President Biden signed the Inflation Reduction Act of 2022 (Act) into law Tuesday, August 16. The legislation includes several income tax provisions that could impact businesses and individuals. Kassouf Director Joel Jones, CPA, CIA, CVA, ABV, CFF, CGMA broke down the changes below.
Summary of Changes:
- Tax increases for some large corporations
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Potential healthcare savings for some Americans
- Opportunities to boost green-energy funding
We dive deeper into each aspect of the Act below.
Corporate Alternative Minimum Tax for Large Corporations
The Act imposes a 15% alternative minimum tax on the adjusted financial statement income of certain corporations based on an income test as defined under the Act. A corporation meets this income test if its average annual financial statement income for the three-tax-year period ending with the tax year exceeds $1 billion. To calculate the income test, the Act includes provisions applicable to foreign-parented multinational groups and commonly controlled entities. Adjusted financial statement income for a taxpayer is the net income or loss provided on the taxpayer’s applicable financial statement but allows for certain specific adjustments including tax depreciation.
1% Excise Tax on Repurchase of Corporate Stock
The Act imposes an excise tax on certain covered corporations equal to 1 percent of the fair market value of stock of the corporation repurchased during a taxable year. For purposes of this provision, a covered corporation is any domestic corporation the stock of which is traded on an established securities market. This excise tax applies to repurchases of stock after December 21, 2022 and does not apply to:
- Stock repurchased as part of a reorganization
- A case in which stock repurchased is, or an amount of stock equity to the value of the stock repurchased is, contributed to an employer sponsored retirement plan, employee stock ownership plan, or similar plan.
- Total value of stock repurchased during tax year does not exceed $1 million
- Repurchase by a dealer in securities in ordinary course of business (subject to prescribed regulations)
- Repurchase by a regulated investment company or real estate investment trust
- Repurchase treated as a dividend
Additional Funding for the Internal Revenue Service
The Act includes an appropriation of approximately $80 billion to the Internal Revenue Service to be used for enforcement, operations support, and business systems modernization.
Extension of Limitation on Excess Business Losses
The Act extended the limitation on excess business losses on non-corporate taxpayers by two years to 2028.
Health Insurance Premium Tax Credits
The American Rescue Plan Act of 2021 (ARPA) provided a reduced household income percentage that is used to calculate the health insurance premium for individuals claiming the premium tax credit. This provision generally results in higher premium tax credits for many taxpayers. The Act extends this provision through 2025. In addition, the Act extends the availability of the premium tax credit for taxpayers with household income that exceed 400% of the federal poverty line. This extension is also through 2025.
Increase in Research Credit against Payroll Tax for Small Businesses
The Act increases the amount of research credit that qualified small businesses may treat as a credit against payroll tax liabilities. The limit increased from $250,000 to $500,000.
Excise Tax on Designated Drugs during Nonenforcement Period
The Act provides for a nondeductible excise tax on manufacturer, producer or importer of certain types of drugs.
Safe Harbor for Absence of Deductible for Insulin
The Act allows continuation of high deductible health plan treatment for qualifying plans with no deductible for selected insulin products.
Energy-Related Tax Credits
The Act provides for a number of new and expanded energy-related tax credits including (but not limited to) the following:
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Extension and Modification of the Energy Credit: The current credit is available related to new or reconstructed depreciable property that uses solar energy to generate electricity, heat or cool a structure, or provide solar process heat (Type 1 solar property), illuminates a structure using fiber-optic distributed sunlight (Type 2 solar property), is used to produce, distribute, or use energy from a geothermal deposit (geothermal deposit energy property), qualified fuel cell property, qualified microturbine property, combined heating and power (cogeneration property), qualified small wind energy property, uses the ground or ground water to heat or cool a structure (ground water heating and cooling property), or waste energy recovery property. The Act adds energy storage technology, qualified biogas property and microgrid controllers and expands some of the existing definitions of qualified property.
- New Income or Excise Tax Credit Allowed for Sustainable Aviation Fuel for 2023 and 2024: This new credit is related to sale or use of a “qualified mixture” with the credit based on the number of gallons of “sustainable aviation fuel.”
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Extension, Increase, and Modifications of Nonbusiness Energy Property Credit: The current credit is available to individuals equal to 10% of the sum of amounts paid for certain qualified energy improvement property installations and the amount of residential energy property expenditures and this credit only applied to property placed in service before January 1, 2022. The Act increases the credit rate to 30% of qualified expenditures, now includes amounts spent for a home energy audit and provides that most of the provisions under this credit are available for energy efficient property placed in service before January 1, 2033.
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Extension and Modification of Residential Clean Energy Credit: The current credit rate of 26% of qualified expenditures for residential energy efficient property is expanded to 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. This credit is also now available for qualified battery storage technology expenditures.
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Accelerated Cost Recovery for Green Building Property: The current cost recovery deduction for energy efficient commercial building (EECB) is expected to lower the efficient standard benefits from 50% energy reduction to 25% reduction and change the formula for calculating the maximum deduction. The Act also revises the methodology for past deduction reduction factor.
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Extension, Increase and Modification of New Energy Efficient Home Credit: The current New Energy Efficient Home Credit (NEEHC) only available to eligible contractors for qualified new energy efficient homes acquired by homeowner before January 1, 2022 is now available for qualified new energy efficient homes acquired before January 1, 2033. In addition, the credit can now be $500, $1,000, $2,500 or $5,000 depending on which energy efficient requirement is met.
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New Clean Vehicle Credit: The current credit for new qualified plug-in electric drive motor vehicle of up to $7,500 is expanded and restated. The Act now provides a $3,750 critical minerals requirement and separate $3,750 battery component requirement. The definition of a clean vehicle has also been revised, and the final assembly of the vehicle must occur in North America. The credit is also not allowed for vehicles that exceed a maximum suggested retail price limitation of $80,000 for vans, SUVs and pickups and $55,000 for all others. In addition, the credit is not allowed if modified adjusted gross income exceeds $300,000 for married taxpayers, $225,000 for heads of households, and $150,000 for all others. These credits may also be transferred to selling dealer in return for full payment of credit amount subject to recapture if modified adjusted gross income limits are exceeded.
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Credit for Previously-Owned Clean Vehicles: This new provision allows a credit of the lesser of $4,000 or 30% of a vehicle’s sales price for a qualified buyer who places in service a previously owned clean vehicle after 2022. This credit is subject to limits and includes specific definitions of previously-owned clean vehicle, qualified sale and qualified buyer. This credit can also be transferred to a selling dealer in exchange for cash.
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Credit for Qualified Commercial Clean Vehicles: This new credit under the Act provides a credit for the lesser of 15% of the vehicle’s basis (30% for vehicles not powered by a gasoline or diesel engine) or the “incremental cost” of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight of less than 14,000 pounds and $40,000 for heavier vehicles. To qualify, the vehicle must not be acquired for resale and must be made for use on public streets, roads and highways or be mobile machinery (as defined). The Act also provides for specify battery requirements and other technical requirements. This credit applies to vehicles acquired after December 31, 2022 and before January 1, 2033.
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Extension and Modification of Alternative Fuel Vehicle Refueling Property Credit: The current credit of 30% of cost of property placed in service by taxpayer related to cost of any qualified alternative fuel refueling property is extended to property placed in service before January 1, 2033 and lowers the credit rate to 6% if the property is depreciable.
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Extension of the Advanced Energy Project Credit: This provides an additional $10 billion for qualifying advanced energy project credit and expands the credit to include projects that reequip, expand, or establish manufacturing or industrial facility for projection or recycling certain energy efficient products.
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Advanced Manufacturing Production Credit: This provides a new credit for each eligible solar energy component, eligible wind energy component, eligible inverter, qualifying battery component, and applicable critical mineral, which is produced by the taxpayer in the United States, or in a U.S. possession, and sold to an unrelated person. This credit applies to components and minerals produced and sold after 2022.
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Reinstatement of Superfund Hazardous Substance Financing Rate: This provides the return of a per-barrel excise tax on crude oil and petroleum products at a rate of 16.4 cents per barrel.
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Clean Energy Production Credit: This establishes a new credit for energy production facilities placed in service after 2024.
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Clean Energy Investment Credit: This creates a new credit of 6% of taxpayer’s investment in qualified property for year placed in service with increased credit up to 30% for investments in qualified facilities with maximum output less than 1 megawatt that meet other requirements.
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Cost Recovery for Qualified Facilities, Qualified Property and Energy Storage Technology: This provides 5-year MACRS property classification for qualified facilities, qualified property and energy storage technology placed in service after December 31, 2024.
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Clean Fuel Production Credit: This provides a credit for low-emissions transportation fuel that a taxpayer produces at a qualifying facility and sells for qualifying purposes.
If you have any questions about this new legislation, please reach out to our team of experts.