On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022. The full bill can be found by clicking here and contains a range of provisions relating to tax, health care and clean energy. A summary of key legislation in the bill includes:
New Taxes
15% Corporate Alternative Minimum Tax – Revenue Maker
The bill re-establishes a 15% corporate Alternative Minimum Tax (AMT) provided by IRC Section 55 with modifications from the version that was previously eliminated by the Tax Cuts and Jobs Act. This new tax will be effective for tax years beginning after 2022 and will apply to corporations (other than S-corporations) with average annual adjusted financial statement income for the 3-year taxable period ending with the current tax year of $1 billion or more or will apply to foreign-parented international financial reporting groups with $100 million or more of average annual adjusted financial statement income. (Act Section 10101)
For corporations that are members of foreign-parented multinational groups for any taxable year, the income of all members of the group will be included for purposes of determining average annual adjusted financial statement income.
Foreign corporations engaged in a trade or business with the United States will be treated as a separate domestic corporation that is wholly owned by the foreign corporation.
If the corporation meets the 3-year average annual adjusted financial statement income test, the corporate alternative minimum taxable income is calculated by taking the net income or loss from the current taxable year’s financial statement and making various adjustments for:
- Financial statements covering different taxable years
- Special rules for related entities
- Adjustments to take into account certain items of foreign income
- Effectively connected income
- Adjustments for certain taxes
- Adjustment with respect to disregarded entities
- Special rule for cooperatives
- Rules for Alaska Native Corporations
- Amounts attributable to elections for direct payment of certain credits
- Consistent treatment of mortgage servicing income of taxpayer other than a regulated investment company
- Adjustment with respect to defined benefit pensions
- Tax-exempt entities
- Depreciation
- Qualified wireless spectrum
1% Excise Tax on Corporate Stock Repurchases – Revenue Maker
A 1% excise tax (IRC Section 4501) is introduced on the fair market value of stocks repurchased after 2022 by publicly traded companies during the tax year. This will apply to IRC Section 317(b) redemptions and IRC Section 368 tax-free reorganizations. (Act Section 10201)
Other Tax Related Items
Increase Research Credit Claimed Against Payroll Tax for Small Businesses
The research credit available for certain qualified small businesses for tax years beginning after 2017 previously allowed a business to claim a limited amount of the research credit against payroll taxes [IRC Section 41(h)]. The bill increases the amount of credit that can be taken against payroll taxes from $250,000 to $500,000 for tax years beginning after 2022. (Act Section 13902)
Extension of Excess Business Loss Limitations for Noncorporate Taxpayers (Individuals) – Revenue Maker
The bill extends the limitation on excess business losses for noncorporate taxpayers (individuals) for two years through 2028. Previously the limitation on excess business losses applied for tax years beginning in 2021 through 2026. The provision limits the amount of ordinary business deductions that can offset nonbusiness income in the same tax year. Prior to tax year 2021, taxpayers were permitted to use all their business deductions to offset their nonbusiness income. Beginning in 2021, limits were introduced limiting the amount of ordinary business deductions to the amount of gross business income or gain plus an additional threshold amount subject to inflation [IRC Section 461(l)(3)]. The new thresholds permit single taxpayers for tax year 2021 to offset $262,000 of nonbusiness income and $524,000 for married filing joint taxpayers. With the introduction of these limits, any excess business losses disallowed in the current tax year are deferred and carried forward to subsequent years as a net operating loss. Excess business loss carryovers may be subject to an 80% of taxable income limitation in subsequent years under IRC Section 172, which were introduced for tax years beginning after 2020 to limit the net operating loss deduction to 80% of a taxpayer’s taxable income. (Act Section 13903)
Additional Funding for IRS – Revenue Maker
The IRS will receive additional funding of approximately $80 billion, for which more than half will be allocated to increasing staffing for tax enforcement. We can expect to see the expanded number of IRS auditors looking for cases of tax avoidance among wealthy taxpayers. The investment to fund the IRS is expected to yield approximately $204 billion in additional tax revenue. The remaining funds will go towards improving customer service and upgrading technology systems. (Act Section 10301)
The IRS will also receive approximately $15 million to create and maintain an IRS-run free e-file system.
Prescription Drug Price Reform
Improve Affordability and Reduce Premium Costs of Health Insurance for Consumers
The Affordable Care Act provisions from the American Rescue Plan Act of 2021 related to medical insurance premium subsidies that were scheduled to expire at the end of 2022 will be extended for three more years through 2025. This allows a taxpayer with household income of 400% or more of the federal poverty line for the year to qualify for the premium tax credit. (Act Section 12001)
Excise Tax Imposed on Drug Manufacturers During Noncompliance Periods
Medicare will be allowed to negotiate certain prescription drugs beginning in 2026, helping decrease the price to be paid for medications. Tax penalties will be imposed on drug companies for failing to abide by the new prices. (Act Section 11003)
Safe Harbor for Absence of Deductible for Insulin
High deductible health care plans will no longer need to require a deductible for selected insulin products. (Act Section 11408)
Medicare Part D Benefit Redesign
Medicare recipients will have a $2,000 cap per year for out of pocket drug costs beginning in 2025. (Act Section 11201)
Coverage of Adult Vaccines Recommended by the Advisory Committee on Immunization Practices Under Medicare Part D
Beginning in 2023, seniors will have access to free vaccines that are recommended by the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention. (Act Section 11401)
Climate & Energy Spending
Extension and Modification of the Credit for Electricity Produced from Renewable Resources
Extends the date by which construction must commence for certain renewable electricity production facilities as provided by IRC Section 45 to before January 1, 2025. It also modifies the credit by reducing the base credit amount unless prevailing wage and apprenticeship requirements are met, or an exception is applicable. (Act Section 13101)
Extension and Modification of the Energy Credit
The deadline to begin construction for certain types of energy property, including qualified fuel cell property and qualified small wind property as provided by IRC Section 48, is extended through the end of 2024. The deadline to begin construction for geothermal equipment is extended through the end of 2034. The bill also modifies the credit by reducing the base credit amount unless prevailing wage and apprenticeship requirements are met or an exemption applies. (Act Section 13102)
Increase in Energy Credit for Solar and Wind Facilities in Service in Connection with Low-Income Communities
Effective beginning in 2023, the energy credit under IRC Section 48 is expanded to add IRC Section 48(e) which includes certain qualified solar and wind facilities if it meets a certain amount of power output and one of the following applies:
- Installed in a low-income community
- Installed on American Indian land
- Part of a low-income residential building project
- Part of a low-income economic benefit project (Act Section 13103)
Extension and Modification of the Carbon Oxide Sequestration Credit
Extends the date by which construction must commence for construction of carbon capture equipment, under the credit for carbon oxide sequestration provided by IRC Section 45Q, to before January 1, 2033. The bill also modifies the credit by lowering the minimum carbon capture requirement. Increased credit amounts can be obtained if prevailing wage and apprenticeship requirements are met. (Act Section 13104)
Zero-Emission Nuclear Power Production Credit
Provides a new business credit (IRC Section 45U) for electricity produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person after December 31, 2023. Increased credit amounts can be obtained if prevailing wage requirements are met. (Act Section 13105)
Extension of Incentives for Biodiesel Renewable Diesel and Alternative Fuels
Extends the biodiesel fuels credit provided by IRC Section 40A through December 31, 2024. (Act Section 13201)
Extension of Second-Generation Biofuel Incentives
Extends the second-generation biofuel producer credit (IRC Section 40(b)(6)) through January 1, 2025. (Act Section 13202)
Sustainable Aviation Fuel Credit
Provides a new business credit [IRC Section 40B and IRC Section 6426(k)] for sustainable aviation fuel sold or used as part of a qualified mixture after December 31, 2022 through December 31, 2024. (Act Section 13203)
Credit for Production of Clean Hydrogen
Provides a new business credit (IRC Section 45V) for the production of clean hydrogen production effective the date the bill is signed for 10 years. Increased credit amounts can be obtained if prevailing wage and apprenticeship requirements are met. (Act Section 13204)
Extension Modification of the Nonbusiness Energy Property Credit
Extends the nonbusiness energy property credit provided by IRC Section 25C through December 31, 2032. The credit is also increased to 30% of the amount paid or incurred by the taxpayer for qualified energy efficient improvements and expenditures. These credits are subject to lifetime limits, which vary based on the specific type of property and these lifetime limits have also been increased by the bill. (Act Section 13301)
Residential Clean Energy Credit
Extends the residential ‘Energy Efficient Property’ credit provided by IRC Section 25D through December 31, 2034. This provision will also be renamed to ‘Clean Energy Credit.’ The bill also removes the previous IRC Section 25D(a)(6) which included biomass fuel property expenditures and replaces it to include qualified battery storage technology expenditures. The changes take effect for expenditures made after December 31, 2022. (Act Section 13302)
Energy Efficient Commercial Buildings Deduction
Modifies the method for computing the energy efficient commercial buildings deduction provided by IRC Section 179D for taxable years beginning after December 31, 2022. Increased credit amounts can be obtained if prevailing wage and apprenticeship requirements are met. (Act Section 13303)
Extension and Modification of the New Energy Efficient Home Credit
Extends the New Energy Efficient Home Credit provided by IRC Section 45L through December 31, 2032. This credit is for eligible contractors who manufacture or construct qualified new energy efficient homes. The bill also modifies the energy saving requirements. Increased credit amounts can be obtained if prevailing wage requirements are met. (Act Section 13304)
Clean Vehicle Credit
The ‘New Qualified Plug-in Electric Drive Motor Vehicles’ credit provided by IRC Section 30D is renamed to the ‘Clean Vehicle Credit’ and modifies the credit to exclude vehicles made with battery components manufactured by foreign entities from receiving the credit after 2023. The bill also modifies the requirements to require that the final assembly of the vehicle occur within North America. The credit amount of $7,500 is limited per vehicle and can only be claimed for:
Electric Cars
Electric Trucks, Vans & SUVS
Costing $55,000 or less
Costing $80,000 or less
Taxpayers can only claim the credit if their modified adjusted gross income is below certain thresholds:
$150,000 or less
$225,000 or less
$300,000 or less
for Single Filers
for Head of Household
for Married Filing Joint
The credit is available for vehicles sold after December 31, 2022 through December 31, 2032. (Act Section 13401)
Credit for Previously Owned Clean Vehicles
Provides a new nonrefundable personal credit (IRC Section 25E) for qualifying clean vehicles that were previously owned, purchased through a qualifying sale. The credit amount, which is the lesser of $4,000 or 30% of the cost of the vehicle, can only be claimed for:
Electric Vehicles
Costing $25,000 or less
Taxpayers can only claim the credit if their modified adjusted gross income is below certain thresholds:
$ 75,000 or less
$112,500 or less
$150,000 or less
for Single Filers
for Head of Household
for Married Filing Joint
The credit is available for vehicles acquired after December 31, 2022. (Act Section 13402)
Qualified Commercial Clean Vehicles
Provides a new business credit (IRC Section 45W) for qualified commercial clean vehicles. The credit is the lesser of 15% of the cost of the vehicle (or 30% for fully electric vehicles, not powered by gas or diesel) or the difference in price between the qualified commercial clean vehicle and a comparable vehicle powered solely by gas or diesel. The credit amounts are limited by the weight of the vehicle as follows:
Vehicles weighing less than 14,000 pounds
Vehicles weighing 14,000 pounds or more
$ 7,500 credit
$40,000 credit
The credit is available for vehicles purchased after December 31, 2022 through December 31, 2032. (Act Section 13403)
Alternative Fuel Refueling Property Credit
Extends the Alternative Fuel Vehicle Refueling Property Credit provided by IRC Section 30C through December 31, 2032. Increased credit amounts can be obtained for refueling project that begin with a certain time frame and if prevailing wage and apprenticeship requirements are met. (Act Section 13404)
Extension of the Advanced Energy Project Credit
Extends the Qualifying Advanced Energy Project Credit provided by IRC Section 48C effective on January 1, 2023. Increased credit amounts can be obtained if prevailing wage and apprenticeship requirements are met. (Act Section 13501)
Advanced Manufacturing Production Credit
Provides a new manufacturing production credit (IRC Section 45X) for eligible components (including components for solar energy, wind energy, inverters, qualifying battery components and applicable critical minerals) produced by the taxpayer in the United States and sold to an unrelated person after December 31, 2022. (Act Section 13502)
Reinstatement of Superfund Hazardous Substance Financing Rate
Beginning in 2023, the bill will reinstate the Hazardous Substance Superfund provided by IRC Section 9707. This provides a financing rate on crude oil and imported petroleum products at the rate of 16.4 cents per gallon, increased from 9.7 cents (adjusted for inflation). (Act Section 13601)
Clean Electricity Production Credit
Provides a new business credit for the production of clean electricity (IRC Section 45Y) for qualified facilities placed in service after December 31, 2024, where the greenhouse gas emissions rate is not greater than zero. The base credit is equal to 0.3 cents or 1.5 cents multiplied by the kilowatt hours of electricity produced and sold. Increased credit amounts can be obtained if prevailing wage and apprenticeship requirements are met. (Act Section 13702)
Clean Electricity Investment Credit
Provides a new investment credit for investments in energy storage technology and qualified facilities used for the generation of electricity, placed in service after December 31, 2024, for which the anticipated greenhouse gas emissions rate is not greater than zero (IRC Section 48E). The base credit is 6% of the investment. Increased credit amounts can be obtained if certain requirements related to construction date, output, wages, etc. are met. (Act Section 13702)
Cost Recovery for Qualified Facilities, Qualified Property, and Energy Storage Technology
Expands what is included in five-year property under the general depreciation system under IRC Section 168(e)(3)B) to include the following:
- qualified facilities for purposes of the new clean electricity production credit
- qualified property or energy storage technology for purposes of the clean electricity investment credit (Act Section 13703)
Clean Fuel Production Credit
Provides a new business credit for taxpayers producing clean fuel after 2024 at a qualified facility and selling it for qualifying purposes before 2028 (IRC Section 45Z). (Act Section 13704)
Permits Treating Applicable Credits as Amounts Directly Paid for Taxes
Permits applicable entities including tax-exempt entities, state and local governments and political subdivisions, the Tennessee Valley Authority, tribal governments, Alaska Native Corporations, and cooperatives that provide electricity to rural areas, to elect to receive payment in lieu of any applicable credit. (Act Section 13801 and new IRC Section 6417) Applicable credits include:
- Alternative fuel vehicle refueling property credit
- Renewable electricity production credit
- Carbon oxide sequestration credit
- Zero-emission nuclear power production credit
- Clean hydrogen production credit
- Qualified clean commercial vehicles credit
- Advanced manufacturing production credit
- Clean electricity production credit
- Clean fuel production credit
- Energy credit
- Qualifying advanced energy project credit
- Clear electricity investment credit
Permits the Transfer of Applicable Credits to Unrelated Taxpayer
Permits a taxpayer to elect to transfer all or part of an eligible credit to an unrelated eligible taxpayer for tax years beginning after 2022. (Act Section 13801 and new IRC Section 6418) The recipient of the credit cannot then transfer any portion of the transferred credits. Amounts received for transferred credits are nontaxable and the amounts paid for the credits are nondeductible. Eligible credits include:
- Alternative fuel vehicle refueling property credit
- Renewable electricity production credit
- Carbon oxide sequestration credit
- Zero-emission nuclear power production credit
- Clean hydrogen production credit
- Advanced manufacturing production credit
- Clean electricity production credit
- Clean fuel production credit
- Energy credit
- Qualifying advanced energy project credit
- Clear electricity investment credit
Items Not Included in the Bill
- The carried interest tax break for private equity was not addressed and remains intact.
- The cap on state and local tax deductions (SALT) remains at $10,000.
- No increases to long-term capital gains tax rates.
- The gift and estate lifetime exemption remains unchanged, with no other changes to estate and gift tax rules.
- The qualified small business stock exclusion remains intact.
- No changes were made to the like-kind exchange rules.
- No change to the corporate income tax rate, which remains at 21%.
- No approval to implement a 15% global minimum tax.
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