Sustainability Incentives for Small Businesses in the Inflation Reduction Act
In August of 2022, Congress passed the Inflation Reduction Act, which included a wide array of tax incentives to promote more sustainable business practices. While many businesses are eager to reduce their carbon footprint, it can be hard to understand the legislation and the financial opportunities it provides to help lower the costs of that transition, especially for smaller businesses.
As a small business ourselves, and one that prioritizes the environment, we set out to better understand how the Inflation Reduction Act might help us make sustainable improvements to our business. We read over the legislation and found two broad areas where it might help our business (and others like us) transition towards a greener future: renewable energy and electric vehicles.
To be clear, the act contains many complicated conditions and limitations that are beyond the scope of this blog and require a professional accountant with detailed knowledge of the tax code to implement correctly. We simply want to share what we’ve learned to give you a sense of what opportunities may exist for your company. You can then use this information as a starting point for conversations with your accountant.
As renewable energy generation becomes more economically accessible to non-utility scale producers, you may have considered making the investment to install solar panels on your business or institution’s property. The Inflation Reduction Act extends tax incentives that make it possible not only to save money by generating your own power but also to be able to receive significant tax credits for doing so.
The government offers a choice between two mutually exclusive tax credits to subsidize the cost of installing renewable energy generation capacity, including solar, wind, geothermal, and hydroelectric. While the tax credit applies to any of these energy sources, the one most feasible for a small business is solar. Note additional rules may apply to sources other than solar and on-shore wind.
The first is the investment credit that allows you to deduct 30% of the cost of installing renewable energy generation capacity. This is generally the better option for smaller-scale producers that are primarily interested in generating power for their own business and want money upfront. This is likely the option More Vang would make if we decided to install 200 solar panels on our roof.
The second option is a production credit that allows you to earn 1.5 cents per kilowatt/hour of energy you sell to a third party (usually a utility company) for a period of 10 years. This option makes sense if you’re generating a large amount of power, especially in an area well-suited to the energy resource you are harnessing. For example, if a state university wished to install four full-sized wind turbines in a particularly windy area, they would likely make more money opting for the production credit. This is because larger projects and those in particularly windy or sunny areas tend to generate more energy per dollar spent and can be cost-competitive on the energy market.
If you buy American-made renewable energy equipment, you can get an additional 10% credit applied until 2024 when it will be reduced to 9%. Further credits are available if you are located in a low-income, tribal, or energy community (e.g., a coal mining county). There are some restrictions to eligibility. The credits have only been approved until 2025, so equipment installed later will not be covered. You generally must begin construction within 60 days of receiving approval. And if you are a large-scale producer (more than one megawatt hour or roughly 2,000 solar panels), significant labor regulations apply regarding the installation or construction of the energy-generating equipment.
The second portion of the Inflation Reduction Act that will likely have a major impact on a wide range of businesses is the electric vehicle tax credit. This tax credit is very generous, but there are some limitations you may have to consider depending on your needs.
For small vehicles, like a company car, pickup truck, or van, the government will grant a $7,500 tax credit provided that it is from a qualified manufacturer. This requirement applies to larger vehicles as well. For a larger vehicle like a commercial truck, the tax credit is the lesser of these scenarios:
- The difference in cost between an electric vehicle and a comparable (likely diesel) vehicle
- 15% of the cost of a hybrid or 30% of the cost of a fully electric vehicle
This is a considerable write-off considering the savings in fuel costs over a vehicle’s lifespan. Electric semi-trucks, however, are relatively new on a commercial scale. The technology is improving rapidly, but as of now electric semi-trucks do not have the same range as conventional vehicles. Most models have a range of around 100-300 miles before needing one to two hours of charge. This may make sense for your business if your shipping needs are mostly local and relatively low frequency. Otherwise, it probably makes more sense to wait for the technology to improve.
The electric vehicle tax credit extends until 2032, although there are increasing requirements about the national origin of components as time goes on and the credit may not survive a conservative congress. In order to receive this credit, a vehicle under 14,000 pounds will need to have a battery of at least 7 KWH, and a vehicle over 14,000 pounds will need a battery of 15 KWH. An all-electric vehicle will meet these requirements, but there may be rare cases where a plug-in hybrid vehicle does not. A non-plug-in hybrid (one that generates electricity from its engine as most early hybrids did) will likely not meet this requirement.
To help both individuals and businesses navigate the tax credits and deductions available under the Inflation Reduction Act, the IRS has set up a page to provide guidance as it becomes available. You may also read the original Inflation Reduction Act itself here. As with all legislation, requirements and details are subject to change as the law is amended over time, so be sure to check with your accountant on the latest information.