Tax Implications of the Inflation Reduction Act of 2022
The Inflation Reduction Act of 2022 has now been signed into law by President Biden. The legislation primarily focuses on government spending programs designed to impact climate change, but a variety of tax provisions are contained as well.
General Business Tax Provisions
The Inflation Reduction Act is the scaled-back compromise to what was originally referred to as Biden’s Build Back Better Plan (BBB). The most dramatic, broadly applicable business tax provisions originally proposed in BBB have been removed from the current legislation, including the last-minute removal of proposed changes to the taxation of carried interests. What’s left is generating a lot of buzz but will likely have limited applicability to most taxpayers.
- Corporate Alternative Minimum Tax – A new 15% minimum tax will be imposed on the adjusted net book income of C corporations whose average adjusted net book income exceeds $1 billion. The net book income threshold is reduced to $100 million for foreign-parented international financial reporting groups.
- 1% Excise Tax on Repurchase of Corporate Stock – This applies to publicly traded U.S. corporations and certain affiliates of such corporations.
- Section 461(l) Overall Loss Limitation – A limitation on the ability to deduct business losses against other non-business income was scheduled to expire at the end of 2026. The Inflation Reduction Act extends this limitation through 2028.
Although IRS guidance will be needed to effectively implement many of these, a host of energy-related credits are included in the Inflation Reduction Act that taxpayers must consider if they are purchasing electric vehicles, making energy improvements to a residence, producing renewable energy, or otherwise involved with energy efficiencies and/or alternative energy sectors.
- Qualified Commercial Clean Vehicles – A new business credit is available for qualified vehicles acquired and placed in service after Dec. 31, 2022. Among the various qualification requirements, only vehicles made by certain manufacturers can qualify for this new credit.
- Advanced Manufacturing Production Credit – A new business credit is available to taxpayers that produce solar energy components, wind energy components, inverters, qualifying battery components, and applicable critical minerals. The credit is available with respect to components that are produced and sold after Dec. 31, 2022.
- Section 179D, Energy Efficient Commercial Buildings Deduction – There are several modifications that expand the availability of this deduction for taxable years beginning after 2022.
- Clean Vehicle Credit – The credit available to individuals for the purchase of a new clean vehicle – such as a plug-in electric vehicle – has been modified for vehicles placed in service after Dec. 31, 2022. The legislation increases the minimum battery capacity requirement from four to seven kilowatt-hours, and it requires the seller of the new clean vehicle to provide a report to the buyer and to the IRS containing certain details about the vehicle and the available credit amount.
- Previously-Owned Clean Vehicles – A new credit is available to certain individuals for the purchase of a used clean vehicle that is at least two years old. This credit is available to individuals with modified adjusted gross income in the credit year or preceding taxable year of less than $150,000 in the case of joint filers, $112,500 for head of household filers, and $75,000 for single filers.
- Nonbusiness Energy Property Credit – The new legislation extends this individual credit through 2032. The legislation also increases the credit amount and expands eligibility for this credit with respect to eligible property placed in service after Dec. 31, 2022. Individuals making energy efficient improvements to a dwelling unit after 2022 may be eligible for this expanded credit.
- Additional Energy-Related Tax Credits – These credits could benefit taxpayers that make energy-efficient building improvements, construct energy-efficient houses, produce renewable energy, utilize certain carbon capture equipment, produce clean hydrogen, or have any other involvement with alternative fuel sources or energy efficiencies. It is incumbent on taxpayers engaging in such energy-related activities to discuss details with their KSM advisors to determine potential applicability. The list of additional credits impacted by the new legislation includes:
- Clean energy production
- Clean energy investment
- Clean fuel production
- Carbon oxide sequestration
- Clean hydrogen production
- Construction of new energy-efficient homes (available to contractors)
- Residential clean energy improvements (solar, wind, fuel cell, geothermal, qualified battery storage technology)
- Electricity produced from certain renewable resources
- Solar and wind facilities placed in service in connection with low-income communities
- Zero-emission nuclear power production
- Incentives for biodiesel, renewable diesel, and alternative fuels
- Extension of second-generation biofuel incentives
- Sustainable aviation fuel
- Alternative fuel vehicle refueling property
- Qualifying advanced energy project
Other Miscellaneous Tax Provisions
- R&D Tax Credit – The Inflation Reduction Act increases the maximum amount a qualified small business can elect to claim as a payroll tax credit from $250,000 to $500,000 beginning after Dec. 31, 2022.
- Premium Tax Credit – Certain favorable provisions applicable to 2021 and 2022 have been extended through 2025, allowing more taxpayers to claim the premium tax credit than would have qualified without this new legislation.
A considerable amount of attention has also been given to the $45.6 billion in additional funding provided to the IRS for tax enforcement activities. However, much of the information discussed in public forums is misleading. For example, it has become common to say the IRS will hire 87,000 new auditors with this additional funding. The Treasury Department has estimated the new funding could cover about 87,000 employees, but this would include a wide range of IRS employees, including replacement of staff turnover, not just new auditors. It is unknown at this time the extent to which this additional funding will result in increased IRS audit activity, or how successful the IRS will be in hiring a large number of new employees.
KSM will continue to provide information on these credits and provisions as it becomes available. In the meantime, please reach out to your KSM advisor or complete this form.
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