Inflation Reduction Act: An Overview of the Tax Provisions
After more than a year of negotiations, what started as the Build Back Better Act (BBB), has been modified, slimmed down and tweaked into the Inflation Reduction Act (IRA) which was signed into law by President Biden on August 16, 2022. While many of the original provisions included in the Build Back Better Act, both tax and otherwise, are not included in the final legislation, the Inflation Reduction Act still has some significant tax provisions and many other provisions aimed at investing in our country’s climate and energy initiatives.
The majority of the revenue raising tax provisions that were being discussed during the BBB negotiations are not included in the Inflation Reduction Act. As a result, most privately owned taxpayers will not be directly impacted by most of the unfavorable tax provisions included in the IRA.
The major revenue raiser included in this legislation is the enactment of a 15% minimum tax on C corporations who have average financial statement income over a three-year period in excess of $1 billion. There is a $100 million threshold for certain “foreign-parented” corporations. Another significant revenue raiser is a 1% excise tax that will be assessed on certain corporate stock buybacks. These provisions will only apply to “covered corporations” which are defined as domestic corporations whose stock is traded on an established securities market. In addition to these two items, there are several other excise taxes that are being introduced and/or extended specifically in the drug manufacturing, oil and petroleum and coal industries. So, unless your business operates in one of the targeted industries, these provisions will only apply to very large C corporations and those companies whose stock is traded on an established securities market.
The one unfavorable tax provision that may impact some individuals is the extension of the excess business loss limitation rules. These rules were originally added as part of the Tax Cuts and Jobs Act of 2017 and limit the amount of losses that an individual may take in total in any given year ($500,000 for married filing joint; $250,000 for all other taxpayers). This limitation was set to expire at the end of 2026; however, the IRA has tacked two more years onto this provision so it will be effective through 2028 tax years for those individuals that have excess losses.
Now, to look at the more favorable tax provisions included in this latest legislation, many of which will be beneficial to taxpayers at all income levels…
There are a number of provisions included in the IRA related to the expansion and/or extension of a variety of existing energy efficient tax credits as well as the introduction of several new tax credits. The following provides a brief overview of some of the tax credits that many taxpayers may be able to take advantage of:
- The IRA significantly expands the amount of tax credits that an individual may claim for making certain energy efficient improvements to their home. The expansion comes in the form of increasing the annual limits, increasing the percentage of expenditures available for the credits, removing the lifetime limitation and other existing limitations, as well as expanding the list of items available for the credits. These new and expanded benefits are generally available for property acquired after December 31, 2022.
- The IRA makes significant changes to the credit available for the purchase of new qualified electric vehicles. The law removes the provision that phased-out the credit once manufacturers had sold in excess of 200,000 electric vehicles. Therefore, those manufacturers that had already reached that limit (Tesla and GM) will now be able to sell vehicles that will be eligible for the new Clean Vehicle Credit. While removing this limitation will expand the list of vehicles that will be eligible for the credit, the IRA does place a significant amount of new restrictions on what vehicles will qualify by requiring manufacturers to meet strict manufacturing and assembly requirements. The IRA also put a limitation on the MSRP of a vehicle that will qualify for the credit ($80,000 cap on SUV’s/vans/pick-ups; $55,000 cap on all other vehicles). In addition, no credit will be allowed for taxpayers with modified adjusted gross income in excess of certain thresholds ($300,000 for married filing joint/surviving spouse; $225,000 for head of household; $150,000 for all other taxpayers). Many of the new restrictions apply as of the date the law was enacted while some of the provisions become effective for vehicles sold after December 31, 2022. For vehicles placed in service after December 31, 2023, the credit can be received in advance directly from the dealer versus having to wait until the taxpayer files their income tax return to receive the credit. This will require the taxpayer to repay any credit received in advance if, once they file their return, they do not meet the required income thresholds.
- The IRA enacts a new law allowing taxpayers to claim a tax credit for the purchase of a qualified used electric vehicle. The credit will be equal to the lesser of $4,000 or 30% of the purchase price and only includes vehicles costing $25,000 or less. The credit will only be available to taxpayers whose modified adjusted gross income doesn’t exceed certain thresholds ($150,000 for married filing joint/surviving spouse; $112,500 for head of household; $75,000 for all other taxpayers). These rules apply to qualified used vehicles purchased after December 31, 2022. Similar to the rules applicable to the purchase of a new electric vehicle, this credit can also be received in advance directly from the dealer.
- A new credit has also been added for the purchase of “qualified commercial clean vehicles” for use in a taxpayers’ business. The credit will equal the lessor of (1) 15% of the vehicle’s basis (30% for vehicles not powered by gasoline or diesel engines) or (2) the additional cost of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The credit is capped at $7,500 for vehicles weighing less than 14,000 pounds and $40,000 for heavier vehicles. As with the other vehicle credits that are part of the IRA, there are many restrictions on manufacturers of the vehicles in order for them to be eligible for the credit. This credit will be available for vehicles acquired after December 31, 2022.
So, if you are planning on making any home improvements and/or purchasing a new vehicle in the near future, you may want to consider what credits are available (or will be available starting in 2023) to ensure you take advantage of the new and expanded IRA provisions.
In addition to expanding, and creating, many tax credits, the IRA also significantly expands the deductions available under 179D. This deduction is available to taxpayers that place energy efficient commercial property into service assuming it meets certain energy efficient standards and the other requirements under IRC 179D. One significant change made by the IRA is that it reduces the required reduction in total annual energy and power costs from a 50% reduction to now only requiring a 25% reduction. The Act also modified the formula for calculating the allowable deduction. In general, the new rules are effective for tax years beginning on or after December 31, 2022.
Another significant taxpayer friendly provision that is included in the IRA is the extension of the provisions that were included in the American Rescue Plan Act (ARPA) that reduced the premium percentages resulting in eligible individuals receiving higher premium tax credits to help subsidize their health insurance costs. These provisions were set to expire after 2022; however, the IRA has extended those provisions for 3 additional years, so the reduced premium percentages are now in place through 2025.
And we would be remiss if we didn’t mention the fact that the IRA provides the Internal Revenue Service with an additional almost $80 billion dollars to improve taxpayer service and compliance. The Act specifies the amounts required to be used on a variety of different expenditures including modernizing their technology systems, providing additional taxpayer services and education and a significant amount going toward IRS enforcement. The hope is that this additional funding will enable the IRS to put the resources in place to more adequately provide taxpayers with the assistance and resources they need to properly comply with the evolving and ever-changing tax laws.
While this article provides an overview of many of the new provisions included in the Inflation Reduction Act, it does not provide all of the details and caveats that are part of the new laws. It also does not cover all of the new provisions that are included in the IRA. Therefore, please reach out to your trusted BRC advisor if you would like to discuss the specifics of any provision and how your business or individual tax situation may be impacted.