On August 12, 2022, Congress passed the Inflation Reduction Act of 2022, with a 220-207 vote in the house. This followed the Senate passing the bill on August 7, 2022, by a vote of 51-50, with Vice President Kamala Harris casting the tiebreaking vote. The legislation extends or creates many new tax credits associated with investments in clean energy with the goal of reducing carbon emissions and extends Affordable Care Act subsidies. The bill is paid for through four provisions which include the implementation of a 15% corporation alternative minimum tax, an excise tax on stock repurchases of publicly traded companies, increased IRS funding, and a two-year extension of the excess business loss limitation rules. President Biden signed the bill into law on Tuesday, August 16, 2022. Here are several bill highlights to be aware of for your tax planning needs:
- A new 15% corporate alternate minimum tax would be imposed on adjusted financial statement income (AFSI) of corporations. It will apply to corporations with profits over $1 billion or more in average AFSI over the previous three years. The tax will apply to taxable years ending after December 31, 2022.
- A new 1% excise tax will apply to stock buybacks of publicly traded U.S. corporations for the value of any of its stock that is repurchased by the corporation during the tax year. The tax will apply to taxable years beginning after December 31, 2022.
- The IRS will be allocated $80 billion over a ten-year period to add auditors, improve customer service, and modernize technology. The Treasury Secretary has stated that the funds should not be used to increase the likelihood of audits for small businesses or households making $400,000 or less.
- Excess business loss limitations were set to expire in 2026. Now the limitation will apply through tax years beginning before January 1, 2029. Excess business losses are applicable to individuals and their rules limit the amount of trade or business losses that can offset nonbusiness income. In 2022, the excess business losses cannot exceed $270,000 (single filers) or $540,000 (married spouses filing jointly). Amounts in excess of this amount are carried forward as net operating losses.
The bill extends the Affordable Care Act subsidies through 2025. Previously these provisions would have expired at the end of 2022. The expansion of affordability percentages used in calculating the premium tax credit to make credits available for individuals with incomes above 400% of the federal poverty line, as well as credit amounts for those that are already qualified would be extended.
Certain qualified small businesses are allowed to claim an amount of the research credit against payroll taxes. In tax years beginning after December 31, 2022, the amount is increased from $250,000 to $500,000.
Most of the outlays in the new bill are devoted to extending, expanding, and modifying incentives for green energy with a large share of those being in the form of tax credits.
- The renewable electricity production tax credit (PTC) is extended and modified. The beginning-of-construction deadline for certain renewable electricity production facilities is extended through the end of 2024. The base amount of the credit is reduced but facilities that pay prevailing wages and fulfill apprenticeship requirements can qualify for up to 5x the base amount.
- The investment tax credit (ITC) applying to solar, wind, and geothermal is extended and modified for facilities beginning construction before January 1, 2025. The ITC base amount is reduced from 30% to 6%, and an increased credit of 5x the base amount (totaling 30%) is available if prevailing wages and apprenticeship requirements are met. An enhancement of the credit is available for solar and wind facilities placed in service in low-income areas.
- Incentives for biodiesel, renewable diesel, alternative fuel, and alternative fuel mixtures are modified and extended through 2024.
- The nonbusiness energy property credit that expired on December 31, 2021, is extended through 2022. The credit applies to energy-efficient windows, doors, certain HVAC systems, and heat pumps. Starting in 2023 it is modified and further extended through 2032, and the $500 maximum lifetime credit is replaced with an annual credit of $1,200.
- The residential energy efficient property credit is renamed the “residential clean energy credit.” The credit is extended through 2034 and stand-alone storage becomes eligible for the credit along with wind, solar, and fuel cells. The credit applied is 30% of property placed in service between 2022 and 2032, 26% for 2033 property, and 22% for 2034 property.
- The energy-efficient commercial buildings deduction under Sec. 179D is modified for tax years beginning after December 31, 2022. The deduction is increased if new wage and apprenticeship requirements are met, up to a maximum deduction of $5.00 per square foot.
- The new energy-efficient home credit is modified and extended through 2032 for contractors who manufacture or construct energy-efficient homes. Single-family and manufactured homes will see their tax credits increase while multifamily homes will see their tax credits decrease.
- The credit for the purchase of new, clean vehicles is modified and extended through 2032. Starting in 2023, the current per manufacturer limit is eliminated and the credit will be $3,750 for meeting the critical minerals requirement and $3,750 for meeting the battery components requirement making the maximum credit $7,500 per vehicle. There are income limitations as well as limitations on the suggested retail price of the vehicle.
- Starting in 2023, a new nonrefundable credit of up to $4,000 is available for the purchase of a previously owned clean vehicle, subject to income limitations through 2032.
- A new business tax credit for qualified commercial clean vehicles is established for vehicles acquired after December 31, 2022, and before December 31, 2032. The amount of the credit maxes out at 30% of the vehicle’s cost.
- The alternative fuel refueling property credit is increased and extended through 2032. Starting in 2023, charging or refueling property will only be eligible if they are placed in service within a low-income community or in a nonurban area.
- A new advanced manufacturing production credit would be established for components and minerals sold in the generation of alternative energy after December 31, 2022.
- Tax-exempt entities, state and local governments and political subdivisions can elect to receive a direct payment in lieu of any applicable credit for taxable years beginning after 2022. This provision applies only to certain tax credits.
- After 2022, an election will be made available whereby taxpayers can elect to transfer all or a portion of an eligible credit to an unrelated taxpayer. The transferred credit must be exchanged for cash and is not included in the transferor’s income, nor is it deductible by the transferee. This provision applies only to certain tax credits.
At BerganKDV, we help clients navigate new legislation to ensure their taxes are compliant with the law while remaining efficient. If you have additional questions about how the Inflation Reduction Act of 2022 may impact your tax planning strategy, we can help. Contact us and one of our professionals will be happy to assist you with your tax planning needs.