The Inflation Reduction Act of 2022, which includes both tax and non-tax measures, was signed into law by President Joe Biden on August 16, 2022.
The act contains multiple opportunities with updated incentives, including the expanded Internal Revenue Code (IRC) Section 179D deduction, increased ability to leverage the R&D credit to offset payroll taxes for eligible start-up businesses, and several new and expanded clean energy credits and incentives.
Notably, the final legislation doesn’t change the carried interest rules, make any updates to the $10,000 state and local tax cap, or include a change to Section 174 to restore full expensing of research and experimental (R&E) costs.
Below are some of the key tax provisions included in the act:
Changes to Section 179D Deduction Amount and Qualifications
The Inflation Reduction Act will dramatically increase the scope and value of the energy-efficiency tax incentive under Section 179D for the architecture, engineering, and construction industries, along with commercial building owners.
The changes apply to qualifying property placed in service after December 31, 2022. Regarding eligibility, real estate investment trusts (REITs) are now able to utilize this deduction; and the deduction can now be allocated to designers of buildings for not-for-profit and tax-exempt organizations in addition to designers of buildings owned by government entities.
The act increases the possible tax deduction rate from $1.88, which is a tax year 2022 inflation-adjusted maximum, to $5 per square foot. The deduction rate increases on a sliding scale for each percentage point by which energy cost savings is improved above 25%, up to a cap at a 50% reduction. The standard base deduction rate ranges from 50 cents to $1 per square foot, while properties qualifying for the increased bonus deduction rate range from $2.50 to $5 per square foot.
To qualify for the increased deduction rate, prevailing wage and apprenticeship requirements must be met for any laborers and mechanics employed by the taxpayer or contractors associated with the installation.
Additionally, the lifetime cap of $1.80 per square foot on a building was removed and replaced with a three-year cap. This means buildings where subsequent energy-efficient upgrades were made after previously claiming a full deduction for past work are now eligible to utilize additional Section 179D deductions.
The act also creates an alternate deduction path for renovation projects based on reducing a building’s energy use intensity by 25% or more.
Increased R&D Credit for Eligible Start-up Businesses
The Inflation Reduction Act provides enhanced incentives for start-ups to pursue R&D activity within the United States as originally included in 2015’s Protecting Americans from Tax Hikes (PATH) Act.
The PATH Act revised Section 41 to add a payroll credit election which enables start-ups that are qualified small businesses to utilize their R&D credits against the employer’s portion of Social Security tax on all of their employees.
The Inflation Reduction Act changes the existing payroll credit election for tax years beginning after December 31, 2022. Specifically, it increases the maximum allowable payroll credit election from $250,000 to $500,000 each year.
However, the additional $250,000 credit can be used to offset the employer’s Medicare payroll tax of 1.45%. In other words, up to $250,000 of the credit amount can be used to offset the 6.2% Social Security tax paid by employers and up to $250,000 can be used to offset the employer’s 1.45% Medicare tax.
As before, any payroll credits remaining after the current quarterly payroll tax is offset would be rolled forward to following quarters, until the credits have been used up. While the maximum amount eligible for a payroll election will be $500,000 each year, utilization of the payroll credit carryovers is limited by the amount of payroll tax owed in future quarters.
15% Corporate Minimum Tax on Large Corporations
For tax years beginning after December 31, 2022, applicable C corp taxpayers are subject to a 15% alternative minimum tax. An applicable corporation is a C corp with average annual financial statement income of more than $1 billion for the three tax-year period.
The minimum tax doesn’t apply to S corps, REITs, or regulated investment companies (RICs). Due to these limitations, the Joint Committee on Taxation projects that only about 150 taxpayers will be subject to this minimum tax.
1% Excise Tax on Public Company Stock Buybacks
A 1% nondeductible excise tax is imposed on publicly traded domestic corporations and certain foreign corporations for the value of its stock repurchased during the tax year, reduced by the fair market value of its stock issued.
The tax applies to repurchases of stock after 2022. A repurchase means a redemption within the meaning of Section 317(b) and transactions to be identified by the Secretary of the Treasury as economically similar. Repurchases include acquisitions by affiliates of such stock where the affiliate is more than 50% owned directly or indirectly by vote or value.
The excise tax doesn’t apply in some situations, including repurchases that are part of a tax-free reorganization, repurchases treated as a dividend, when total repurchases during the tax year are $1 million or less, and certain other transactions.
New Clean Vehicle Credit and Previously Owned Clean Vehicle Credit
New qualified plug-in electric vehicles placed in service after 2022 are eligible for a maximum credit of $7,500. The clean vehicle credit is available for vehicles with an MSRP less than $80,000 for vans, sports utility vehicles (SUVs), and pickups, and $55,000 for any other vehicle.
The credit isn’t permitted for taxpayers with modified adjusted gross income exceeding $300,000 (married filing jointly) or $150,000 (single) for the current or preceding tax year. The Inflation Reduction Act also removes the manufacturer credit limitation after December 31, 2022, which previously limited credits to 200,000 units per manufacturer.
Additionally, the act creates a credit for previously owned clean vehicles. Qualified previously owned clean vehicles with a sales price of $25,000 or less and placed in service after 2022 are eligible for a credit equal to the lesser of $4,000 or 30% of the vehicle’s sales price.
The previously owned clean vehicle credit isn’t available to taxpayers with modified adjusted gross income exceeding $150,000 (married filing jointly) or $75,000 (single) for the current or preceding tax year.
Other Clean Energy Tax Credits and Incentives for Businesses and Individuals
The Inflation Reduction Act includes numerous clean energy tax credits and incentives for businesses and individuals, some of which are expansions and modifications of existing incentives, while others are new incentives.
Some of the incentives that were extended and modified in the act include the new energy-efficient home credit for businesses that manufacture or construct energy-efficient homes through 2032, the production tax credit for businesses that produce electricity from certain renewable sources, and the investment tax credit for qualified energy property.
Some of the new business credits included in the act are the qualified commercial clean vehicle credit, alternative fuel refueling property credit, and zero-emission nuclear power production credit. The act also allows taxpayers to elect to make many of the clean energy credits transferable to unrelated taxpayers.
Also included in the new law: individuals may receive tax incentives for making energy-efficiency improvements in their homes, such as solar panels, energy-efficient water hears, heat pumps, and HVAC systems.
Additional IRS Funding
The Inflation Reduction Act provides the IRS and related agencies a total of $79.6 billion of additional funding to use through 2031.
Most of the additional funding is targeted for the following:
- $45.6 billion for tax enforcement activities, such as hiring additional agents, providing more legal support, and investing in emerging technologies
- $25.3 billion for operations, such as facilities, security, telecom, and information technology
- $3.2 billion for taxpayer services, such as filing and account services, prefiling assistance
- $4.8 billion for modernization or business systems used to administer taxpayer services; an example would be investing in a customer service technology such as an automated callback system for phone lines
Extension of Limitation on Excess Business Losses
The Inflation Reduction Act includes a two-year extension of the excess business loss (EBL) rules under Section 461(l).
The EBL rules created a limitation on the amount a noncorporate taxpayer can deduct from a pass-through entity or sole proprietorship. Under the Tax Cuts and Jobs Act, the EBL rules were set to expire for tax years beginning in 2027, but the Inflation Reduction Act extends the limitation by two years.
We’re Here to Help
To learn more about how provisions in the Inflation Reduction Act of 2022 could impact your business, contact your Moss Adams professional. You can also see the most updated tax planning strategies related to these changes on our Tax Planning Resources page.