Business owners should always look for opportunities to expand their markets or pivot their product lines to take advantage of changing marketplace conditions. Whether opportunities come in the form of new marketplace demand that can boost revenues or tax incentives that can save money, recognizing the opportunities and making the changes needed to take advantage of them is an important growth strategy.
I recently talked with the owners of a company that is in the hydrogen business. They were excited about the opportunities that will come to their industry from a massive piece of clean energy legislation called the Inflation Reduction Act (IRA,) which was signed into law on August 16, 2022.
The IRA will accelerate a shift that has been occurring for a while in American business. Rather than view government environmental initiatives as a regulatory burden, businesses are now seeing the new commitment to clean energy – taking the form of significant tax credits and other spending programs – as opening new markets and opportunities.
The IRA – which commits the largest investment in this nation’s history to climate action and clean energy – provides such opportunities for many businesses. Smart business owners already are fine-tuning their product lines or investing in new technologies to take advantage of the legislation’s myriad ways to garner significant tax breaks.
IRA Fuels ESG Trend
In a broader sense, the IRA adds economic fuel to the growing trend in the business world toward proactive business practices that support environmental, social and governance (ESG) goals. It’s an example of how the government uses the tax code to encourage businesses and individuals to do things that advance national goals.
We discussed the ESG trend last month in this space and focused on the way businesses and corporations are, in many instances, taking the lead in implementing policies and practices that can benefit the environment and society as a whole.
Government often uses the tax code to encourage such policies and practices in the private sector, and that’s exactly what the IRA does. You may not like all its provisions. There’s plenty of fine print and, as the old saying goes, the devil is in the details. For example, some tax incentives are tied to strict adherence to labor rules such as paying prevailing wages, or to requirements that products contain a certain percentage of American-made components.
Those requirements could knock a lot of companies – especially smaller businesses – out of eligibility. Or they could spur new thinking about how selling into new markets can help pay those prevailing wages or how to source more American-made components.
Let’s look at just a few of the IRA provisions that would impact businesses and encourage investment in clean energy:
- A $3-per-kilogram tax credit for hydrogen produced with renewable energy and nuclear energy. The credit encourages hydrogen producers to develop cleaner ways to synthesize hydrogen, which is used to make fertilizer and in industrial processes. The credit could help grow a new industry looking to use clean hydrogen as a replacement for fossil fuels.
- Expansion of the research and development (R&D) tax credit for small businesses. The act doubles the amount against which the credit can be taken, to $500,000.
- Production tax credits for renewable power sources are extended and, in some cases, enhanced. Existing credits covering alternative energy facilities that began construction before 2022 are now extended to facilities constructed through 2025 providing wind, biomass, geothermal, solar, landfill gas, trash, qualified hydropower, marine and hydrokinetic resources.
- Investment tax credits are extended through 2024 at a base rate of 6% for solar, fuel cells, waste energy recovery, combined heat and power, small wind property, and 2% for microturbine property. However, the credit amounts can increase significantly for projects that pay prevailing wages.
- Tax credits are added or extended to boost production on advanced energy and manufacturing projects. Eligibility would require companies to produce and source certain components in the U.S.
- A tax credit for purchase of electric commercial vehicles, up to $7,500 for vehicles weighing less than 14,000 pounds, and $40,000 for vehicles over 14,000 pounds.
- Extension of the tax credit for alternative fuel refueling property, including recharging stations. This tax credit expired in 2021 but is extended through 2032. The credit is up to 30% of the first $100,000 and 20% for larger amounts.
- A tax credit for building energy-efficient homes. This credit had expired at the end of 2021, but contractors may now claim it through 2032.
These are just a few of the $369 billion worth of clean energy provisions in the IRA, but they provide a glimpse into the tax incentives that will reward businesses that explore new product lines and new ways of doing business.
There is much more to the IRA than the business provisions. Many clean energy tax credits will benefit individuals who, for example, make energy-efficient improvements to their homes. The act also includes significant healthcare provisions, such as enabling Medicare to negotiate some prescription drug prices.
No doubt, it will be several years before the full impact of the IRA is apparent. But to the extent that it opens new opportunities for American businesses to innovate and grow, and to advance the ESG values that many companies are embracing, it appears to be a factor that will help companies already committed to clean energy markets continue to thrive.
President & CEO
brandon.miller@hwco.cpa
