Leveraging the Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022 (the Act) was signed into law by President Biden on August 16^th. The Act includes significant provisions related to climate change, health care, and taxes. The Act also addresses the federal budget deficit. According to the Congressional Budget Office (CBO), the Act is projected to reduce the deficit by approximately $300 billion.

Significant Tax Provisions 

New 15% Corporate Alternative Minimum Tax (CAMT)

The Act imposes a new 15% CAMT on the adjusted financial statement income of applicable corporations with profits exceeding $1 billion in tax years beginning after December 31, 2022. 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

The Act imposes on each “covered corporation” a tax equal to 1% of the fair market value of any stock of the corporation which is repurchased. A covered corporation generally would mean any domestic corporation that is publicly traded.  The 1% excise tax applies to repurchases of stock after December 31, 2022.

 

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 Act extends this limitation through 2028. 

 

Energy Tax Credits

Clean Vehicle Credit

The Clean vehicle credit (previously known as plug-in electric drive vehicle credit) available to individuals for the purchase of a new clean vehicle (e.g. plug-in electric vehicle) has been modified for vehicles placed in service after Dec. 31, 2022. There are also price and income limitations.

The clean vehicle credit isn’t allowed for a vehicle with a manufacturer’s suggested retail price above $80,000 for vans, sport utility vehicles and pickups, and above $55,000 for other vehicles. In addition, the clean vehicle credit isn’t allowed if a taxpayer’s modified adjusted gross income (MAGI) for the current or preceding tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for heads of household.

The manufacturer limitation on the number of vehicles eligible for the credit will be eliminated for vehicles sold after December 31, 2022. However, additional requirements that the final assembly of the vehicle occurs in North America apply.

 

Previously Owned Clean Vehicles

A new tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sales price 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 MAGI 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. The sales price must be $25,000 or less to qualify and the buyer must not be a dependent of another taxpayer.

 

Residential Clean Energy Credit (solar, wind, fuel cell, geothermal, qualified battery storage technology)

Before the enactment of the Act, individuals were allowed a personal tax credit, known as the residential energy efficient property (REEP) credit, for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property installed in homes in years before 2024. The Act makes the credit available for property installed in years before 2035. The Act also makes the credit available for qualified battery storage technology expenditures and provides a definition of those expenditures.

Under the Act, the applicable rate is 26% for property placed in service before January 1, 2022, 30% for property placed in service after December 31, 2021, and before January 1, 2033, 26% for property placed in service after December 31, 2032, and before January 1, 2034, and 22% for property placed in service after December 31, 2033, and before January 1, 2035.

 

Nonbusiness Energy Property Credit

The Act extends the nonbusiness energy property credit, which expired at the end of 2021, through 2032.

The Act increases the credit to 30% for expenditures after 2021 and repeals the lifetime credit limitation ($500), and instead limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows, and skylights, and $250 for any exterior door. Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.

 

Additional Energy-Related Tax Credits

Below is a list of additional credits impacted by the new legislation. Please reach out to us if you may be involved in any such energy-related activities to determine potential applicability:

• Qualified Commercial Clean Vehicles
• Advanced Manufacturing Production Credit
• Section 179D, Energy Efficient Commercial Buildings Deduction
• Clean energy production
• Clean energy investment
• Clean fuel production
• Carbon oxide sequestration
• Clean hydrogen production
• Construction of new energy efficient homes (available to contractors)
• 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

 

Health care provisions

The Act allows Medicare to negotiate the price of prescription drugs and caps Medicare enrollees’ annual out-of-pocket drug costs at $2,000 and monthly insulin costs at $35 and provides them free vaccines. Additional provisions to rein in drug costs include a requirement that pharmaceutical companies raising the prices on drugs purchased by Medicare faster than the rate of inflation must rebate the difference back to the program.

 

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.  Specifically, taxpayers with household income over 400% of the Federal Poverty Line remain eligible for the Premium Tax Credit for 2023-2025.

 

IRS funding

The Act allocates $80 billion to the Internal Revenue Service (IRS) over 10 years for improvements, such as better technology, facilities, additional employees and increase in enforcement and compliance.  It is unknown at this time the extent to which this additional funding will result in increased IRS audit activity.

 

Other Miscellaneous Tax Provisions

R&D Tax Credit

The Act increases the maximum amount of research and development tax credits a qualified small business can elect to claim as a payroll tax credit from $250,000 to $500,000 beginning after December 31, 2022.

 

The credits and provisions of the Act are numerous and complicated. We will continue to monitor the situation and provide information as it becomes available. In the meantime, feel free to contact us at info@ppandco.com or (408) 287-7911 to determine the best course of action for your specific situation.