The Inflation Reduction Act (IRA) of 2022 is a game changer for businesses pursuing sustainability. Among the many initiatives the IRA covers, it has a strong focus on reducing energy use and expediting renewable energy development in the U.S. It is the largest climate and energy spending package in U.S. history and includes $394 billion in funding for renewable energy and climate resilience projects. Out of this, $216 billion are tax credits for businesses.
This is an opportunity for businesses to improve their sustainability with significantly reduced costs — a chance that should not be passed up. However, specific guidelines and targets must be met to qualify for the incentives. Understanding what the IRA covers and how to qualify is critical for interested parties.
If you want a deeper understanding of the IRA and its relevance to business owners, be sure to check out this recent blog. However, if you're already committed to pursuing IRA incentives, here are some quick tips for you!
Start Planning Early
It's always better to be proactive rather than reactive. Knowing what's possible before starting a project and integrating IRA requirements throughout the process is far more efficient than trying to prove compliance retroactively. This proactive approach is not only a good idea for programs in the IRA but also for sustainability initiatives in general.
Including sustainability programs from the beginning of a project integrates them throughout its lifecycle rather than retroactively squeezing them into existing systems or searching for the necessary budget.
Fleet Vehicle Cost Savings
The IRA offers a tax credit for 30% off the sale price of commercial electric vehicles, up to $7,500 per. Trucks have incentives of up to $40,000. This is the first federal tax credit for commercial EVs and is valid through 2032.
To help efficiently capitalize on this, it's useful to have an inventory of your existing fleet. Having a record of all vehicles, their age, and average yearly mileage helps prioritize which vehicles should be "retired" first and create a budget for their replacement. Because the tax credit is available until 2032, businesses can retire their existing vehicles when they are no longer cost-efficient to maintain and when it makes the most sense.
The IRA offers incentives for either the initial installation of renewable systems or for producing renewable energy — the same renewable energy system can't claim both. Which option is better depends on the size of the system, installation cost, and efficiency. Typically, larger projects with high rates of energy generation should go for the production credit, and smaller, less efficient projects are better off with the installation credit.
Energy Investment Credit
The energy investment tax credit provides a 30% credit for the installation and equipment costs of solar, wind, energy storage, and other renewable energy systems. An additional 10% tax credit is available for projects in low-income communities. That's a chance to reduce installation costs by up to 40%! However, to qualify, the installation and maintenance workers on the project need to be paid the local prevailing wage, and at least 10% need to be in registered apprenticeship programs.
Meeting this tax credit requires forward planning. You should start by evaluating which type of renewable energy system is most suitable for your location. Factors such as annual sunshine and wind are major considerations, along with available space to place the system. Next up is getting estimates and ensuring contractors can meet the labor requirements to qualify for the tax credit.
Clean Energy Production
The production tax credit is 2.75 cents per kWh of renewable energy produced for the first 10 years of the project's lifetime. It has the same labor requirements as the investment tax credit.
Again, planning is critical. Not only do you need to ensure labor requirements are met during installation and following 10 years of maintenance, but you also need to determine whether the production or investment tax credit is the best option. Using an online renewable energy calculator is a good place to start, but using a professional to model your location's renewable energy potential is even better.
Energy-Efficient Building Improvements
Improved building-related energy efficiency is a significant focus of the IRA. The IRA extended and expanded the existing 45L tax credit, which provides incentives for homebuilders, and the 179D credit, which focuses on commercial structures.
Residential units can receive a maximum credit of up to $5,000 when they meet the Energy Star Program and the Department of Energy's Zero Energy Ready Home Program requirements. Commercial structures can receive between $2.50 and $5.00 per square foot based on building energy efficiency improvements. Just like with renewable energy, 45L and 170D have worker prevailing wage and apprenticeship requirements.
Developers aiming for either tax credit need to make their design team aware of their goal in the early planning stages. Meeting DOE program requirements and achieving high energy efficiency requires specific designs that are far above what is typically included in standard building codes. This will likely involve building-specific strategies and early-stage energy modeling to meet necessary energy savings. Additionally, the 179D credit requires developers to receive third-party verification of energy reduction estimates, which requires thorough documentation of proposed energy savings.
Opportunities For Other IRA Incentives
Beyond what was already discussed, a variety of opportunities are available for more niche businesses. This includes tax credits for businesses manufacturing renewable energy components or implementing carbon capture equipment.
Researching the IRA to identify which incentives apply to your specific projects and understanding how to claim them is an integral part of forward planning. You can also tap into sustainability experts to help guide you through the process!
Emerald Built Environments Can Guide You Through the IRA
Navigating the complexities of the IRA and understanding which incentives your business can claim requires expertise. Additionally, making sure the incentives play a significant role in your business's larger sustainability programs, rather than a one-off project, is important. Showing ongoing sustainability improvements continues to grow in importance to investors and consumers alike.
At Emerald Built Environments, we can help you throughout the process, from initial inquiries into how the IRA applies to your business to integrating them into an ongoing sustainability roadmap. We specialize in helping business owners identify and implement ESG programs. Learn more about how we can support your sustainability journey.