Inflation Reduction Act of 2022

Friday, August 12th Congress passed the Inflation Reduction Act of 2022 and President Biden signed into law on August 16th.   The Inflation Reduction Act (hereafter referred to as “Act”) contains several clean energy incentives and tax related provisions.  Below are highlights included in the Act that may impact you and/or your business.  We will continue to monitor this and other tax legislation and keep you abreast of important changes that may impact you.

Revenue Generators:

  • IRS Audits: The IRS’ budget is increased to provide funding to improve enforcement and thus increase audits of taxpayers.  IRS expects to hire 87,000 exam agents over the next 10 years.  It is estimated that 2/3 of the IRS workforce is expected to retire over the next 5-6 years.
  • Extension of Excess Business Loss Limitation: The excess business loss limitation for taxpayers other than Subchapter C corporations is extended to 2028 (was previously set to expire at the end of 2026).
  • Oil Excise Tax:  To assist with funding toxic waste site cleanups nationwide
  • Corporate Minimum Tax: Effective for tax years beginning after 2022, the corporate minimum tax applies to corporations with average annual adjusted book income in excess of $1 billion for three consecutive tax years. This threshold is reduced to $100 million for certain subsidiaries owned by foreign corporate parents.  Expected to apply to approximately 150 companies in America.  Aggregation rules under Section 52(a) and (b) apply.  Once a corp’s income exceeds a threshold, the new min tax will apply for all future years unless Treasury implements regs altering this outcome.  Minimum tax credit carryover feature exists.
  • Stock Buyback Excise Tax: A 1% excise tax applies to certain transactions in which publicly traded corporations repurchase their own stock from shareholders. This provision is effective for stock buybacks made after December 31, 2022.

Uses/Tax Benefits of the Revenues:

  • Health insurance and prescription drug costs
    • Medicare:  Allowed to negotiate drug prices, starting with 10 high-priced drugs by the middle of this decade and expanding from there. It would cap out-of-pocket drug costs for seniors enrolled in Part D at $2,000 per year.
    • Obamacare premiums:  Three year extension of subsidies thereby preventing expiration in 2023.
  • Tax Credits
    • Businesses
      • Section 41 Small Business Research Credit:  For tax years beginning after December 31, 2022, the payroll tax credit limitation available to a qualifying small business for increasing its qualified research activities is increased from $250,000 to $500,000 and post 12.31.22 will reduce Medicare tax in addition to SS tax.  Small business is defined as <$5M in annual revenue and they have revenue <5 years.  Grace period ends 1/10/22 and additional documentation will be required to be filed when claiming the credit. After grace period ends, one year transition period during which taxpayer will have 30 days to perfect a research credit refund claim .
      • Section 179D Credit: Modifies the energy efficient commercial buildings deduction beginning after 2022.  Increase deduction available from $1.88/square foot to $5/square foot and expands the type of property eligible.  Also adds 30% of cost credit for solar panels on commercial buildings subject to meeting a prevailing wage and apprenticeship rules to which the credit would be reduced to 6%.  Waiting on additional guidance/interpretation as to what that means.
      • Section 45L Credit: Increases after 2022 and extends through 2032, this credit for the building of new energy homes.  Increases from $2K to either $2500 or $5000.
      • Commercial Clean Vehicle Credit: New credit available through 2032 and is up to 30% of the sales price of a clean vehicle manufactured for commercial use on public streets, roads, or highways.
    • Individuals
      • Energy Efficient Home Improvement Credit Section 25C
        • New credit = 30% of qualified energy efficiency improvements, residential energy property and home energy audits
          • Qualified energy efficiency improvements – windows, exterior doors, insulation.  Must be installed in US, be the original user, expect improvement to last 5 years, and be the principal residence.
          • Residential Energy Property – energy efficient appliances that cool air inside home or heat air/water inside home.  Heat pumps, a/c, water heaters, furnaces, biomass stoves & boilers, cost to upgrade a panel to at least 200 amps.  Note:  heat pumps have their own credit cap of $2K and do not fall under the $1200 cap mentioned below.
          • Home Energy Audits – auditor comes to your home and identifies the most significant and cost-effective energy improvements you could make.
        • Total Annual limit on credit = $1200/year (see heat pump exception)
        • Specific limits
          • Windows max $600/year
          • Exterior doors max $250/door with max of $500/taxpayer/year
          • Residential energy property max $600/year
          • Home energy audits max $150/year
      • Residential Clean Energy Credit Section 25D (formerly the residential energy efficient property credit and known as the solar panel credit):  Extended through 2034.  2021=26%, 2022-2032 30%, 2033=26%, 2034=22%, 2035 onward 0%
      • Electric vehicle charger credit Section 30C – if home is located in either a low income community or rural area.  Max of $1000 and is 30% of charger cost.
      • Clean Vehicle Credit:  Effective immediately however guidance issued 8.16.22 from IRS for those with a binding written contract prior to 8/16.  Extended through 2032 and modified. Credit of up to $7,500 for the purchase of clean vehicles which are new.  Includes both plug-in electric and fuel cell vehicles with final assembly in the United States. The credit does have limitations based on where the battery inputs are sourced and is phased out for taxpayers with modified adjusted gross income of $150,000 Single and $300,000 Married Filing Jointly.  In addition to the taxpayer income threshold, there is also a vehicle price cap for those purchased 8/16 and after ($50K vans/SUVs/trucks and $55K for cars.
      • Previously-Owned Clean Vehicle Credit: A new credit of up to $4,000 subject to income limitations.  The credit is 30% of the sales price and is also available through 2032. The credit is phased out for taxpayers with modified adjusted gross income of $75,000 Single and $150,000 for Married Filing Jointly.
    • Many other clean energy incentives are included such as carbon oxide sequestration credit; biodiesel, renewable diesel, alternative fuel, and alternative fuel mixtures; second generation biofuels; and alternative fuel refueling property.

As with any new legislation, additional details are unknown.  Please be cautious of misinformation and if considering major purchases based on this new legislation, be sure you have the necessary facts.  As always, please reach out to your Seidel Schroeder advisor should you have any questions.