029, this percentage jumps to 100. Otherwise, you won’t be able to take advantage of the tax credit. In addition, if your EV’s battery uses materials from a country that the U.S. deems a state sponsor of terror or is blocked by the Treasury Department’s Office of Foreign Assets Control, you also won’t be eligible. Importantly, China currently controls about 75 percent of the world’s battery production and falls into that blocked category, meaning many EVs might soon not be eligible for the tax credit.
One new addition for EVs is that under the IRA, used EVs will also now be eligible for a tax credit of up to $4,000 or 30 percent of the sale price (whichever is lower). In order for the vehicle to be eligible, it must meet the following requirements:
The model must be at least two years earlier than the calendar year in which you’re buying it
The EV must cost less than $25,000
It must be the first resale of the EV, i.e. the first time selling it as a used vehicle
You also must meet certain requirements:
Can only get the used EV credit once every three years
Joint tax return less that $150,000
Head of household tax return less than $112,300
Single taxpayer return less than $75,000
Crucially, whether you’re purchasing a new or used EVs, the tax credit can now be transferred to you at the point of sale – this means that you won’t have to wait to file your taxes to receive the credit. Instead, you’ll get it upfront off your purchase price.