President Biden signed the Inflation Reduction Act (IRA) into law on August 16, 2022. This bill includes provisions related to taxes, health care, and climate change. The act will impact many taxpayers in several ways. Here’s an overview of how this new legislation may impact you and your business.
Inflation Reduction Act 2022 Tax Provisions
The $430 billion IRA is a wide-reaching legislation that will not raise taxes on businesses and individuals earning less than $400,000 annually. Rather, the bill has other means of generating revenue, which we will dive into below.
A new corporate alternative minimum tax of 15% will be imposed on corporations other than S Corporations with more than $1 billion in annual earnings over the previous three years. The current corporate tax rate is 21%, but many companies in this earning range pay little to no federal income tax because of credits and deductions.
The 15% minimum corporate tax will be imposed on financial statement income, or book income, reduced by tax basis depreciation and net operating losses (NOL). This new minimum tax will be effective for tax years beginning after December 31, 2022.
Private equity firms and hedge funds are exempted from the minimum tax.
Repurchase of Corporate Stock
The IRA imposes a 1% excise tax on the fair market value of any stock repurchased by a publicly traded corporation during the tax year. Nonpublic companies will not need to pay this tax.
R&D Tax Credit Extended by the IRA
The legislation enhances the benefit for start-up companies by expanding the amount of the Research and Experimentation tax credit – often called the R&E or R&D Credit, which can be used to offset payroll tax. Read more about how the R&D tax credit has changed in our article.
Where Is the Revenue From the IRA Allocated?
The IRA is set to generate revenue through the corporate minimum tax, improved funding for IRS tax enforcement, and superfund fees. Plus, the act is set to reduce healthcare expenditures. This funding will be allocated to the IRS, Energy & Climate, and healthcare.
IRS Funding in the IRA
The IRA provides $80 billion in funding to the IRS to improve tax enforcement and technology. In 2020, the IRS’s budget was slashed by 20% compared to 2010. It is anticipated that this increased budget will allow the IRS to collect $203 billion from corporations and wealthy individuals.
Inflation Reduction Act Sustainability and Climate Provisions
$370 billion will be dedicated to climate change and domestic energy production. The legislation aims to reduce carbon emissions by 40% by 2030. Various tax credits will be extended and increased by the IRA to incentivize the use of renewable energy. The IRA credits private companies and public utilities to produce renewable energy or manufacture parts for renewable projects.
The plug-in vehicle credit has been renamed the clean vehicle credit under the IRA. The revised credit removes manufacturer limitations on the number of vehicles eligible, creates mineral and battery component requirements, and sets the price and taxpayer income limitations. This credit applies to vehicles placed in service after January 1, 2023.
The credit will not be allowed for single filers whose modified adjusted gross income (MAGI) exceeds $150,000, $300,000 for married couples filing jointly, and $225,000 for heads of household.
The credit is also not allowed for vans, sport utility vehicles, and pickups priced over $80,000 or for other vehicles priced above $55,000.
Used Electric Vehicles Tax Credit
The IRA also creates a tax credit for used electric vehicles purchased after 2022. The credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. Used EVs must cost no more than $25,000 and be at least two years old to be eligible for the credit.
Home Energy Improvements
Taxpayers can receive tax breaks for improving the energy efficiency of their homes. Installing solar panels, heat pumps, energy-efficient water heaters, and HVAC systems are among the listed improvements.
The Energy Efficient Home Improvement Credit
This credit is the renamed and enhanced Nonbusiness Energy Property Credit that expired at the end of 2021. The new credit will be extended through 2032 and cover 30% of all eligible home improvement costs made during the year up to $1,200. Annual limits on specific improvements have also been updated.
The Residential Clean Energy Credit
The Residential Energy Efficient Property Credit has been renamed the Residential Clean Energy Credit under the Inflation Reduction Act. The credit was set to expire in 2024 but has been extended until 2032. In 2022, it will cover 30% of the cost to install qualifying systems that use solar, wind, geothermal, biomass, or fuel cell power to produce electricity, heat water, or regulate the temperature in your home. The credit limits fuel cell equipment to $500 per one-half kilowatt of capacity.
The 30% credit will apply from 2022 until 2032. In 2033, the credit will be reduced to 26% and then to 22% in 2034, after which it is set to expire.
Alternative Fuel Refueling Property Credit
This credit expired at the end of 2021 but has now been extended through 2032. This credit will cover 30% of the costs of qualified alternative vehicle refueling property up to $1,000.
What Else Is Coming From the Inflation Reduction Act?
The Inflation Reduction Act is a sprawling piece of legislature, and more information is still forthcoming. As our teams work through the changes, we will inform you of the critical changes taxpayers need to know in our blog and newsletter. Get in touch with our team if you have any questions.