Renewable Energy Incentives and the Inflation Reduction Act: What Taxpayers Need to Know

With 2022’s momentous Inflation Reduction Act (IRA) now law, taxpayers have various new opportunities to take advantage of renewable energy incentives that could significantly reduce their tax liability.

Saving money on your energy and tax bills while simultaneously benefiting the environment may sound great…but, of course, nothing about the tax code or this sprawling piece of legislation is exactly simple to understand or navigate. For taxpayers, this means knowing precisely what incentives are available and how best to leverage them can be daunting.

Whether you’re a homeowner interested in installing solar panels or a business owner looking to switch to renewable energy sources, you need to ensure you don’t leave money on the table. You must understand how the IRA will impact your decisions, the benefits and drawbacks of the various incentives offered, and how to approach filing your taxes and claiming incentives.

With the proper knowledge, taxpayers can take full advantage of the potential benefits of the Inflation Reduction Act. In this post, we’ll dig deeper into the renewable energy incentives provided by the IRA and explore opportunities that could help you save money and make well-informed decisions at tax time.

How does the Inflation Reduction Act affect energy?

As the most significant piece of renewable energy legislation in two decades, the Inflation Reduction Act can be a significant game-changer for the entire industry.

This substantial bipartisan infrastructure package is set to revamp and upgrade the country’s infrastructure over the next decade. It includes several provisions that will directly impact the energy sector. Among these provisions are tax incentives that encourage the development of renewable energy sources.

These incentives can help offset the upfront costs of investing in renewable energy, making it more accessible and affordable for those who might otherwise be unable to use technologies like wind and solar power. By doing so, the act aims to reduce greenhouse gas emissions, improve air quality, and pave the way for a more sustainable future.

For individuals and businesses interested in transitioning to clean energy sources, understanding how the IRA will impact their individual circumstances is essential to taking advantage of the available incentives in a way that aligns with their specific goals and priorities.

What renewable energy incentives are in the Inflation Reduction Act?

So, what exactly does the IRA have to offer?

Let’s start by taking a closer look at some of the major tax credits extended by the IRA: the Investment Tax Credit, the Production Tax Credit, and the Clean Energy Manufacturing Tax Credit.

What are the investment vs. production tax credits?

First, the Investment Tax Credit (ITC) is a federal tax credit that provides financial incentives for individuals and businesses to invest in renewable energy technologies. The IRA has extended the ITC for solar projects until 2030, meaning that you can receive a tax credit of up to 30% of the project’s cost if you invest in a solar project. This is a significant incentive for individuals and businesses interested in transitioning to clean energy sources, as the tax credit can help to offset the initial costs of developing and installing solar energy systems.

Similarly, the Production Tax Credit (PTC) is a tax credit that incentivizes the production of renewable energy. The IRA extends the PTC until 2031 for wind projects and offers a tax credit of up to 1.5 cents per kilowatt-hour of electricity produced. This provision is meant to incentivize the production of renewable energy, which can help reduce greenhouse gas emissions and increase energy independence.

Finally, suppose you’re in the clean energy manufacturing sector. In that case, the IRA also extends the Clean Energy Manufacturing Tax Credit (CEMTC) until 2030, which provides a tax credit of up to 30% of the cost of qualified investments. This tax credit is intended to incentivize the production of clean energy technologies.

Is the Investment Tax Credit (ITC) transferable?

The ITC is not refundable, meaning taxpayers can only claim the credit against their tax liability. However, there is some good news: Under the Inflation Reduction Act, project developers (except for tax-exempt entities) can transfer the Investment Tax Credit (ITC) or Production Tax Credit (PTC) to a third party.

There are some qualifications. For example:

  • The third party must pay for the tax credit in cash.
  • The income received is not included in the developer’s gross income and is not deductible by the third party.
  • To transfer the tax credit, the developer must make an election on or before the due date of their tax return in the year they are eligible to claim the credits.
  • Any ITC or PTC credits purchased may be carried forward. However, they may not be transferred to another taxpayer.

This provision creates a tax credit marketplace in which third parties will likely pay 92 cents on the dollar for a tax credit. This would leave developers with 90 cents and the market maker with the difference.

Developers may also opt to purchase ITC insurance, including the original ITC amounts and the eligibility determination for the third party.

Overall, the provision offers greater flexibility for developers to monetize tax credits and opens up opportunities for investors to participate in renewable energy projects.

What is the Inflation Reduction Act's federal solar tax credit in 2023?

The ITC rate varies based on the year of construction. So, suppose you’re considering installing a solar energy system in 2023. In that case, you need to understand the specifics to make the most of the federal solar tax credit available under the IRA.

For projects that commence construction before December 31, 2022, the ITC is available at the current rate of 26% of the solar project’s cost. For projects that start construction in 2023, the ITC is reduced to 22% of the solar project cost. For projects that commence construction in 2024 or later, the ITC is reduced to 10% of the solar project cost.

What other energy incentives are in the Inflation Reduction Act?

The Inflation Reduction Act provides several other incentives for energy development. These include, but are not limited to:

In addition, the Inflation Reduction Act also provides incentives for affordable housing and community development projects. The act provides tax credits for investments in community development entities (CDEs) and qualified, affordable housing projects. These tax credits can be used to offset the investor’s tax liability and combined with other tax credits.

In closing…

By taking advantage of renewable energy incentives provided by the Inflation Reduction Act, individuals and businesses can save money and have a positive impact on the environment at the same time.

Of course, with a complex topic, it’s always a good idea to carefully evaluate your unique circumstances to determine the best course of action for you. Consult with expert tax advisors (like us!) to understand which incentives apply to your specific situation and how to take advantage of them.

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Jeff Coyle, CPA

Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.

He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.

His business experience includes:

Creating and preparing financial reporting, budgeting and forecasting.
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Jeff also has a long history of helping individuals manage their taxes and plan their finances including:

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Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.

Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.

Jody H. Chesnov, CPA

Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004.  After a career of public accounting and general management, Jody knows the value of good financials.  Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.

He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles.  His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.

He has a particular expertise in early-stage growth companies.  His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.

Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller.  He has experience across industries, which gives him a deep understanding of business.

Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.

In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.  

He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.

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