December 27, 2023
While we’ve seen a relatively quiet year in terms of tax law changes, there is always a laundry list of items to check on as we wind up another calendar year and brace ourselves for the onset of another tax compliance cycle. Most of our major tax updates relevant for the 2023 filing year have stemmed from the passing of the SECURE 2.0 Act, along with the Inflation Reduction Act. Each of these acts contained several amendments to existing laws. Under the Inflation Reduction Act, perhaps the most detailed revisions to tax law surround clean energy credits. In this realm, the two credits we get the most questions about as farm tax preparers are the Solar Energy Property Credit and the Clean Vehicle Energy Credit. We will mainly focus on these two credits, but will also touch on other energy property credits to consider as you ready your 2023 year-end materials for your tax preparer.
The unique application of energy credits
Unlike a lot of tax credits, energy credits have widespread applicability to both individual taxpayers and business owners. The credits themselves are commonly established under Internal Revenue Code Section 48. In terms of claiming the credit, we look to Section 38 (General Business Credits) for businesses and Section 25D (Residential Clean Energy Credit) for individuals. You’ll find, though, that the end result is often the same, and we have only one set of rules for deciding which property qualifies. This is great news for many taxpayers – it allows a broader range of choices in deciding to make these investments. Whether you are looking to make a clean energy investment personally or for your business, chances are these credits will apply to you.
Solar Energy Property Credit
Most are aware by now, but under Internal Revenue Code Section 48, solar energy property is just one of the alternative energy types that has offered a 30% non-refundable tax credit for several years. A non-refundable credit is one that does not reduce your tax liability beyond $0. (Note: in such a case, you still may receive a refund if you had withholdings or other, refundable credits at play in your tax situation).
Any claimable credits in excess of a taxpayer’s liability are carried forward to a future year. Prior to the Inflation Reduction Act, the solar energy credit was set to phase down between 2020 and 2023. For tax years 2020 and 2021, the credit decreased to 26%. However, beginning for property placed in service in 2022, the 30% credit was restored and will remain in effect until 2033, when the phaseout will again begin over a three-year period.
For individuals, the credit is claimed on Form 5695: Residential Energy Credits. The costs which qualify for the credit include materials and labor for onsite preparation, assembly or original installation of the property and for piping/wiring to connect it to the home. Solar roofing tiles and solar shingles qualify, but trusses or traditional shingles that support solar property do not, as these components serve primarily a structural function and not an energy-generating function. To claim the credit, provide the total of all qualifying costs.
It is also recommended to submit supporting documentation (i.e. vendor/contractor invoices or itemized statements) to make the reporting process easier.
For businesses, the credit is claimed on Form 3800: General Business Credits. The mechanics of the General Business Credits are beyond the scope of this article, however important to note are the General Business Credit’s ordering rules and the overall limitation of an allowable credit for taxpayers whose tax liability exceeds $25,000. As far as ordering, energy property is second only to rehabilitation credits. For taxpayers with a tax liability of $25,000, the credit is limited to 25% the amount over $25,000. As a tax planning point, business taxpayers will want to check with their tax advisor to be sure they are not losing the benefits of any General Business Credits, should they be eligible for multiple credits in a single year.
Clean Vehicle Tax Credit
This credit has caused some confusion among taxpayers, as we often see its benefits advertised by car dealerships and manufacturers, with very hard-to-read fine print at the bottom. In general, for property placed in service in 2023, qualified new plug-in electric vehicles (EVs) or fuel cell electric vehicles (FCVs) will qualify taxpayers for a credit of up to $7,500. Qualified used Evs or FCVs purchased from a licensed dealer for $25,000 or less may qualify for a credit equal to 30% of the sale price, for a maximum credit of $4,000. These credits are non-refundable, and more importantly, cannot be carried forward.
Due to the lack of a carryforward provision, consulting with your tax advisor about your expected tax liability in the year of purchase is crucial to ensure full utilization of the credit. Since the criteria for qualified vehicles has changed drastically in the years since the credit was first created, we recommend utilizing the U.S. Department of Energy’s Office of Energy Efficiency & Renewable Energy’s website at www.fueleconomy.gov. The website has a tax incentives section, which allows a search of qualified vehicles by model year, make and model. This available tool should be the first thing taxpayers check when having conversations about qualifying vehicle purchases with their dealer. This list is updated for each model year and has changed based on modifications to the qualifying vehicle criteria.
An important limitation to the Clean Vehicle Tax Credit is an Adjusted Gross Income (AGI) limit of $300,000 for married couples filing jointly, a $225,000 limit for head of household filers, and a $150,000 limit for all other filers. If your AGI exceeds the applicable amount in the year of purchase, you will not qualify for the credit.
Another potential limitation involves the placed in-service date if the vehicle was purchased in 2023. For vehicles placed in service January 1 through April 17, 2023, to qualify for the full $7,500 credit, a vehicle must meet certain battery capacity requirements. Starting April 18, 2023, the battery capacity requirements were replaced by critical mineral and battery component requirements. These criteria are also addressed on the available lists at www.fueleconomy.gov. Finally, the vehicle must be primarily used in the U.S., and not be purchased for resale.
As you can see, the navigation of this credit is very nuanced. Thankfully, the IRS has proposed regulations which will allow car dealers to initiate the qualifying credit at the point of sale. This will put the responsibility of claiming the credit on the dealership rather than on the taxpayer and will surely eliminate confusion over qualifying vehicles. It does appear, though, that the dealership claiming process is optional, and therefore, we still recommend mentioning these purchases to your tax preparer to ensure the appropriate credits have been claimed.
Other Energy Property Credits
For various other consumer energy property credits, most contractors or retailers have enough familiarity to boast applicability when marketing these items. However, it can still be easy to overlook these incentives when preparing your tax materials. In 2023 and beyond, there are many home energy property items which qualify, from heating and cooling systems to energy-efficient insulation, windows or doors, and even home electric vehicle chargers. Many of these have a credit of 30% of the cost, but with total credit limits ranging from $600 to $2,000. This makes them less impactful than the solar credits or clean vehicle credits, but still worth pursuing when these investments are made.
In addition to home energy property credits, there are also various credits for energy producers, and a boosted credit for solar and wind facilities placed in service in connection with low-income communities. While these are not widely applicable to Farm Credit East’s customer base, a general rule of thumb is to always check with your tax advisor when making any investment in clean energy usage, as these rules continue to evolve and expand as their adoption becomes more widespread.
Taxes are becoming increasingly more complex every year, don’t try to navigate the waters alone. Contact a Farm Credit East tax specialist today to discuss your situation and options that may be available!
Senior Tax Specialist
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