Federal Tax Credits for Electric Vehicles (New or Used), Home Charging Stations, and Solar Energy   

by Walter Martin, JD, LLM

The U.S. Congress and automakers are promoting electric vehicles to reduce carbon emissions and create a cleaner environment. General Motors’ aim is to stop selling gasoline-powered vehicles by 2035 and pivot to battery-operated models.  However, the minerals used to make current batteries and the mining process itself creates additional environmental problems and child safety issues.  To promote clean energy, Congress passed the Inflation Reduction Act (IRA) of 2022.

Electric Vehicle (EV) Charger Tax Credit – IRC 30C 

Taxpayers are eligible for a one-time nonrefundable tax credit of 30% of the costs of an electric vehicle charging station installed at their primary residence.  The maximum amount of the credit is $1,000.  It is scheduled to expire in 2032.  See Form 8911.

Tax Credit for Purchasing an Electric Vehicle (“EV”) – IRC 30D

You may qualify for a $7,500 tax credit if you buy a new qualified plug in EV in 2023 through 2032.  The credit is available to individuals and their businesses on Form 8936 (need VIN, year, make, and model). To qualify, under the IRA of 2022 you must:

• Buy the EV new for your own use,
• Use it primarily in the U.S., and
• your modified AGI may not exceed:
• $300,000 for married couples filing jointly, $225,000 for heads of households, and $150,000 for all other filers.  You can use your modified AGI from the year you take delivery or the year before.  The credit is nonrefundable. 

The maximum credit is $7,500 only if the vehicle meets both the mineral and battery component requirements (percentage of materials must be mined or manufactured in the US or a country that has signed a free trade agreement).  The vehicle must have a battery capacity of at least 7 kilowatt hours, a gross vehicle weight of less than 14,000 lbs. and be made by a qualified manufacturer (final assembly must be in North Am).  The manufacturer suggested retail price (MSRP) can't exceed $80,000 for vans, SUVs, and pickup trucks or $55,000 for other vehicles.  The seller must report the details of the sale to the IRS.  Note: the credit does not apply to foreign vehicles or those with batteries made in foreign countries

• 25E Previously-owned clean vehicles

The IRA added IRC 25E to allow taxpayers who acquire a used clean vehicle from a dealer for less than $25,000 (i.e., at least two years old) before January 1, 2033, to claim a federal tax credit during the tax year the vehicle is placed in service. The credit would be equal to the lesser of $4,000 or 30% of the sales price.  Dealers who sell vehicles eligible for a used (previously owned) vehicle credit under IRC 25E must furnish a report to the buyer at the time of sale and then to IRS for those vehicles to be eligible for a credit under IRC 25E.  The buyer’s MAGI must be less than $150,000 if filing jointly and $75,000 if single.  The vehicle must meet the requirements under IRC 30D.

• 45W credit for qualified commercial clean vehicles

The IRA created IRC 45W to provide a new credit for qualified commercial clean vehicles acquired before January 1, 2033. The credit is the lesser of (1) 30% of the basis of a vehicle not powered by a gasoline or diesel internal combustion engine, or (2) the incremental cost of that vehicle (i.e., the excess of the purchase price of that vehicle over the price of a comparable vehicle). The IRC Section 45W credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for other vehicles.

Solar Power and Federal Tax Credits

The amount of sunlight that strikes the earth's surface in an hour and a half is enough to handle the entire world's energy consumption for a full year. Solar technologies convert sunlight into electrical energy. This energy can be stored in batteries or thermal storage.  There are two main types of solar energy technologies—photovoltaics (PV) and concentrating solar-thermal power (CSP).  

PV systems utilize solar panels.  When the sun shines onto a solar panel, energy from the sunlight is absorbed by the PV cells in the panel. This energy creates electrical charges that move in response to an internal electrical field in the cell, causing electricity to flow.

CSP technology produces electricity by concentrating and harnessing solar thermal energy using mirrors. At a CSP installation, mirrors reflect the sun to a receiver that collects and stores the heat energy. That heat is used to power an engine or turbine that is connected to an electricity generator.

Solar energy systems can be both residential and commercial. Residential systems are found on rooftops across the United States, and businesses are also opting to install solar panels. Utilities, too, are building large solar power plants to provide energy to all customers connected to the grid.

Energy Efficient Home Improvement Credit

The energy efficient home improvement credit was a $500 lifetime credit. As amended by the IRA of 2022, it is now an annual credit of $1,200. Beginning January 1, 2023, the amount of the credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures with a ceiling of $1,200.  The credit is allowed for qualifying property such as:

• exterior doors (30% of costs up to $250 per door, up to a total of $500);
• exterior windows and skylights (30% of costs up to $600); and
• insulation materials or systems and air sealing materials or systems (30% of costs).
• central air conditioners, natural gas, propane, or oil water heaters, and natural gas, propane, or oil furnaces and hot water boilers (30% of costs up to $600).

• 25D - Residential Clean Energy Credit 

In the case of an individual, there shall be allowed as a credit an amount equal to the sum of the applicable percentages of the qualified solar electric property expenditures made by the taxpayer during such year. Any unused credit shall be carried forward and added to the credit allowable under subsection for such succeeding taxable year.  The term “qualified solar electric property expenditure” means an expenditure for property which uses solar energy to generate electricity for use in a dwelling unit located in the United States and used as a residence by the taxpayer.

Note: there is no overall dollar limit for the credit. The credit is limited to 30% of qualified expenditures made for property placed in service beginning in 2022 through 2032.  There is no annual maximum or lifetime limit.

Note: Form 5695 calculates the residential solar tax credit as part of the nonbusiness energy property credit. The nonbusiness energy property credit then goes on schedule 3 of Form 1040.

In Notice 2013-70 - the IRS specifically states that while the credit may be taken for solar panels installed for use in a vacation home, the taxpayer may not claim the Sec. 25D credit for expenditures for improvements made to an investment property, such as rental property, that is not also used as a residence by the taxpayer.

No expenditure relating to a solar panel or other property installed as a roof shall fail to be treated as property described above solely because it constitutes a structural component of the structure on which it is installed.

If a credit is allowed under this section for any expenditure with respect to any property, the increase in the basis of such property which would (but for this subsection) result from such expenditure shall be reduced by the amount of the credit so allowed.

A qualified solar electric property expenditure (QSEPE)

Expenditures for the labor costs that are allocable to the onsite preparation, assembly, or original installation of the qualified solar electric property and for piping or wiring to interconnect such property to the dwelling unit are eligible under §25D." The IRS concluded that costs related to solar panels, solar subpanels, portions of the air conditioning condensing unit, and wiring components are all QSEPEs.

In Letter Ruling 201809003, the IRS found that a "battery" that stores solar electricity generated by a solar energy system for use in a dwelling unit, as well as a software management tool necessary to monitor the charging and discharging of solar energy, is a properly includible cost in calculating the QSEPE amount.

Regs. Sec.1.48-9(d)(1) provides that "'solar energy property' includes equipment and materials (and parts related to the functioning of such equipment) that use solar energy directly to (i) generate electricity (ii) heat or cool a building or structure, or (iii) provide hot water for use within a building or structure" (emphasis added). Regs. Sec. 1.48-9(d)(3) defines electric generation equipment:

Solar energy property includes equipment that uses solar energy to generate electricity, and includes storage devices, power conditioning equipment, transfer equipment, and parts related to the functioning of those items. In general, this process involves the transformation of sunlight into electricity through the use of such devices as solar cells or other collectors. However, solar energy property used to generate electricity includes only equipment up to (but not including) the stage that transmits or uses electricity. 

Letter Ruling 20153014, interpreting Sec. 48 (which uses language similar to Sec. 25D), only permits the "incremental costs" of a new roof, limiting the amount that may be included for purposes of the residential energy tax credit only to amounts that exceed the cost to install a new normal roof. Therefore, it is reasonable to believe the IRS would also take a similar position for Sec. 25D, not permitting the entire cost of the new roof being installed as part of a solar energy upgrade.

Investment Tax Credit is 30% of Cost of Solar Panels Installed on Rental Properties

While Sec. 25D does not allow a solar tax credit for the cost of installing solar panels for use in residential rental property, Sec. 48 is more favorable. Sec. 48 provides for a solar energy tax credit for the installation of solar panels as part of the general business credit under Sec. 38. Under Sec. 48(a)(5)(D), property that is eligible for the general business credit is tangible property for which depreciation is allowable. Solar panels installed for use in residential rental property meet this requirement.

However, under Sec. 50(b)(2), business credits are generally not available for property that is used predominantly to furnish lodging. However, a further reading of Sec. 50(b)(2), provides that the restriction on the availability of the general business credit for property used to furnish lodging does not apply to "any energy property" Sec. 48(a)(3)(A)(i) defines equipment that uses solar energy to generate electricity or to heat or cool a structure as energy property, as long as it is not used to heat a swimming pool.  

The credit is equal to 30% of the cost basis of said property.  The percentage can climb to 50% if the project qualifies for the 10 percent domestic content bonus and the 10 percent low-income community bonus.

PLR-101882-19 3

Equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight, or electrochromic glass that uses electricity to change its light transmittance properties in order to heat or cool a structure.

While § 48 and the Treasury Regulations promulgated thereunder define the property to which the investment credit is applicable and the percentage of the qualifying basis, the Treasury Regulations promulgated under § 46 provide the rules to calculate the qualified investment subject to the credit. 

Under Treas. Reg. § 1.46-3(a), the qualified investment of the taxpayer, with respect to any taxable year, is generally the aggregate of: (1) the applicable percentage of the basis of each new § 38 property placed in service by the taxpayer during the taxable year; plus (2) the applicable percentage of the cost of each used § 38 property placed in service by the taxpayer during such taxable year.

Treasury Regulation § 1.46-3(c) states generally that the basis of any new § 38 property shall be determined in accordance with the general rules for determining the basis of property. Thus, the basis of property would generally be its cost determined under the provisions of § 1012.

Treasury Regulation § 1.46-3(d)(1) explains that for purposes of the investment credit, property is considered placed in service in the earlier of following taxable years:

• the taxable year in which, under the taxpayer’s depreciation practice, the period for depreciation with respect to such property begins; or 
• the taxable year in which the property is placed in a condition or state of readiness and availability for a specifically assigned function.

Treasury Regulation § 1.46-3(d)(4)(i) explains, in part, that the investment credit allowed by § 38 with respect to any property shall be allowed only for the first taxable year in which such property is placed in service by the taxpayer. The determination of PLR-101882-19 4 whether property is § 38 property in the hands of the taxpayer shall be made with respect to such first taxable year.

Treasury Regulation § 1.46-3(d)(4)(ii) explains that, for the first taxable year in which property is placed in service by the taxpayer, the property qualifies as § 38 property but the basis of the property does not reflect its full cost for the reason that the total amount to be paid or incurred by the taxpayer for the property is indeterminate, a credit shall be allowed to the taxpayer for such first taxable year with respect to so much of the cost as is reflected in the basis of the property as of the close of such year, and an additional credit shall be allowed to the taxpayer for any subsequent taxable year with respect to the additional cost paid or incurred during such year and reflected in the basis of the property as of the close of such year.

Section 50(c)(1) provides that if a credit is determined under this subpart with respect to any property, the basis of such property shall be reduced by the amount of the credit so determined. Section 50(c)(2) provides that if during any taxable year there is a recapture amount determined with respect to any property, the basis of which was reduced under § 50(c)(1), the basis of such property (immediately before the event resulting in recapture) shall be increased by an amount equal to such recapture amount.

For these purposes, the term “recapture amount” means any increase in tax “or adjustment in carrybacks or carryovers) determined under § 50(a).” Additionally, § 50(c)(3) provides that in the case of the energy credit, only 50 percent of such credit shall be taken into account under § 50(c)(1) and only 50 percent of any recapture amount attributable to such credit shall be taken into account under § 50(c)(2).

Treas. Reg. § 1.48-1(b)(3) provides, in relevant part, that if the cost of property is not recovered through a method of depreciation but through a deduction of the full cost in one taxable year, for purposes of § 1.48-1(b)(1), a deduction for depreciation with respect to such property is not allowable to the taxpayer. However, if an adjustment with respect to the income tax return for such taxable year requires the cost of such property to be recovered through a method of depreciation, a deduction for depreciation will be considered allowable to the taxpayer.   See Form 3468.

Adjustments to the Credit by the IRA of 2022

The ITC increased in amount and its timeline has been extended. Those who install a PV system between 2022 and 2032 will receive a 30% tax credit. That will decrease to 26% for systems installed in 2033 and to 22% for systems installed in 2034. If you’ve already installed a system in 2022, your tax credit has increased from 22% to 30% if you haven’t already claimed it.

 The solar storage equipment expenses included in the ITC have expanded. Now, energy storage devices that have a capacity rating of 3 kilowatt hours or greater are included. This includes stand-alone storage, but here’s why you should pair it with solar.

The ITC will cut the cost of installing rooftop solar for a home by 30%, or more than $7,500 for an average system. By helping Americans get solar on their roofs, these tax credits will help millions more families unlock an additional average savings of $9,000 on their electricity bills over the life of the system.

Depreciation Benefits for Solar Energy Property

Special depreciation benefit. The year you place your solar or other energy installation in service, you may depreciate it. Ordinarily, you reduce the basis of depreciable property by the full amount of any credit. But the ITC reduces the energy property’s basis by only half the credit amount, increasing your depreciation deductions.

 Five-year depreciation. IRC Section 48 energy property gets a five-year depreciation period under MACRS (this is generous because solar panels usually last 25 to 30 years).

 Bonus depreciation. Here’s more good news. The 80 percent first-year bonus depreciation is available for energy improvements for residential rental or commercial property placed in service during 2023; the depreciation is 60 percent for 2024.

 Example. Sally owns a small commercial building in downtown Detroit. She spends $50,000 to install solar panels in 2023. The project qualifies for the 10 percent domestic content bonus and the 10 percent low-income community bonus.

Sally’s total ITC is 50 percent. She gets a $25,000 ITC. The depreciable basis in her building is reduced by only 50 percent of her ITC, so her basis is $37,500. She uses 80 percent bonus depreciation to deduct $30,000 in 2023.  She depreciates her remaining $7,500 basis over five years.