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Tax credits are the incentives in the Inflation Reduction Act – Entrepreneurs | Casual Expat

The Inflation Reduction Act (IRA) was signed into law by President Joe Biden on August 16, 2022. The goal is to reduce inflation by reducing health care costs, raising funds for the IRS, and funding efforts to decarbonize energy and climate through projects to reduce carbon emissions by (-40%) by 2030. The climate portion of the bill sees According to President Biden, $369 billion in funding to reduce climate change and “usher in an era of affordable clean energy in America.” However, not only in the form of direct payments, but also in the form of tax credits. Tax credits appear to be the real incentives in the IRA. – MarketBeat

IRA Summary

The IRA expects to reduce the US deficit by over $300 billion. It is expected to raise $737 billion, broken down into: $222 billion of 15% corporate minimum tax, $265 billion for prescription drug pricing reform, $124 billion for IRS tax enforcement , $74 billion for 1% share buyback fees and $52 billion for loss limit extension. The law envisages total investments of $437 billion, including $369 billion for energy security and climate change, $64 billion for an extension of the Affordable Care Act, and $4 billion for western drought resilience. It expects to cut energy bills by $500 to $1,000 a year. It expects to create millions of clean manufacturing jobs domestically through investments of more than $60 billion. The goal is to cut US emissions by 40% by 2030, the equivalent of 1 billion tons. It aims to add 950 million solar panels, 120,000 wind turbines and 2,300 grid-scale battery arrays, driving cost-saving clean energy projects for 42 million people. Reducing fossil fuel pollution aims to prevent 3,000 premature deaths and up to 100,000 asthma attacks.

Consumer Energy Tax Credits

The IRA includes $9 billion in residential energy rebates. Homeowners can apply for tax credits for installing energy efficient windows, doors, water heaters, air conditioning, and furnaces for solar panels and systems. It provides a $4,000 consumer tax credit for the purchase of used electric vehicles (EVs) and a $7,500 tax credit for the purchase of new EVs. However, it also requires manufacturing to be done in the US and EV battery components to be sourced from the US or another authorized reseller. This also applies to middle- and low-income households. Tax breaks are extended for the installation of EV chargers. While the original Nonbusiness Energy Property Credit expired in late 2021, the IRA will introduce the Energy Efficient Home Improvement Credit in 2023. It also simplifies the loan to 30% of the cost of any eligible home improvements made during the year. It is also extended to certain devices and equipment. However, canopies and circulating air fans are no longer covered. The original limit of $500 on the lifetime tax credit is replaced by an annual limit of $1,200 on the loan amount.

Energy tax credits for companies

The IRA is investing $30 billion in product tax credits to speed up the production of clean energy products like solar panels, batteries, wind turbines and mineral processing. It has $10 billion in tax credits aimed at building clean technology manufacturing facilities to produce clean energy products. It provides $20 billion to rural communities for forest conservation, fire-resistant forests, urban tree planning, and climate-friendly agricultural practices. It aims to protect nearly 2 million acres of national forests.

2025 tax credits for investments

The IRA will introduce technology-neutral investment tax credits (ITCs) that expand the scope of investments in renewable energy technologies. Currently, to qualify for ITCs, the investment must be directly associated with a project that uses solar, wind, or a small list of approved renewable energy technologies. This requires proof and demonstration of the integration of approved renewable energy sources to be used for the project, which can be complicated. The new ITC does not require any specific technologies, just that the project generates zero emissions. This can unlock a wide range of zero-emission investments, beyond the usual solar, wind and hydro technologies, to include battery technology, hydrogen, carbon sequestration and new technologies yet to be discovered. It does not allow ITCs to drive transmission investments, encouraging opportunities to optimize transmission technology more efficiently. However, with all the power expected to be generated, new transmission infrastructure would be required to distribute the power rather than pinning it to the points of generation.

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