A deeper dive into the Inflation Reduction Act’s tax provisions

A deeper dive into the Inflation Reduction Act’s tax provisions

The budget reconciliation bill, P.L. 117-169, known as the Inflation Reduction Act, was signed into law on Aug. 16. It includes numerous tax provisions, including new corporate taxes. It also contains numerous clean-energy-related tax incentives, and money for IRS enforcement and other initiatives.

Earlier budget reconciliation bill proposals were known as the Build Back Better Act and had included much more far-ranging tax provisions, most of which did not make it into the bill as enacted. The enacted bill, for example, makes no change to the $10,000 SALT deduction cap; earlier versions had proposed to increase the cap. Earlier proposals to increase the child tax credit, extend changes to the earned income tax credit, and tax high-income individuals were also abandoned.

Late in the Senate negotiation process, proposed changes to the taxation of carried interests were also dropped.

The enacted bill features a wide array of nontax provisions, many aimed at promoting clean energy initiatives. The act also includes prescription drug pricing reform.

Here is an in-depth look at the tax items in the act.

Corporate alternative minimum tax

The act introduces a new corporate alternative minimum tax (AMT). The last corporate AMT was repealed by the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, in 2017.

The new corporate AMT is based on book income rather than taxable income. Specifically, it imposes a 15% tax on the excess of the corporation’s adjusted financial statement income over its corporate AMT foreign tax credit for the year. The new corporate AMT applies only to certain large corporations, specifically corporations (but not S corporations, regulated investment companies, or real estate investment trusts) with average annual adjusted financial statement income of more than $1 billion for the three consecutive tax years ending with the tax year, or, for members of certain foreign-parented multinational groups, where the combined annual adjusted financial statement income of all members of the group is $1 billion for three consecutive years and the member has average annual adjusted financial statement income of more than $100 million.

A new Sec. 56A defines “adjusted financial statement income.” It generally means a corporation’s net income (or loss) as set forth in the taxpayer’s applicable financial statement, as defined in Sec. 451(b)(3). Adjusted financial statement income is reduced by the amount of tax depreciation deductions the taxpayer claims when calculating taxable income for the year.

Sec. 56A also provides for general adjustments for other situations such as financial statements that cover different tax years, consolidated financial statements of related entities, and corporations that are partners in a partnership. Also, adjustments are made for certain items of foreign income, for effectively connected income, for certain taxes, and for other items.

The new corporate AMT generates a minimum tax credit under Sec. 53 that the taxpayer can then use against regular tax liabilities in future years.

The act introduces a new corporate AMT foreign tax credit in Sec. 59(l). The corporate AMT foreign tax credit is available to taxpayers who claim a foreign tax credit.

The new corporate AMT is effective for tax years beginning after Dec. 31, 2022.

The AICPA has expressed concerns about basing tax liability on the nontax criterion of book income. The two have several distinct “key conceptual differences … including the concept of materiality,” a letter the AICPA wrote to congressional tax-writing committee leaders on Aug. 4 stated. “Public policy taxation goals should not have a role in influencing accounting standards or the resulting financial reporting. Independence and objectivity of accounting standards are the backbone of our capital markets system.”

In addition, the AICPA said, the provision will introduce new and substantial complexities to tax law that “could result in uncertain results to taxpayers and a costly compliance requirement.”

Excise tax on repurchase of corporate stock

The act introduces a new 1% excise tax on corporate stock repurchases (new Sec. 4501). Covered corporations must pay the tax on the fair market value (FMV) of any stock the corporation repurchases during the tax year. A “covered corporation” is any domestic corporation, the stock of which is traded on an established securities market. Special rules apply for the acquisition of stock of certain foreign corporations.

The amount taken into account for purposes of the tax is reduced by the FMV of any new stock issued by the corporation during the tax year.

The excise tax does not apply to stock repurchases that are part of a reorganization under Sec. 368(a) in which no gain or loss is recognized by the shareholder. The excise tax also does not apply where the repurchased stock is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan.

The tax also does not apply where the total value of stock repurchased during a tax year is $1 million or less.

The excise tax applies to repurchases of stock after Dec. 31, 2022.

Affordable Care Act subsidies

The act extends through 2025 the rule allowing the Sec. 36B premium tax credit to taxpayers whose household income exceeds 400% of the poverty line.

Clean energy provisions for individuals

The Sec. 25C nonbusiness energy property credit is extended through 2032 and is renamed the energy-efficient home improvement credit. The credit now equals 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. (Previously, the credit equaled 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.)

The amount of the 25C credit is changed from a $500 maximum lifetime credit to a credit of up to $1,200 per year. Certain limits also apply to the credit for purchases of certain types of qualifying property and home audits.

The modified Sec. 25C credit is available for property placed in service after Dec. 31, 2022.

The act extended the Sec. 25D residential energy-efficient property credit through 2034 and renamed it the residential clean energy credit. Qualified battery storage technology expenditures are added to the list of qualifying expenses.

The act also extended the Sec. 45L new energy-efficient home credit through 2032. The amount of the credit is increased, and various modifications are made to the energy savings requirements. The changes apply to dwelling units acquired after Dec. 31, 2022.

Clean vehicle credits

The act modified the $7,500 Sec. 30D credit for electric vehicles in several ways. First, it changes the name of the credit to the clean vehicle credit. It also imposes a requirement that the final assembly of the vehicle must occur in North America (effective Aug. 16, 2022). The act also removes the limitation on the number of vehicles eligible for the credit, so electric vehicles purchased from manufacturers that had formerly reached their cap will now be eligible for the credit. However, there are price caps, so the credit is not allowed for cars with a manufacturer’s suggested retail price over $55,000 or for vans, SUVs, or pickup trucks with a manufacturer’s suggested retail price over $80,000.

However, the act imposes a new requirement that a percentage of critical minerals used in the car must have been extracted or processed in the United States or in a country with which the United States has a free trade agreement or recycled in North America. This requirement phases in and applies to 40% of such minerals before 2024 and to 80% after 2026. A percentage of the battery components for the vehicle must also be manufactured or assembled in North America. This requirement applies to 50% of a battery’s components before 2024 and phases in until it applies to 100% of a battery’s components after 2028.

The credit is allowed once per vehicle (and includes a requirement that the taxpayer include the vehicle identification number on the return). Also, the credit is not allowed for taxpayers whose modified adjusted gross income (MAGI) exceeds certain thresholds ($300,000 on joint returns, $225,000 for heads of household, and $150,000 for single taxpayers).

The changes to Sec. 30D are generally effective for vehicles placed in service after Dec. 31, 2022 (the final assembly requirement, as noted, was effective when the law was enacted). The credit will expire after 2032. Taxpayers who purchased a clean vehicle or entered into a written binding contract to purchase a clean vehicle between Jan. 1 and Aug. 15, 2022, but placed it in service on or after Aug. 16, can elect to have the former Sec. 30D credit rules apply to that vehicle.

The act also creates a new credit for used clean vehicles (new Sec. 25E). Qualified buyers can claim a credit of up to $4,000. Their MAGI must be under $150,000 on joint returns, $112,500 for heads of household, and $75,000 for single taxpayers. The sales price for the used vehicle must be $25,000 or less. The used clean vehicle credit applies to vehicles acquired after Dec. 31, 2022.

The act also creates a new credit for qualified commercial clean vehicles (new Sec. 45W). The credit equals the lesser of 15% of the basis of the vehicle or the “incremental cost” of the vehicle. For commercial clean vehicles with no gasoline or diesel engine, the credit amount is the lesser of 30% of the basis of the vehicle or the “incremental cost.” The incremental cost is the amount the cost of the commercial clean vehicle exceeds the cost of a comparable gasoline or diesel-powered vehicle. The credit cannot exceed $7,500 for vehicles with a gross vehicle weight under 14,000 lbs. and cannot exceed $40,000 for all other vehicles. The commercial clean vehicle credit is effective for vehicles acquired after Dec. 31, 2022.

The Sec. 30C alternative fuel vehicle refueling property credit is extended through 2032 and modified. The maximum credit is increased from $30,000 to $100,000. The changes are effective for property placed in service after Dec. 31, 2022.

Clean energy manufacturing

The act extends the Sec. 48C advanced energy project credit by making allocations for up to $10 billion more in awards for qualified investments, effective Jan. 1, 2023.

The act also creates a new advanced manufacturing production credit (new Sec. 45X) for U.S. production of various photovoltaic cells and other solar and wind energy property.

To encourage the clean production of electricity, the act creates a new credit in Sec. 45Y for the production of electricity at qualified facilities. Qualified facilities (which includes certain expansions of existing facilities) must be placed in service after Dec. 31, 2024, and have a greenhouse gas emissions rate of zero. New Sec. 48E creates a clean electricity investment credit, effective for eligible property placed in service after Dec. 31, 2024. Qualified facilities under Sec. 48E and 45Y are made five-year property under Sec. 168(e)(3)(B).

The act also creates a clean fuel production credit in new Sec. 45Z for clean transportation fuels produced in the United States. The credit is based on the emissions rate of the fuel compared to a base rate of 50 kg of CO2-equivalent global warming potential per metric million British thermal units. The credit is effective for qualified fuel produced after Dec. 31, 2024.

Energy provisions for businesses

The Sec. 45 credit for electricity produced from certain renewable sources (including geothermal, solar, and wind facilities) is extended through 2024. The base credit amount is modified. The credit rate reduction for qualified hydroelectric production and marine and hydrokinetic renewable energy is eliminated after 2022.

The Sec. 48 energy credit is extended through 2024 and modified. For certain energy property (defined in Sec. 48(a)(3)(A)(vii)), the credit is extended through 2034. The phaseout of the credit for certain energy property is modified.

Sec. 48 is also amended to provide an increase in the energy credit for qualified solar and wind facilities placed in service in connection with low-income communities.

The Sec. 45Q credit for carbon oxide sequestration is modified and extended. Under the act, construction of a qualified facility must begin before Jan. 1, 2033. The applicable dollar amount for purposes of the credit is modified.

The act creates a zero-emission nuclear power production credit (in new Sec. 45U). The credit equals 0.3 cents times the kilowatt hours of electricity produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer to an unrelated person during the tax year, minus a reduction amount. The 0.3 cents amount will be adjusted for inflation. The credit is effective for electricity produced and sold after Dec. 31, 2023.

Several alternative fuel credits are extended through 2024. These include the Sec. 40A biodiesel and renewable fuel credit; the Sec. 6426 biodiesel mixture credit; the Sec. 6426 alternative fuel credit; the Sec. 6426 alternative fuel mixture credit; and payments for alternative fuels under Sec. 6427. The second-generation biofuel incentives under Sec. 40 are also extended through 2024.

The act creates a new sustainable aviation fuel credit in new Sec. 40B, effective for fuel sold or used after Dec. 31, 2022.

The act also creates a credit for production of clean hydrogen in new Sec. 45V, effective for hydrogen produced after Dec. 31, 2022. Alternatively, taxpayers can elect to treat clean hydrogen production facilities as energy property under Sec. 48, in which case no credit would be available under new Sec. 45V or 45Q (the carbon oxide sequestration credit).

The act changed the method for determining the maximum amount of the Sec. 179D energy-efficient commercial buildings deduction. The efficiency standard is also modified — for tax years after 2022, the energy-efficient property will have to be installed as part of a plan to reduce overall applicable energy costs by 25% compared to a reference building under the American Society of Heating, Refrigerating, and Air Conditioning Engineers and the Illuminating Engineering Society of North America’s Reference Standard 90.1-2007, rather than 50%.

The former Sec. 179D lifetime cap on the deduction is generally converted to a rolling three-year cap. The final determination period is extended to four years from two. These changes are effective for tax years beginning after Dec. 31, 2022.

The act also introduces an alternative deduction under Sec. 179D for taxpayers that retrofit property to be more energy efficient. This change is effective for property placed in service after Dec. 31, 2022, if it is placed in service pursuant to a qualified retrofit plan.

Treating clean energy tax credits as payments

Under new Sec. 6417, eligible taxpayers can elect to treat certain energy credits as tax payments. For facilities owned by S corporations or partnerships, the S corporation or partner will make the election.

The credits eligible for this election include:

  • The Sec. 30C alternative fuel refueling property credit;
  • The Sec. 45(a) renewable electricity production credit;
  • The Sec. 45Q carbon oxide sequestration credit;
  • The Sec. 45U zero-emission nuclear power production credit;
  • The Sec. 45V clean hydrogen production credit;
  • The Sec. 45W qualified commercial vehicle credit (for tax-exempt entities only);
  • The Sec. 45X credit for advanced manufacturing production;
  • The Sec. 45Y clean electricity production credit;
  • The Sec. 45Z clean fuel production credit;
  • The Sec. 48 energy credit;
  • The Sec. 48C qualifying advanced energy project credit; and
  • The Sec. 48E clean electricity investment credit.

Under new Sec. 6418, eligible taxpayers generally can transfer these credits (except the qualified commercial vehicle credit) in any tax year to another taxpayer. Any amount paid by the transferee taxpayer must be in cash, is not deductible by the transferee taxpayer, and is not included in the transferor taxpayer’s income.

Both of these provisions are effective for tax years beginning after Dec. 31, 2022.

Other tax provisions

The limitation amount for the Sec. 41(h) research credit against payroll tax for small businesses is increased by $250,000, for tax years beginning after Dec. 31, 2022.

The Sec. 461(l)(1) limitation on excess business losses of noncorporate taxpayers is extended through 2028. The TCJA limited individuals from using more than $250,000 ($500,000 for married taxpayers filing jointly) of business losses to offset nonbusiness income, but the effective date was delayed. The provision finally became effective in 2021. It was originally scheduled to run through 2026.

The act levies an excise tax on drug manufacturers during periods when they are not in compliance with drug price negotiation requirements imposed by the act, which are designed to lower the price of certain single-source drugs.

Finally, the act makes permanent the Sec. 4121 coal tax to fund the black lung disability trust fund.

IRS funding

The act appropriates approximately $80 billion in funds for the IRS. Funds are directed to taxpayer services ($3 billion), enforcement ($46 billion), operations ($25 billion), and business systems modernization ($5 billion). The act also directs the IRS to study the cost of developing and running a free direct e-file system.

The Congressional Budget Office estimates that the IRS enforcement appropriations will increase federal revenues by $204 billion through 2031.

Before the act was passed, Treasury Secretary Janet Yellen wrote to IRS Commissioner Charles Rettig, directing him that the increased IRS enforcement funds should not be used to increase audits of small businesses or taxpayers with household incomes under $400,000.

The AICPA submitted comments to Congress on several of the tax provisions in the bill and plans to submit comments to the IRS on needed priority implementation guidance from the legislation.

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https://www.journalofaccountancy.com/news/2022/aug/a-deeper-dive-into-inflation-reduction-acts-tax-provisions.html