Inflation has been rising over the past few years due to the pandemic, which has caused labor shortages, supply chain pressure, and many other issues. Consumers and businesses across all industries have been impacted by the rising costs associated with inflation, which brought about the Inflation Reduction Act of 2022 (IRA 2022). With the new law's introduction, several changes to the existing tax incentives for energy efficiency should be considered when updating your tax strategies in the upcoming year.

 45L Energy Efficient Home Credit Changes

Section 45L had expired initially in December 2021, but with the IRA 2022, it has been extended through December 2032. The credit amounts have been updated based on participation in the ENERGY STAR program, with credits ranging from $500 to $5,000 depending on whether prevailing wage requirements are met1. For example, new residential construction homes can qualify for a $2,500 credit by meeting ENERGY STAR requirements and prevailing wage rules.

179D Energy-Efficient Commercial Buildings Deduction Changes

The 179D deduction has been significantly changed under the IRA 2022. The base deduction now starts at $0.50 per square foot for buildings that achieve at least 25% greater efficiency over the baseline model and can increase up to $5.00 per square foot for projects meeting prevailing wage and apprenticeship requirements4. The changes remove partial qualifications and expand eligibility to all tax-exempt entities.

Commercial Clean Vehicle Credit (Section 45W)

A new credit for commercial clean vehicles went into effect on January 1, 2023. Section 45W offers credits up to $7,500 for vehicles under 14,000 lbs and up to $40,000 for heavier vehicles to incentivize the use of environmentally-friendly models.



Additional Provisions and Updates

The Inflation Reduction Act contains various other clean energy, climate, and tax incentive provisions that have been detailed in subsequent guidance from the IRS, Treasury, and other agencies. It is critical that taxpayers and advisors consult the latest releases to ensure full compliance and maximize available benefits.

Staying Up to Date

Given the evolving guidance around IRA 2022 incentives, it is vital to check the IRS, Treasury, and Department of Energy websites regularly for updates that may impact eligibility and tax planning. Reach out to our team if you need any assistance navigating the new and expanded tax provisions related to energy efficiency.

Understanding these 45L and 179D energy efficiency updates can help you maximize deductions and credits in the upcoming tax years. Our team at STG is here to walk you through these updates, so contact us today!