The Build Back Better Act – Tax Benefits You Need To Know
On November 19, 2021, the U.S. House of Representatives passed the highly anticipated Build Back Better Act. We have all heard of the tax increases that are included in this approximately $2 trillion bill. However, what has received very little fanfare are the credits and additional tax deductions which are presently contained within the bill. Many of these tax incentives are geared toward energy efficiency and climate control, to encourage the use of alternative energy sources. With proper planning, there are ways you can take advantage of the incentives to mitigate the effects of the tax increases. I encourage you to avail yourself of the following credits:
Extension and Enhancement of Nonbusiness Energy Credit
This credit is currently equal to 10% of qualifying costs, including insulation, exterior windows, doors, skylights and specific metal roofing materials. This credit also applies to energy-efficient furnaces, hot water heaters and air conditioners. This credit is subject to a lifetime limit of $500, with reduced annual limits for windows, furnaces, hot water heaters and air conditioners.
Beginning in 2022, the Build Back Better draft includes revisions to the nonbusiness energy credit that increases the applicable percentage to 30% of qualifying costs. If passed, the $500 lifetime limit would be eliminated and replaced with an annual limit of $1,200. This credit would also extend the credit through 2026.
Extension and Enhancement of Residential Energy Efficient Property Credit
This credit is currently equal to 26% of the following qualified costs incurred and paid in 2021:
- Qualified solar electric property costs
- Qualified solar water heating property costs
- Qualified small wind energy property costs
- Qualified geothermal heat pump property costs
- Qualified fuel cell property costs
There is a scheduled phase down of this credit. For tax years 2022 and 2023, the applicable percentage will be 22% of qualifying costs. After 2023, the credit will no longer be available.
The Build Back Better draft includes revisions to the residential energy efficient property credit that increases the applicable percentage back up to 30% of qualifying costs for tax years 2022 through 2031. If passed, the applicable credit percentage would be 26% in 2032 and 22% in 2033.
Refundable Qualified Plug-in Electric Drive Motor Vehicle Credit
The credit is equal to $2,500 plus, for a vehicle that draws propulsion energy from a battery with at least 5 kilowatt hours of capacity, $417, plus an additional $417 for each kilowatt-hour of battery capacity in excess of 5 kilowatt hours. The total amount of the credit allowed for a vehicle is limited to $7,500. Currently, manufacturers are subject to a phase out based on the number of vehicles sold.
The Build Back Better draft would increase the maximum credit to $12,500 per vehicle and make the credit refundable beginning with vehicles purchased in 2022. If passed, manufacturers would no longer be subject to the phase out rules, and the credit would apply to all qualifying vehicles regardless of the number sold. The Build Back Better Act would also add a credit of up to $2,000 for qualified pre-owned electric drive motor vehicles purchased after December 31, 2021.
Extension and Modification of Alternative Fuel Refueling Property Credit
For qualifying property placed in service at your main home (personal use property), the credit for all property placed in service at your main home is generally the smaller of 30% of the property’s cost or $1,000.
The Build Back Better draft would extend the credit through 2031.
The above credits are just a few of the tax benefits included in the most recent draft of the Build Back Better Act proposed bill. Please ensure you are working with your tax professional to properly plan to take advantage of all the available incentives.
Contributing Author: Nicholas L. Shires, CPA, is the partner-in-charge of tax services at Dannible & McKee. Nick has over 17 years of experience providing tax and consulting services to a wide range of clients, including individuals and privately held companies. For more information on this topic, you may contact Nick at firstname.lastname@example.org or (315) 472-9127.