Conversations surrounding tax strategies for energy credits have been happening for decades, but the passage of the Inflation Reduction Act (IRA) in August 2022 has reinvigorated the intent and incentive behind the credits. The IRA increased the available clean energy federal funding to $400 billion, creating a strong incentive for banks to reassess their clean energy investment strategies.
Investing in renewable energy projects creates eligibility for energy credits. The credits are applied directly against tax liabilities, effectively providing a dollar-for-dollar reduction in income taxes. By structuring investments this way, banks can both support green initiatives and make a return on investments through tax savings.
The IRA has enhanced and introduced three credits that may apply to your bank’s tax strategy: the investment tax credit (ITC), the new clean vehicle credit and the alternative fuel vehicle refueling property credit.
Investment tax credit
The ITC is available for energy properties placed into service. Some examples include solar energy (such as solar panels or fiber-optic solar), wind energy and energy storage. Requirements for the property include original use of the energy property by the taxpayer and the specification that the property must be depreciable.
For property placed into service after December 31, 2022, the ITC base credit is 6% of the cost of the property and installation, with multipliers that can increase the credit up to 30%.
Energy properties funded with tax-exempt bonds will reduce the credit proportionally and, once the credit has been claimed, the depreciable basis of the property is reduced by 50% of the credit amount.
New clean vehicle credit
New vehicles placed into service after April 18, 2023, will qualify for the new clean vehicle credit of up to $7,500. To maximize this credit, the vehicle must meet both the critical minerals requirement and the battery components requirements, each worth $3,750 respectively.
Other requirements to take into consideration for this credit include:
- Gross vehicle weight rating
- Domestic production
- Seller requirements
If your bank is already considering the purchase of new vehicles, this credit may create an incentive to invest in clean vehicles.
Alternative fuel vehicle refueling property credit
This credit has stricter qualifications but may be applicable to rural and nonurban-based banks.
It applies to the cost of equipment and installation of alternative refueling sources, such as electric vehicle charging stations. The base credit is 5% but can increase to 30% with multipliers for a maximum dollar value of $100,000. The property must be installed in nonurban or low-income census tracts as defined by the Department of Housing and Urban Development.
Once earned, C corporations can claim credits directly against their tax liability, and S corporations pass the credits through to their shareholders on schedule K-1. The use of credits by shareholders may be limited by passive activity rules.
How Wipfli can help
While there are immense potential benefits to taking advantage of clean energy credits, navigating the specific requirements of energy credits and ITCs can be complex. Wipfli’s team of tax professionals brings our specialized knowledge of financial institutions to help you tap into these opportunities.
Contact us to learn how we can help you identify the strategies you need to enhance profitability and contribute to a sustainable future.
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