The Inflation Reduction Act (IRA), signed into law on August 16, 2022, includes tax provisions affecting businesses, individuals, the clean-energy industry, healthcare, and more. Let’s take a look:
Businesses
Sec. 461(l) Business Loss Limitation. The pass-through tax deduction for small business owners (sole proprietorships, some limited liability companies, partnerships, and S-corporations) was enacted under tax reform (TCJA of 2017). The tax break limited individuals from taking more than $250,000 ($500,000 for married taxpayers filing jointly) of business losses to offset nonbusiness income. In effect for tax years 2021 through 2026, it has been extended through 2028.
Research Credit Against Payroll Taxes. For tax years beginning after December 31, 2022, the limitation amount increases by $250,000 to $500,000 for the Sec. 41(h) research credit against payroll tax for small businesses . The first $250,000 of the credit limitation will be applied against the FICA payroll tax liability. The second $250,000 of the limitation will be applied against the employer portion of Medicare payroll tax liability.
Alternative Minimum Tax for Large Corporations. The corporate AMT repealed under tax reform in 2017 has been reinstated but is based on book income – the amount of income corporations publicly report on their financial statements to shareholders – instead of taxable income. Generally, this new corporate AMT of 15% applies only to large corporations with an average adjusted financial statement income exceeding $1 billion for the three consecutive tax years preceeding the tax year.
Nondeductible 1% Excise Tax on Corporate Stock Repurchases. A new 1% excise tax applies to corporate stock repurchases after December 31, 2022. The tax is paid on the stock’s fair market value (FMV); however, the excise tax does not apply if the total value of stock repurchased during a tax year is $1 million or less. Furthermore, it also does not apply if repurchased stock is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or for stock repurchases that are part of a reorganization in which the shareholder recognizes no gain or loss.
Healthcare
Affordable Care Act Premium Tax Credits. The premium tax credit is extended through 2025 for taxpayers whose household income exceeds 400% of the poverty line.
IRS Funding
Approximately $80 billion is allocated to fund IRS activities such as taxpayer services, enforcement against tax evasion by high earners and corporations, operations, and modernization of IRS business systems. The IRS has stated that it does not intend to use this increased funding to “increase audit scrutiny on small businesses or middle-income Americans.”
Clean Energy
Clean Vehicle Tax Credits. The clean vehicle tax credit was extended through 2032, in addition to a new credit for previously owned clean vehicles. However, for new clean vehicles purchased after August 16, 2022, the tax credit is generally available only if the qualifying vehicle’s final assembly occurred in North America (the “final assembly requirement”). To determine whether the vehicle meets the final assembly requirement, taxpayers should enter the vehicle’s 17-character vehicle identification number (VIN) into the National Highway Traffic Safety Administration’s VIN Decoder tool. They can view the “Plant Information” field identifying where the vehicle was built.
Buyers who entered into a written, binding contract to purchase a qualifying clean vehicle before August 16, 2022, – but did not take possession of the vehicle until on or after that date – should abide by pre-existing rules in effect before August 16, 2022.
Clean Energy Credits for Individuals. Renamed the energy-efficient home improvement credit, the nonbusiness energy property credit is extended through 2032. It is now equal to 30% of the sum of the amount paid or incurred by the taxpayer for energy-efficient improvements installed during the tax year, the amount of residential energy property expenditures paid or incurred by the taxpayer during the tax year, and the amount paid by the taxpayer for home energy audits.
In prior years, the credit was equal to 10% of the amount paid or incurred for qualified energy-efficiency improvements plus the amount of residential energy property expenditures paid or incurred by the taxpayer during the tax year.
Also renamed (the residential clean energy credit) and extended (through 2034) is the Sec. 25D residential energy-efficient property credit. Furthermore, the new energy-efficient home credit under Sec. 45L has increased dwelling units acquired after December 31, 2022, and the credit extended through 2032.
Clean Energy Credits for Manufacturing. Several new credits have been created: Sec. 45Y to encourage clean electricity production at qualified facilities placed in service after December 31, 2024, with zero greenhouse gas emissions; Sec 45X for US production of photovoltaic cells and solar and wind components. In addition, starting January 1, 2023, the Section 48C Manufacturers’ Tax Credit is expanded to provide $10 billion in tax credits. The tax credit is 30 percent of the amount invested in new or upgraded factories to build specified renewable energy components.
Energy Credits for Businesses. Several energy credits for business have been created, extended, or modified in the Inflation Reduction Act, including a new sustainable aviation fuel credit, the Sec 48 energy credit (extended through 2024 and modified to increase the energy credit for qualified solar and wind facilities placed in service in connection with low-income communities), the Sec. 45 credit for electricity produced from renewable sources such as geothermal, solar, and wind facilities (extended through 2024 and modified), the Sec. 40A biodiesel and renewable fuel credit, and several alternative fuel credits (extended through 2024).
