On August 7, 2022, the Senate passed the Inflation Reduction Act of 2022, which was later passed by the House of Representatives on August 12, 2022, and was signed into law on August 16, 2022, by President Joe Biden. The act includes numerous tax provisions that promote investments in clean energy and reductions in carbon emissions as well as other miscellaneous tax provisions. All the provisions discussed below are effective starting in 2023 unless noted otherwise.
Clean Vehicles
The existing credit for the purchase of plug-in electric and fuel cell vehicles is extended through 2032 with several modifications. The existing limit on the number of vehicles produced by each manufacturer is eliminated, however the vehicles’ battery systems and other critical components must meet new sourcing requirements. The maximum amount of the credit on new vehicles remains at $7,500 and a new credit of $4,000 is available for the purchase of pre-owned vehicles. These credits are subject to limits on the MSRP of a vehicle and on a taxpayer’s income. A new credit of up to 30 percent of the cost of qualified commercial clean vehicles is also available. These credits can be claimed by taxpayers or transferred to a dealer to help defray the initial purchase price of a vehicle.
Residential Energy
The existing credit for nonbusiness energy property which expired on December 31, 2021, is extended through 2032. This credit applies to energy efficient doors and windows and certain HVAC systems and heat pumps. The existing maximum lifetime credit amount is replaced with an annual credit limit of $1,200. The existing credit for residential solar panels and other renewable energy sources such as wind, geothermal, and biomass fuel which was set to expire in 2024 is extended through 2034.
Commercial Buildings
The existing Section 179D deduction has been increased from $1.77 per square foot to $5 per square foot. This deduction relates to the construction of energy-efficient commercial buildings and multi-family buildings that are four stories or taller. New construction as well as remodels of existing buildings qualify for the deduction.
Affordable Care Act
The act extends the provisions from the American Rescue Plan Act of 2021 that allows higher-income households to qualify for the health insurance Premium Tax Credit and boosting the subsidy for lower-income households through 2025.
Research and Development
The existing research and development credit that allows certain qualified small businesses to claim a portion of their research and development credit against payroll taxes has been increased from $250,000 to $500,000. The credit can also be applied to both the Medicare and the Social Security portion of the payroll taxes whereas previously it was only available to be used against the Social Security portion.
Corporate Alternative Minimum Tax
The Inflation Reduction Act of 2022 includes several revenue generating provisions to offset the costs related to the clean energy and other credits. The first would reenact a revised corporate alternative minimum tax (AMT) that was eliminated by the Tax Cuts and Jobs Act. The new corporate AMT would apply to corporations with average annual adjusted financial statement income in excess of $1 billion for the three prior tax years and would equal 15 percent of the corporation’s adjusted financial statement income less any corporate AMT foreign tax credit.
Stock Repurchases
Publicly traded companies will be subject to a one percent excise tax on any stock repurchases, stock buybacks, stock redemptions, or any transaction deemed to be economically similar to a stock redemption.
IRS Enforcement
The act increases the funding for the IRS to improve IRS service and to close the “tax gap” or the difference between what is collected by the IRS and what should have been collected by the IRS. The intent is that an increase in IRS funding will pay for itself and generate additional revenue through increased enforcement actions.
There are several notable provisions excluded from the final version of the act that were included in prior drafts of the legislation. These include changing the existing tax law regarding the treatment of carried interests and restoring the individual deduction for state and local taxes (SALT) to its pre-Tax Cuts and Jobs Act amount.
The final text of the Inflation Reduction Act of 2022 is a massive act and contains more than 300 pages of tax-related changes and an in-depth analysis and discussion is beyond the scope of this summary. Our team at Market Street Partners is continually researching and studying new legislation as it is enacted to better understand the opportunities available for our clients. Please reach out to us if you have any questions or concerns about how any specific provisions affect your situation.