Inflation Reduction Act of 2022: Impact on Taxation

Inflation Reduction Act of 2022: Impact on Taxation

The Inflation Reduction Act of 2022 (IRA) was signed into law by President Biden on August 16.

This significant new law includes a considerable number of tax provisions. Below is a summary of several of the more notable tax changes. Unless noted otherwise, these changes will be effective after December 31, 2022.

Corporate and International Taxes

Corporate Alternative Minimum Tax

The Act imposes a new 15% corporate alternative minimum tax on corporations with at least $1 billion in financial statement income. This alternative minimum tax can be thought of as a “Book Minimum Tax” because the starting point of the calculation is a corporation’s average annual adjusted financial statement income.

The minimum tax will apply if it exceeds the corporation’s regular tax, including its base erosion and anti-abuse tax (BEAT), a special tax related to international operations, for the applicable tax year.

1% Stock Repurchase Excise Tax

The Act imposes a 1% excise tax on the fair market value of any stock repurchased by a covered corporation during the tax year. A covered corporation is any domestic corporation with stock traded on an established securities market.

The excise tax does not apply when one of the following conditions is met:

1. The repurchase is part of a reorganization and no gain or loss is recognized
2. The stock repurchased, or an amount of stock equal to the value of the stock repurchased, is contributed to an employer sponsored retirement plan, employee stock ownership plan, or similar plan
3. The total value of the stock repurchased during the tax year does not exceed $1 million
4. The repurchase is by a dealer in securities in the ordinary course of business
5. The repurchase is by a regulated investment company or a real estate investment trust
6. To the extent that the repurchase is treated as a dividend

Excess Business Loss Rules

The Act extends the limitations on pass-through business losses enacted in the 2017 Tax Cuts and Jobs Act (TCJA) by two years through 2028. This rule limits the amount of a loss from a pass-through business that can offset other income to $250,000 or $500,000 for a married couple filing a joint return.

Increase in Research Credit Against Payroll Tax for Small Businesses

The limit on the amount of research credit that qualified small businesses may elect to treat as a credit against their payroll tax liability has been increased from $250,000 to $500,000. This is beneficial for applicable small business that may not be able of utilize research credits to offset income tax.

Energy

Extension and Modification of the Energy Investment Tax Credit

The Act extended the construction start date by one year for certain qualifying property to January 1, 2025. Previously, construction had to begin before 2024.

The credit has been expanded to include the following qualifying types of property:

• Energy storage technology
• Qualified biogas property
• Microgrid controllers

Extension of Tax Credits for Biodiesel, Renewable Diesel, and Alternative Fuels

The Act extends the tax credits for biodiesel, renewable diesel, and alternative fuels through 2024. This credit applies to fuel sold or used after 2021.

Extension and Modification of Nonbusiness Energy Property Credit

The nonbusiness energy property credit has been extended through 2032, and the rate is increased to 30% for both qualified energy efficiency improvements and residential energy property expenditures.

The $500 lifetime limit on this credit has been replaced with a $1,200 annual limit.

Extension and Modification of Residential Energy Efficient Property Credit

The residential energy efficient property credit has been extended through 2034. The credit for biomass fuel property expenditures has been replaced with a new credit for battery storage technology expenditures.

Extension and Changes to New Qualified Plug-In Electric Drive Motor Vehicle Credit (Clean Vehicle Credit)

The Act extends the new clean vehicle credit through 2032, and increases the dollar limit on the credit if critical minerals and battery component requirements are met. The limit on number of credit-eligible vehicles has been eliminated, but only one credit is allowed per vehicle. The maximum amount of the credit remains at $7,500, but includes income limitations as well as limitations on manufacturer’s suggested retail price.

A new requirement was added that the final assembly of the vehicle must occur in North America, in effect for all vehicles sold after the date of enactment (August 16, 2022).

The Act requires that vehicles with battery components manufactured by “foreign entities of concern” are ineligible to receive the credit after 2023. Beginning in 2025, use of any critical mineral in a battery that is extracted or processed by those countries will be prohibited.

New Credit for Previously Owned Clean Vehicles

A new, nonrefundable personal credit of up to $4,000 is available qualifying previously owned clean vehicles purchased by individuals whose modified adjusted gross income does not exceed $300,000 for joint filers, $225,000 for heads of household, or $150,000 for single filers. The credit is set to terminate after 2032.

Other Notable Provisions

Extends Health Insurance Premium Tax Credit Rules

The Act extends the expanded health insurance Premium Tax Credits provided in the American Rescue Plan Act (ARPA), including allowing higher-income households to qualify for the credits and boosting the subsidy for lower-income households, through the end of 2025. Taxpayers with household income of 400% or more of the federal poverty line now qualify for the premium tax credit.

IRS Enforcement

The IRS will be provided $80 billion in additional funding to add auditors, improve customer service, and modernize technology.

No current SALT deduction restoration

The restriction on the deduction of state and local taxes (the “SALT deduction”) is still effective until its scheduled expiration in 2025.

Conclusion

In summary, the goals of the Inflation Reduction Act of 2022 are to fight inflation, invest in domestic energy production, and reduce carbon emissions. We have highlighted selected provisions of this major law change, however for more information you can access the full text of the law here. As always, please reach out to your trusted advisor at Herbein with any questions through the form below.

Article contributed by Annika McKinney.