The Inflation Reduction Act of 2022
On August 16, 2022, President Biden signed into law Public Law Number 117-169, the Inflation Reduction Act of 2022 (the Act). AAFCPAs has highlighted below some of the most impactful tax provisions in the Act, including, but not limited to, provisions and credits affecting clean energy, a significant monetary reinvestment into the IRS, and a tax on the repurchase of corporate stock.
Clean Energy Credits and Provisions
Enhanced Tax Credit for new and used electric cars.
Certain eligible electric cars (The Energy Department provided a projected list here: Eligible Vehicles) who have been final assembled in North America, are eligible for a tax credit. New plug-in electric drive vehicles are eligible for up to a $7,500 tax credit, where used plug-in electric drive vehicles are eligible for up to a $4,000 tax credit. There are certain limitations for these credits based on modified gross incomes and the price of the electric vehicles.
The Act also created a new credit for qualified commercial clean vehicles. In general, subject to certain limitations, the amount of the commercial clean vehicle credit is equal to the lesser of:
- 15% of the basis of such vehicle, for a hybrid vehicle, or 30% for a pure electric vehicle; or
- The incremental cost of such vehicle.
The incremental cost definition is an amount equal to the excess of the purchase price for such clean energy vehicle over such price of a comparable non clean energy vehicle.
Research Credit Against Payroll Taxes
For taxable years beginning after December 31, 2022, the Act increased the amount of Research Credits that qualified small businesses may use to offset payroll taxes from $250,000 to $500,000. A qualified small business is generally a business whose gross receipts do not exceed $5,000,000 in a taxable year and has not had gross receipts for more than 5 years.
Extension of Resident Clean Energy Credit under Section 25D
The Act extended the residential clean energy credit to December 31, 2034. The Act also increased certain phaseouts for residential clean energy property credits to the following amounts:
- For property placed in service before January 1, 2022, the credit is 26%;
- For property placed in service after December 31, 2021, and before January 1, 2033 the credit is 30%;
- For property placed in service after December 31, 2032, and before January 1, 2034, the credit is 26%; and
- For property placed in service after December 31, 2033, and before January 1, 2035, the credit is 22%.
Section 179D Tax Deduction
The Act increased the deduction for the building of eligible energy efficient commercial buildings from $1.88 per square foot to $5.00 per square foot. Additionally, the Act now allows tax-exempt entities to take advantage of the Section 179D tax deduction.
Residential Energy Credit under 25C
Increased from the prior credit, taxpayers are now allowed an increased tax credit equal to 30% of the amount paid or incurred for qualified energy efficiency installations. The maximum credit allowable under this provision cannot exceed $1,200 for any taxable year. This $1,200 limit is an annual limit, and not a lifetime limit. This credit is extended until December 31, 2032.
Energy Efficient Home Credit under 45L
Increased from the prior credit, eligible contractors who participate in either the Energy Star Residential New Construction Program or the Energy Star Manufactured New Homes Program are now eligible for the increased credit of either $2,500 in some cases, or $5,000 if other requirements are met. This credit is extended until December 31, 2032.
Significant Monetary Funding of the Internal Revenue Service
While it may seem unimportant in the grand scheme of the Act, the IRS has been underfunded and inefficient for many years. Inefficiencies lead to errors, delays in processing electronic, paper returns, and correspondence, difficulties correcting problems on tax notices, as well as inequitable enforcement of the tax code.
Included in the Act are billions of dollars dedicated to improving the IRS’s performance and efficiencies. The funding will be allocated to the following activities:
- Taxpayer services;
- Operations Support;
- Business Systems Modernization; and
- The development of a free direct e-file tax return system.
Excise Tax on Repurchase of Corporate Stock
The Act created a corporate excise tax equal to 1% of the fair market value of any stock which is repurchased by the covered corporation after December 31, 2022. This excise tax only applies to covered corporations, which include any entity that is taxed as a corporation for US federal tax purposes, and of which has its shares traded on an established securities market within the meaning of US Code 7704(b)(1). This could include publicly traded partnership which is taxed as a corporation for US federal tax purposes.
What do we advise?
As always, AAFCPAs will continue to monitor new and emerging legislation and keep you informed as significant changes occur or provisions become clarified. If you have any questions please contact: Christopher Consoletti, Esq. at 774.512.4180, firstname.lastname@example.org; Richard Weiner, CPA, MST at 774.512.4078, email@example.com; or your AAFCPAs Partner.