Inflation Reduction Act of 2022
Note from SVA: This article was written and contributed by Jessica Moslander, CPA, a tax manager who works for our colleagues at Holsinger P.C. who have over 20 year of experience in tax research, preparation and planning. This information is not meant as tax advice but merely an informative piece.
On August 16, 2022, the Inflation Reduction Act (IRA) was signed into new law. The legislation creates 2 new taxes and extends an existing loss limitation provision. In addition, the IRA provided additional funding to the IRS and expanded many energy credits. We will briefly discuss a few key provisions of the Act.
The first “new” tax is just an old law reinstated with slight alterations. The corporate alternative minimum tax, which was eliminated by the Tax Cuts and Jobs Act (TCJA), was reinstated. For tax years beginning after 2022, the slightly altered AMT equals 15% of the corporation’s “adjusted financial statement income” if the average annual adjusted financial statement income (defined in §56A(d)) exceeds $1 billion for the three prior tax years. The corporate AMT does not apply to S corporations, regulated investment companies, and real estate investment trusts. For certain foreign-parented corporations, the income threshold is reduced to $100 million. There are also other exceptions where there is a change in ownership or a consistent reduction in income.
The second new tax is a 1% excise tax on stock repurchases by domestic corporations whose stock trades on an established securities market (as defined in §7704(b)(1)). The term “repurchase” as defined in the bill means a §317(b) redemption and any transactions determined by the Treasury Secretary to be economically similar to a §317(b) redemption. This excise tax does not apply to §368(a) reorganizations, stock later contributed to an employer-sponsored retirement plan or ESOP, $1 million or less in total repurchases in the tax year, a dealer in securities in the regular course of business, repurchases by RICs and REITS, or repurchases treated as dividends under the IRC.
The TCJA added §461(l) which limits certain large business losses for non-corporate taxpayers for tax years 2018 through 2025. The CARES act eliminated this provision for tax years 2018 – 2020 and the American Rescue Plan Act (ARPA) extended the provision through tax year 2026. Sec. 13903 of the Inflation Reduction Act further extends this loss limitation provision through tax year 2028. These losses are disallowed and carried over to the following tax year as a net operation loss (NOL). For 2022, the inflation adjusted amount is $270,000 ($540,000 for joint returns).
The Inflation Reduction Act gives the IRS additional funding for the following:
$3.18 billion for taxpayer services
$4.75 for business systems modernization
$45.6 billion for enforcement
$25.3 billion for operations support and
$675.5 million for non-IRS tax administration.
The law also extends two American Rescue Plan enhancements of the §36B premium tax credit through tax year 2025. Taxpayers with household income exceeding 400% of the federal poverty line may be eligible for a premium tax credit and the amount that taxpayers are expected to contribute toward their health insurance premiums is lower. Without this extension, these provisions would expire at the end of 2022.
The IRA increases the §41 research tax credit that can be claimed against payroll taxes for certain qualified small businesses. In tax years beginning after 2022, the amount of this limitation is increased to $500,000 from $250,000.
Most of the energy tax credits that were in the Build Back Better Act survived, although some are modified or have altered termination dates. There are over two dozen expanded and additional niche credits in the IRA. We will discuss the clean vehicle credits and the non-business energy credits.
The credit for the purchase of clean vehicles (including both plug-in electric vehicles and fuel cell vehicles) is extended through 2032. The credit under §30D is renamed the clean vehicle credit. The maximum amount of the credit remains at $7,500 but includes income limitations as well as limitations on the manufacturer’s suggested retail price. Note that the new credit requires final assembly of the vehicle in North America. The new credit replaces the old credit as of August 16, 2022. However, taxpayers who have a binding contract in place before that date can still claim the credit under the old requirements.
A new credit of up to $4,000 is also available for the purchase of a previously-owned clean vehicles (§25E). This is also subject to income limitations and is available through 2032 as well.
The IRA also includes a new credit for up to 30% of the basis of a qualified commercial clean vehicle acquired after 2022 and before 2033 (§45W).
Lastly, the IRA extended and modified the credit for non-business energy property which expired at the end of 2021. This new credit, now called the clean energy credit (§25C), is extended to 2032 and applies to energy efficient windows and doors, HVAC systems, and heat pumps. Rather than a lifetime limit of $500, the credit is replaced with an annual limit of $1,200 with no income limitations. The new credit does not go into effect until January 1, 2023. A summary of the credit is as follows:
EFFECTIVE JANUARY 1, 2023
10% Tax Credit for qualified energy-efficient improvements and expenditures (for primary residence)
30% Tax Credit for qualified energy-efficient improvements and expenditures
$500 lifetime credit
$1,200 annual limit on the credit
$200 lifetime limit for new windows
$300 limit for:
$150 limit for some furnaces and boilers
$600 limit for:
$250 limit for an exterior door ($500 total for all exterior doors)
$2,000 limit for:
The bill also includes large investments in making health care and prescription drugs more affordable in addition to fighting climate change through the energy credits and taxing wealthy corporations with the AMT and 1% excise tax. This article is but a summary of some of the key provisions in the Act.
For more information on any of the provisions above, please contact Holsinger P.C. at email@example.com.