September 14, 2022
The Inflation Reduction Act of 2022 (H.R.5376), hereafter “the Act,” was signed into law by President Biden on August 16, 2022. The law includes several tax implications including a 15% Corporate Alternative Minimum Tax, a 1% excise tax on certain stock repurchases, an extension of the excess business loss limitation, numerous environmental and green energy tax credits, and increased IRS funding. We have compiled a summary of tax provisions in the bill.
Corporate Alternative Minimum Tax
Effective for tax years beginning after December 31, 2022, the Act imposes a corporate alternative minimum tax (AMT) equal to the excess of 15% of a corporation’s adjusted financial statement income (AFSI) over its corporate AMT foreign tax credit.
This new 15% alternative minimum corporate tax is only applicable to C corporations which, for a three taxable year period, have average annual AFSI greater than $1 billion (and at least $100 million for members of foreign-parented international financial reporting groups). Entities subject to this tax are generally any domestic corporation – excluding S corporations, real estate investment trusts, or regulated investment companies – whose AFSI is in excess of $1 billion for three consecutive years.
Imposing AFSI is the net income or loss set forth on an applicable financial statement, with certain adjustments. The provision provides rules for calculating AFSI for certain entities and income (e.g., consolidated groups, foreign-parented groups, effectively connected income). AFSI is reduced by accelerated depreciation deductions.
This provision was critical to the passage of the bill, since it provides more than 40% of the new revenue to fund energy investments and deficit reduction.
Excise Tax on Repurchase of Corporate Stock
Effective for stock repurchases by a covered corporation after December 31, 2022, The Act imposes a non-deductible 1% excise tax on the fair market value of corporate stock repurchased during the taxable year less the fair market value of the stock issued by the corporation during the year.
A covered corporation is typically any domestic corporation excluding S corporations, real estate investment trusts, and regulated investment companies. Private companies are excluded from the tax.
Repurchases include any redemption within the meaning of Section 317(b) of the IRC, and acquisitions by affiliates of the corporation. Affiliates include any corporation that the corporation directly or indirectly owns more than 50% of the vote or value.
Exceptions to the Excise Tax:
The excise tax would not apply to these transactions:
- A repurchase that is characterized as a dividend for tax purposes.
- Certain repurchases by dealers in securities.
- Repurchases where the buyback is part of a tax-free reorganization where no gain or loss is recognized.
- Repurchases where the stock or its value is then contributed to certain retirement or stock ownership plans.
- Repurchases where the total value of the buyback for the year is less than $1 million.
- Repurchases where the purchaser is a RIC or REIT.
Extension of Limitation on Excess Business Losses
The Act extends the limitation on passthrough business losses originally enacted in the 2017 Tax Cuts and Jobs Act for two years through 2028. The law limits a noncorporate taxpayer’s ability to deduct excess business losses above a certain threshold. The limitation for 2022 is $534,000 for joint fillers. Any losses in excess of the limitation will be suspended and allowed to be carried forward in the following taxable year.
The energy and environmental provisions are major parts of the Act. It provides for a series of tax incentives for businesses as well as individuals.
Nonbusiness Energy Property Credit
Originally, this credit could be claimed for 10% of the cost of “qualified energy efficient improvements” and 100% of “residential energy property costs.” The credit was worth a maximum of $500 for all years claimed (a lifetime cap). The original credit expired at the end of 2021. Under the Inflation Reduction Act, the credit has been brought back to life for 2022. Additionally, for 2023, the credit will be expanded to equal 30% of the costs of eligible home improvements made during the year. The lifetime limit was replaced with a $1,200 annual limit.
Residential Energy Efficient Property Credit (Residential Clean Energy Credit)
The Act changes the residential energy efficient property credit to the residential clean energy credit. Originally, this credit could be claimed on the cost of qualifying property up to 26% and was set to expire in 2024. The new law expands the credit to 30% from 2022 to 2032. It then falls back to 26% for 2033 and 2034.
Energy Efficient Commercial Buildings Deduction
This deduction allows building owners to claim up to $5 in deductions per square foot of energy efficient buildings. Buildings must be newly constructed or renovated and meet some important energy reduction requirements.
New Energy Efficient Home Credit
Originally expired at the end of 2021, the Act extended the Energy-Efficient Home Credit through 2022 and modifies it beginning in 2023. The Energy-Efficient Home Credit is a business credit for contractors who manufacture or construct energy-efficient homes. Eligible contractors use Form 8908 to claim a credit for each qualified energy efficient home sold or leased to another person during the tax year for use as a residence. The Act increases the credit to $5,000 per unit and modifies energy-saving requirements. The credit generally applies to dwelling units acquired from an eligible contractor after 2022. Extension of credit applies to dwelling units acquired after 2021.
New Qualified Plug-In Electric Drive Motor Vehicle Credit (Clean Vehicle Credit)
Originally, this credit allowed taxpayers to claim a credit up to $7,500 for the purchase of qualifying clean vehicles. The existing credit applies to both business and personal vehicles until August 16, 2022. For the existing credit, please refer to the plug-in hybrid and electric vehicle section in our previous article. Changes made by the Act apply to vehicle purchases after August 16, 2022.
The Act makes the credit available only for qualifying electric vehicles for which final assembly occurred in North America (final assembly requirement). The Department of Energy has provided a list of Model Year 2022 and early Model Year 2023 electric vehicles that may meet the final assembly requirement (DISCLAIMER: be sure to double check on specific vehicle with VIN for the final assembly requirement).
The Act eliminated the limit on the number of credit-eligible vehicles but allows only one credit per vehicle. The credit amount is now limited based on the taxpayer’s Adjusted Gross Income – starting 2023, the limits are $300,000 for married joint filers; $225,000 for heads of household; $150,000 for single filers. Also, beginning 2023, the cost limits for individual taxpayers are $80,000 for vans, SUVs, and pickup trucks, and $55,000 for other vehicles. The Act allows a taxpayer to transfer the credit to a registered dealer in exchange for payment from that dealer. The credit is set to terminate after 2032.
Credit for Previously Owned Clean Vehicles
The Act establishes a credit for previously owned clean vehicles purchased after December 31, 2022. The credit is worth either $4,000 or 30% of the sales price, whichever is less.
Various other credits: The Act has created various new clean energy credits to enhance the existing energy credits for businesses:
Renewable Electricity Production Tax Credit (PTC), Energy Credit for Solar and Wind Facilities, Carbon Oxide Sequestration Credit, Tax Credits for Biodiesel, Renewable Diesel, Alternative Fuels, Sustainable Aviation Fuel Credit, Credit for Production of Clean Hydrogen
Please contact us for more information on these credits.
Additional IRS Funding
The Act provides an additional $80 billion in IRS funding. The bill allocates the funding over a 10-year period in the following ways.
- $45.6 billion for enforcement
- $25.3 billion for operations support
- $4.8 billion for technology modernization
- $3.2 billion for taxpayer services
Over half of the $80 billion is allocated to enforcement. This addition nearly doubles the IRS’s current enforcement budget. The congressional budget office estimates that this additional funding will result in an additional $124 billion in revenue through 2031.
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Filers with questions or concerns about these tax provisions should contact their CPA, or reach out to us at the contact info below.