Signed into law on August 16, 2022, the Inflation Reduction Act of 2022 (IRA) includes major provisions that address several main issues, including:
- Climate change
- Clean energy
- Affordable healthcare
It also includes several tax credits and incentives aimed at small businesses and startups with a goal to energize and stimulate the U.S. economy. As the IRA begins to take effect in the coming months and years, private business owners will need to be increasingly aware of the act’s changes and possible benefits.
While much of the IRA is largely aimed at addressing climate change and benefiting smaller and/or underserved businesses, here we examine the IRA’s effects across four categories relevant to private business owners – clean energy, research and development (R&D), healthcare reforms, and corporate tax provisions – so that you can feel better informed and equipped to take advantage of the opportunities and benefits available to your business.
Clean Energy Tax Credits
The IRA directs $369 billion of spending and tax incentives toward clean energy and climate change provisions. Much of this funding is in the form of tax credits; with $216 billion of tax credits available to corporations, business owners are encouraged to invest in the clean energy economy and technology.
Along with encouraging private investments in the energy sector, these tax credits incentivize any businesses not previously involved with or using clean energy to consider new investments. Relevant tax credits available to private business owners include:
- Deductions for energy-efficient commercial buildings
- Credits for qualifying commercial clean vehicles
- A two-year extension on investment tax credits (ITC) and production tax credits (PTC)
Overall, the IRA provides significant incentives for private business owners to get involved or invested in clean energy and puts many businesses’ net-zero climate goals within reach
Deductions for Energy-Efficient Commercial Buildings
A tax deduction is available for energy-efficiency improvements to commercial buildings. Eligible recipients are owners, long-term lessors, and designers of energy-efficient building property, and eligible improvements include lighting, heating, cooling, and ventilation. Depending on the increase to efficiency, you can receive anywhere from $0.50 to $1 per square foot, with deductions over a four-year period capped at $1 per square foot.
Credit for Qualified Commercial Clean Vehicles and Sustainable Aviation Fuel (SAF)
For businesses that use a fleet of company cars or commercial vehicles, the IRA provides an incentive to transition your fleet to electric. If you purchase qualified commercial clean vehicles, you can receive a credit that is equal to the lesser of:
- 15% of the vehicle’s cost (30% for vehicles without internal combustion engines, or ICE)
- The amount the purchase price exceeds the cost of a comparable ICE
This credit is capped at $7,500 for electric vehicles weighing less than 14,000 pounds and at $40,000 for all others.
If your business uses planes or is involved in the aviation industry, there is a tax credit available for the use or sale of SAF instead of petroleum-based jet fuel. To qualify, the SAF must be produced in the U.S., and the planes must be fueled with the fuel in the U.S. It is possible to receive a credit of up to $1.25 per gallon of SAF.
Extensions of the ITC and PTC
With the ITC and PTC, taxpayers can deduct a percentage of the cost of renewable energy from their taxes. The IRA extends these credits through at least 2025, when they will be phased out and replaced by clean energy investment and production tax credits, which will be functionally similar but not as tech-specific as the current credits.
The ITC and PTC are available to taxable business entities and certain tax-exempt business entities; the tables below outline qualifying projects and the available credit amounts. The available base credit amounts are 30% for ITC and $0.0275 per kWh for PTC, assuming all wage and apprenticeship requirements are met. If the project is greater than 1 megawatt, alternating current (the megawatt capacity of a solar-generating station), the base ITC credit is 6%, and the base PTC is $0.005 per kWh.