What You Need to Know About the Inflation Reduction Act
In early August, Congress passed the Inflation Reduction Act (IRA). This bill is claimed to be one of the boldest climate packages to date. As the name suggests this bill's goal is to reduce the nation’s overall deficit and reduce inflation. The Act includes investments into U.S. manufacturing, prescription drug reform and the expansion of the Affordable Care Act. But most importantly, it contains an unprecedented investment into renewable energy and decarbonized grid.
Close to $369 billion from the bill will be invested into the nation’s energy security and climate change. It is expected that this bill will cut greenhouse gas emissions by about 40% below 2005 levels by 2030. To achieve the goals set forth, the government will utilize direct incentives and rebates for renewable energy, energy efficient upgrades, and electric appliances. This bill takes a step in the right direction to start lowering greenhouse gas emissions, and the effects of climate change. Not only are there the environmental benefits, this bill will create a numerous number of jobs in the clean energy sector.
What Does This Mean for the Consumer?
One of the most notable parts of the bill is the extension of the federal tax credit. The IRA extends the tax credit until 2035 and increases the credit amount back to 30% until 2033. In 2033, the credit will step down to 26% and in 2034 step down to 22%. The tax credit will completely expire for residential installations in 2035. This means for the next 10 years homeowners will be able to claim 30% of the total solar system cost on your federal taxes. For example, if your solar system costs $22,000 you would be able to save $6,600 on your federal taxes. You are able to roll this credit over for up to 5 years in case you do not have enough tax liability in the first year.
Similar to residential projects the tax credit for commercial solar projects has been raised to 30%. However, unlike residential projects this tax credit will end in 2025 but is contingent on if the Department of Treasury goals have been met or not. Additionally, commercial projects may qualify for an extra adder. Projects that meet these criteria can potentially add an additional 10% credit per adder:
- Meet a certain percentage of domestic manufactured products used
- Projects using Brownfield sites or old coal plant
- Projects that benefit low-income or tribal land (< 5 MW AC)
- Projects less than 5 MW AC That qualify as residential projects or economic benefit system (20% adder)
This means your commercial project has the potential of increasing the ITC to 60%, depending on if you meet ALL of the requirements needed. Additionally, new to this bill, projects under 5 MW AC can now receive the ITC for any interconnection fees associated with the project.
Nonprofit & Government Solar
Due to nonprofits and government agencies being tax exempt from paying federal taxes they are not able to receive the ITC. The IRA extends a direct pay provision for these types of organizations. This will allow these types of organizations to reap more benefits and savings from direct ownership, versus having to rely on a PPA system.
With the passing of the IRA, battery storage systems over 3 kWh can now qualify for the tax credit without the need to be paired with a solar energy system. This is a huge benefit for those who aren’t ready for solar but want to have a backup energy source without the need for a noisy generator. Batteries will be subject to the same tax credit schedule as solar systems. Commercial storage projects are now eligible for the ITC credit that are larger than 5 kWh. Like residential storage, you know longer need to pair it with a solar system in order to receive the credit.
Along with solar and battery storage systems, EVs have been given an updated tax credit incentive. In order to get the full $7,500 credit, the battery within the car must have a certain percentage of critical minerals extracted and or processed in the U.S. There is also the exception to that ruling, if the country has a free trade agreement with the U.S. it will also qualify the EV for the full credit. The Act also brings forth a $4,000 tax credit for the purchase of used EVs.
The Inflation Reduction Act (IRA) is taking the right step towards a cleaner and greener future. By 2030 greenhouse gas emissions are estimated to be reduced to 40% of 2005 levels. “Congress has passed the strongest legislation ever to support a clean energy economy in the USA. The Inflation Reduction Act is unprecedented and carves a path towards a greener and cleaner future. Through the bill’s proposed incentives and rebates, homeowners and businesses will now be able to invest in more affordable solar and other climate reduction measures. We thank everyone in Congress who played a part in helping this bill get passed. The future of renewables just got a lot brighter.” – Eric Peterman, GRNE Solar CEO