Inflation Reduction Act Signed Into Law

President Biden signed into effect the budget reconciliation bill – the Inflation Reduction Act on August 16, 2022. The legislation includes the largest-ever federal effort on climate change, a cap on out-of-pocket drug costs for seniors on Medicare, an extension of healthcare subsidies for three years for some Affordable Care Act users and numerous tax provisions.

This limited recap focuses on key tax provisions within the bill. As always, we encourage you to contact your tax advisor before taking any action on these changes.

Corporate Alternative Minimum Tax (AMT)

The legislation includes a 15% minimum “book tax” on applicable corporations: those with $1 billion or more in income. The tax will raise government revenue and will be tied to the taxes reported on financial statements rather than what is claimed on tax returns filed with the Internal Revenue Service (IRS). “Applicable corporations” as defined by the bill are corporations with an average annual adjusted financial statement income exceeding $1 billion for the three-year taxable period ending before the current taxable year and after 2021. The 52(a) and 52(b) aggregations rules apply.

Enhanced Tax Credits for Electric Vehicles (EV) Placed in Service After 2022 And Before 2033

Personal EVs

Taxpayers can receive a $7,500 tax credit for new electric and $4,000 for used vehicles, depending on the taxpayer’s adjusted gross income. The tax credit of $7,500 applies specifically to new electric vehicles that undergo final assembly in North America.

Credits would not apply to/be allowed for:

• EV SUVs, trucks, and vans with an MSRP of  $80,000 or more
• Other vehicles with MSRP above $55,000.
• Any new EV if the lesser of current or prior year AGI of the taxpayer is more than $300,000 for joint filers, $225,000 for head of households, and $150,000 for others.

Credits would apply to/be allowed for:

Used qualifying EVs that are 2+ years old with a sale price of $25,000 or less. This only applies if the taxpayer’s current or prior year adjusted gross income is less than $150,000 for joint filers,  $112,500 for head of households and $75,000 for other.

Such credits are allowed only on the first sale of the vehicle.

Commercial EVs

A credit is available for qualified commercial EVs. Qualified vehicles include:

• vehicles placed in service after 2022.
• qualifying vehicles can receive a credit for 320% of the lesser of the vehicle’s basis or the incremental cost of the vehicle if it is 100% electric.
• hybrid vehicles can receive a credit for 15% of the vehicle’s basis or incremental cost.
• can receive a credit for depreciable commercial electric vehicles of 30% for either 1) the vehicle’s basis or 2) the incremental cost* of the vehicle if the vehicle is 100% electric.
• the 30% credit amount would be reduced to 15% if the vehicle is a hybrid (i.e., uses gasoline or diesel).
• the maximum credit is determined by the Gross Vehicle Weight Rating (GVWR): $7,500 with GVWR of less than 14,000 lbs. and $40,000 with GVWR greater than/equal to 14,000+ lbs.

*An “incremental cost” is the excess of the electric vehicle’s purchase price of a comparable gas- or diesel-powered vehicle.

Energy-Related Credits: New and Expanded

Many new and expanded energy credits are featured in the Act. These include:

Commercial Credits:

• Tax credit for electricity produced from renewable sources
• Energy investment credits, biodiesel, and alternative fuel credit
• Carbon oxide sequestration credit
• Advanced energy property credit
• Alternative fuel refueling property credit
• New credit for qualifying manufacturers of solar and wind energy components, qualifying inverters, and qualifying battery components
• New clean electricity production credit for electricity produced at a facility placed in service after 2024 with zero greenhouse gas emissions
• New clean fuel production credit for the production of low emission fuels

Some of the credits come with very specific requirements to receive some or all of the credit. For instance, prevailing wage and apprenticeship requirements, bonus credits for facilities constructed in an energy community, domestic content requirements and more. We will dig deeper into how these and other requirements may impact businesses in a later post.

Residential Credits:

• Energy Efficient Residential Property Improvements Credit increases from current 10% $500 lifetime limitation to 30% $1,200 lifetime limitation for residential energy property improvements placed in service after 2022 and before 2032.
• Energy Efficient Home Credit is extended and modified for dwelling units acquired after 2022 and before 2032. This credit benefits contractors and manufacturers who construct or manufacture qualified Energy Star Residential New Construction energy-efficient dwelling units. The credit expands to $2,500 or $5,000 (depending on the Energy Star program) from previous credits of $1,000 to $2,000.

Section 179D Tax Deduction

The bill expands and increases the permanent tax deduction from $1.88 per square foot to $5 per square foot to encourage the construction on energy efficient buildings. Energy-efficient commercial buildings including multi-family buildings that are at least four stories tall are eligible for the credit and energy-efficient construction and energy-efficient retrofits of older buildings are eligible. Real estate investment trusts may now use the tax deduction to calculate the REIT’s earnings and profits. Furthermore, tax-exempt building owners can now allocate the tax deduction to architects, engineers and designers who contributed to the overall design of the energy efficient building.

Other changes to the Section 179 tax deduction include:

• Lowering the minimum energy efficient commercial building (EECB) efficiency standard required for deduction benefits from a 50% reduction in total annual energy and power costs to 25%.
• Modifying the formula for calculating the maximum deduction to an “applicable dollar value” (ADV) multiplication factor.*
• Eliminating partial deductions.

* There are new rules for tax years beginning after December 31, 2022 that enhance this deduction and reduce the energy efficiency standards which may make the Section 179D deduction more accessible in the future.

Transfer of Credits

Eligible taxpayers can transfer certain tax credits to other taxpayers. The bill defines an eligible taxpayer as anyone not described in Code Section 6417 and now includes nonprofits. Additional clarity is expected to be released defining taxpayers who are eligible to transfer the credits below.

The eligible tax credits include:

• The credit for alternative fuel vehicle refueling property
• The renewable electricity production credit
• The carbon oxide sequestration credit
• The zero-emission nuclear power production credit
• The clean hydrogen production credit
• The advance manufacturing production credit
• The clean electricity production credit
• The clean fuel production credit
• The energy credit
• The qualifying advanced energy project credit
• The clean electricity investment credit

The transferable credit provisions apply to tax years beginning after December 31, 2022.

Extension of Excess Business Loss Limitations

The bill extends excess business loss limitation rules for any tax year before December 31, 2029.

Research Credit Increase

The bill provides an increase to $500,000 (from $250,000) for the R&D tax credit that can be applied to payroll taxes for qualified small businesses.

American Rescue Plan Tax Credit Provisions

The bill extends the modified Premium Tax Credit (PTC) calculation and provides PTC for household incomes greater than 400% of Federal Poverty Line (FPL). Both provisions were included in the American Rescue Pan Act (ARP) and have been extended for tax years 2021 and 2022.

IRS Funding

The bill allocates roughly $80 billion to the IRS, with over 50% of that funding allocated to enforcement. The remainder is targeted to taxpayer services, operations support and modernizing business systems.

Our tax group will provide additional details on the bill as further guidance and clarity is released. Even on the summary contained in this article, there are additional details and nuances to the provisions noted. Please contact Smith + Howard for details on how this may impact your business by using the Contact an Advisor button below.