The surprise agreement reached between Senators Manchin and Schumer in late July paved the way for President Biden to sign the Inflation Reduction Act (IRA) of 2022 into law on August 16, 2022.
From an income tax perspective, the IRA includes significant tax credits and incentives covering a broad category of clean energy initiatives and four key revenue raisers. The following discussion highlights these income tax provisions of the Inflation Reduction Act.
Clean Energy Tax Credits and Incentives of the Inflation Reduction Act
Extending Existing Tax Credits and Deductions
Key tax provisions of the Inflation Reduction Act extend and enhance existing tax credits that incentivize activities around clean energy. A few of these credits are noted below:
- Internal Revenue Code (IRC) 45 renewable electricity production tax credits and IRC §48 energy investment tax credits’ beginning-of-construction deadlines are extended to the end of 2024 IRC §48 energy investment tax credit is expanded to include solar and wind facilities located in a low-income community or housing project, tribal land or connected with another other low-income economic benefit project
- IRC §45Q carbon oxide sequestration credit beginning-of-construction date is extended to the end of 2032
- IRC §40A credit for biodiesel fuel, renewable diesel and alternative fuels is extended through 2024
- IRC §45L energy efficient home credit can benefit contractors and manufacturers constructing energy efficient homes through 2032
- IRC §179D is modified to include a new formula for calculating the energy-efficient commercial buildings deduction and provides an alternative deduction for energy-efficient building retrofit property placed in service after 2022
- For more information read Cherry Bekaert’s Inflation Reduction Act Nearly Triples Section 179D Tax Incentives article.
- IRC §30C credit for alternative fuel vehicle refueling property is extended and modified to apply until the end of 2032, increase the credit limit to $100,000 per item of qualifying property, but reduce the credit rate from 30% to 6% for depreciable property.
New Tax Credits
The IRA introduces a number of new tax credits to support businesses investing in clean energy technologies and operations, including:
- Credits for production of clean hydrogen (IRC 45V) and for sales of sustainable aviation fuel (IRC §40B)
- Up to $7,500 credit for each qualified commercial-clean vehicle with a gross vehicle weight under 14,000 pounds and for clean vehicles exceeding that weight limit, up to $40,000 credit (IRC §45W)
- Advanced manufacturing production credit for components and critical minerals sold after 2022 for production of solar energy components, wind energy components, inverters and battery components (IRC §45X)
- Clean electricity production credit (IRC §45Y) and clean fuel production credit (IRC §45Z)
- Investment credit for property investments in energy storage technology (IRC §45E)
Boosting the New Tax Credits
The IRA incorporates additional incentives for taxpayers by identifying actions taxpayers can take to boost a credit up to five times (5x) its base amount. Most of these action steps center around paying wages at prevailing rates and providing apprenticeship programs. Other credits can be increased if the activity occurs in certain low-income communities or former energy communities, such as those near coal mining or oil refining. Certain credits, such as the clean vehicle tax credit, include domestic materials content and assembly requirements.
Direct Pay and Transferability
The IRA permits eligible organizations, such as tax-exempt entities, government units, tribal governments and similar non-taxpaying organizations, to elect to treat certain credits as a refundable payment of tax – even if the organizations are not subject to federal income tax or have no federal income tax liability. This tax provision applies to many of the new credits added by the IRA and will allow non-taxpaying entities to participate in clean energy initiatives and benefit from cash flow from the related credits.
Similarly, the IRA permits these same non-taxpaying entities to elect to transfer some or all of a credit to an individual or business. Transferability may allow, say, a rural electric cooperative to benefit from the sale of credits generated from §45Y clean electricity production to a for-profit taxpayer looking for a way to reduce its tax costs.
Research & Development Tax Credit for Start-Up Businesses
The IRA made an important change to the election to apply research and development (R&D) tax credits against an employer’s payroll tax liability rather than against income tax. The IRA doubled the eligible amount from $250,000 to $500,000. This is a beneficial election available to early-stage businesses with a limited history of generating revenue. It enables these companies to monetize their R&D tax credits long before they realize an income tax liability. Cherry Bekaert’s Tax Credits and Incentives team posted the article: Inflation Reduction Act Doubles R&D Tax Credit to Offset Payroll Taxes for Start-Up Businesses with further details.
Clean Energy Tax Credits for Individual Taxpayers
The IRA includes three clean energy related tax credits for individual taxpayers.
First, IRC §25C is extended through the end of 2032 and offers an annual credit of up to $1,200 for both qualified energy efficiency improvements (e.g., new windows) and residential energy property expenditures (e.g., geothermal heat pump). The IRA also modified the standards for determining energy efficiency for this credit. This replaces the former credit which had a lifetime limit of only $500.
Second, the IRA raises the dollar limit on the new qualified plug-in electric drive motor vehicle credit (IRC §30D) and renamed it as the “clean vehicle credit.” The prior “electric vehicle credit” was terminated when the IRA was signed. The new clean vehicle credit takes effect for automobiles purchased in 2023. The IRA adds a requirement that the final assembly of the vehicle must occur in North America and sets requirements on the sources of critical minerals and battery components in the vehicle. The credit can be transferred to a registered dealer in exchange for payment. It will expire at the end of 2032.
Third, IRC §25E introduces a new nonrefundable personal tax credit for the purchase of a qualifying previously-owned vehicle. The credit can be transferred to a registered dealer in exchange for payment. This credit applies to vehicles acquired after 2022. The transfer of credit provision will apply to vehicles acquired after 2023.
Raising Tax Revenue
Extending Section 461(l)
Introduced by the Tax Cuts and Jobs Act of 2017 (TCJA), IRC §461(l) limits an individual taxpayer’s deduction of business losses generated in a tax year. The excess business loss limitation delays a deduction for losses that exceed business income plus certain threshold amounts: $540,000 for married filing jointly filers and $270,00 for all other filers in 2022. The excess loss limited in the current year is carried forward to succeeding years following rules for net operating losses. The Inflation Reduction Act extends the life of this tax provision for two additional years, to the end of 2028.
Corporate Alternative Minimum Tax (AMT)
TCJA eliminated the corporate alternative minimum tax, but less than five years later, the IRA reinstated a minimum tax based on a corporation’s financial statement income (book AMT). The new book AMT is effective for tax years beginning on or after January 1, 2023. It applies to domestic C-corporation taxpayers with a three-year average of annual financial statement income of more than $1 billion. For certain U.S. companies owned by foreign corporations, book AMT applies if the 3-year average income exceeds $100 Million. Book AMT applies a 15% tax rate on “adjusted financial statement income” less the AMT foreign tax credit. Book AMT is then compared with the regular tax (including any Base Erosion and Anti-Abuse Tax), and the corporation pays the higher of the two amounts.
There are adjustments, exceptions and limitations that will complicate the application of book AMT. An important first step is to determine if a corporation, or group of corporations, may be subject to this new tax.
One Percent (1%) Excise Tax on Corporate Stock Buybacks
The Inflation Reduction Act adds a new tax provision to assess a 1% excise tax on a company that is repurchasing its own stock from shareholders. This tax provision was included in earlier drafts of the Build Back Better Act of 2021. The excise tax applies to stock repurchases by publicly-traded companies beginning in 2023. The excise tax is 1% of the fair market value of any stock repurchased during a taxable year. The tax is not deductible. A domestic corporation with its stock trading on an established securities market may be subject to this tax. This new tax will exclude:
- Buybacks of less than $1 million
- Repurchases connected to contributions to retirement savings plans, including employee stock ownership plans
- Transactions by regulated investment companies and real estate investment trusts
- Repurchases that are taxed as dividends
- Transactions that are part of a nontaxable corporate reorganization transaction
New Funding for the IRS
The IRA increases the Internal Revenue Service (IRS) budget with appropriations of approximately $79 billion of new funding available during the next 9 years. More than one-half of the appropriation is to be spent on enforcement activities. Another portion is to be spent on improvements in operations and technology. According to a report from the Congressional Budget Office, the additional funding will support the IRS to collect an estimated $180 billion in additional revenue and narrow the gap between what taxpayers actually owe and what taxpayers report and pay.
Cherry Bekaert is Here to Help You Benefit from the Tax Provisions Included in the Inflation Reduction Act of 2022
The Inflation Reduction Act of 2022 is a large bill that includes numerous tax related provisions to support the development and use of clean energy and provisions to increase tax revenues. The discussion above touches on many of these energy-related credits and new taxes. Over the next months and years, the U.S. Department of Treasury will develop guidance to implement these credits and incentives, apply the new taxes and spend funds to improve the IRS. Your Cherry Bekaert tax advisors will continue to keep an eye on developments and look for ways that this law can benefit you and your business.
Related Insights
- Inflation Reduction Act Tax of 2022: Details & Tax Changes
- Inflation Reduction Act Nearly Triples Section 179D Tax Incentives
- Inflation Reduction Act Doubles R&D Tax Credit to Offset Payroll Taxes for Start-Up Businesses
- How Can A&E Firms Take Advantage of New Tax Credits in the Inflation Reduction Act?
- How the Real Estate and Construction Industry Benefits from the Inflation Reduction Act of 2022
