September 02, 2022

The Inflation Reduction Act, Solar, and Clean Energy Tax Credits

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On August 18, 2022, the Inflation Reduction Act (IRA) instated the largest clean energy investment in United States history.

Including $370 billion set aside for renewable power and climate change programs, the IRA incentivizes emission-free electricity generation, storage, and energy-efficiency improvements for homeowners, businesses, and other domestic organizations.

In other words, solar power and electricity storage will continue to become affordable and accessible in the United States with federal tax credits designed to accelerate the renewable energy industry.

    Solar Energy and the Inflation Reduction Act of 2022

    The Inflation Reduction Act represents a momentous extension of solar tax credits for renewable energy system owners. It also introduces several new investments for clean energy manufacturing and industry advancement.

    Investment Tax Credit (ITC) Extension

    Originally enacted in 2006, the investment tax credit has helped the United States solar industry grow by more than 10,000% in 15 years. The Inflation Reduction Act of 2022 will extend the ITC for 10 years while reinstating a 30% tax rebate on the total cost of a solar installation.

    The solar ITC can be redeemed by the owner of a clean energy system on a residential or commercial property. At up to 30% of project expenses, the federal tax incentive can be applied to the total costs of parts, labor, and installation for solar energy panels, battery storage, and other system components.

    After the 10-year extension, the solar investment tax credit will be reduced to 26% of total system costs in 2033, then 22% in 2034. The current 30% tax credit will also be retroactively available for eligible solar energy system owners with installations completed in 2021 at a 26% rate.

    New Standalone Storage ITC

    Although the federal ITC has always been available for solar power and battery backup systems, the Inflation Reduction Act introduces a new tax credit for standalone electricity storage. At up to 30% of an Energy Storage System’s (ESS) total cost until the end of 2033, homeowners can qualify for tax credits on residential, standalone batteries with a capacity of 3 kWh and more beginning on January 1, 2023.

    On a shorter timeline, the new commercial storage ITC will also be available to businesses that install standalone batteries over 5 kWh between 2023 and 2025. The continuation of commercial storage credits beyond 2025 is contingent on the Department of Treasury’s future evaluation of carbon reduction goals.

    Clean Energy Jobs and Industry Growth

    In addition to the extended tax credits for solar and storage ownership, the Inflation Reduction Act will invest more than $60 billion in domestic clean energy manufacturing. This includes a $10 billion investment in clean energy system production, for technologies such as solar panels, wind turbines, and electric vehicles, as well as a $2 billion investment to accelerate renewable power research.

    Energy Efficiency and Home Improvement Tax Incentives

    Besides going solar, home and property owners can also benefit from the Inflation Reduction Act by improving their home’s energy efficiency. The bill allows homeowners to claim up to $1,200 annually with home improvement tax incentives for upgrades such as smart electricity management systems, appliance efficiency improvements, and new windows or doors.

    Within this $1,200 window, there are a few specific limits on what can be claimed for individual home energy efficiency tax credits. For instance, homeowners can claim up to $150 on a home energy audit or $600 on a main electric panel upgrade. Separately, homeowners can also receive tax credits up to $2,000 on full-home improvements such as electric heat pumps and electric hot water pumps.

    Electric Vehicles and Charging Stations

    To encourage investment in electric transportation, the IRA has extended the Clean Vehicle Tax Credit through 2032. Using the Clean Vehicle Tax Credit, qualified individuals and businesses can claim up to $7,500 after the purchase of a new electric vehicle. The Inflation Reduction Act also creates a Previously Owned Clean Vehicle Credit of up to $4,000 on used electric vehicles.

    In support of EV adoption, the IRA also extends the Alternative Fuel Vehicle (AFV) Refueling Property Credit for Electric Vehicle Supply Equipment (EVSE) installed before 2032. Offered at 30% of total purchase and installation costs, the AFV Refueling Property credit can be claimed by homeowners and businesses on the parts and supporting expenses for AC (alternating current) and DC (direct current) charging stations.

    Want an estimate of how much solar will cost you? Check out the Enphase System Planner, which allows you to customize the optimal system for your home’s needs.

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