Energy Tax Credits for 2023
Article By: Jill Bauer and Jeff Poeschel
With the Inflation Reduction Act already law for a year, we look at how this will help you on your taxes for 2023. The Residential Clean Energy Credit is for both new homes and existing homes. The limits vary with these improvements. For example, there is a solar energy credit limit of 30% of the cost of the solar unit and installation of the unit. No limit on the amount eligible for the 30% credit on solar projects. A biomass stove has the same 30% credit on the cost of the unit and installation, but the credit maxes out at $2,000. Additional items that may be eligible for tax credits are solar water heaters, wind turbines, geothermal heat pumps, fuel cells, and battery storage technology. This tax credit is nonrefundable so it can only be used to off-set current tax liability. Any unused credit will be carried forward to off-set tax liability in future years.
There is a solar incentive called Investment Tax Credit (ITC) for businesses and farmers. These credits are like the Residential Clean Energy Credits, however there are additional credits available if your solar systems meet certain requirements. If 40% of the manufactured components were produced in the U.S., you can take an extra 10% credit. This means the total credit on a qualified project would be 40% of purchase and installation costs. Another nice feature is that you can also depreciate the solar system for your business or farm. To calculate this, take the total cost of your solar system (minus any rebates, grants, or personal use portion) and subtract 50% of the Investment Tax Credit. For example, if the cost of your solar system is $100,000 your ITC at 30% would be $30,000. The amount you would be able to capitalize and depreciate is $85,000 ($100,000 - $15,000).
The USDA does have some grants and loans for small businesses and farmers to help with solar and other energy tax credit eligible projects. Please visit https://www.rd.usda.gov/programs-services/energy-programs/rural-energy-america-program-renewable-energy-systems-energy-efficiency-improvement-guaranteed-loans for more information.
For information on Residential Clean Energy Credits and Investment Tax credits please contact your tax advisor.
Jill Bauer and Jeff Poeschel work at Sundstrom & Company tax and accounting services. The Sundstrom & Company team's focus is helping clients navigate and comply with current tax laws while keeping an eye on long-term tax and succession planning.