The Inflation Reduction Act (“IRA”) was signed into law by President Biden this week, marking the end of more than a year’s worth of negotiations on a tax bill previously referred to the Build Back Better Act (“BBB”). Contents and tax changes are a far cry from those proposed in the BBB, but do provide numerous healthcare and green energy initiatives, a significant change to the taxation of large corporations, and additional IRS funding for technology upgrades and staffing increases.

Below is a high-level summary of the IRA’s notable tax provisions.

Corporate Book AMT

The IRA imposes a new corporate Alternative Minimum Tax (AMT) of 15 percent using book net income as a starting point rather than taxable income, with adjustments including accelerated tax depreciation. It applies for tax years beginning in 2023 to C corporations with average annual adjusted financial statement net income on an aggregate basis greater than $1 billion. Additional rules apply for foreign-parented multinational groups.

Corporate Stock Buyback Excise Tax

A new 1 percent excise tax on the fair market value of corporate stock repurchased in excess of $1 million by publicly traded companies is imposed after 2022, with exceptions.

Excess Business Loss Limitation for Noncorporate Taxpayers

Excess business loss limitations for noncorporate taxpayers have a two-year extension, now sun setting after 2028 rather than 2026.

Research Credit

An increase from $250,000 to $500,000 is provided for research credits to offset payroll tax liabilities, rather than claiming on an income tax return. Small business startups with gross receipts of less than $5 million for the year will qualify for the increase beginning in 2023.

Clean Energy Investments

The IRA extends or enhances multiple credits in relation to investment in clean energy property.

Qualified Commercial Clean Vehicle Credit

A new credit per vehicle for businesses who place in service qualified commercial clean vehicles from 2023 through 2032 is created. The credit per vehicle equals the lesser of 15 percent of the vehicle’s basis (or 30 percent if fully electric), or the difference paid for the vehicle compared a gas model, and has a max credit amount of $7,500 for vehicles weighing less than 14,000 pounds, or $40,000 for heavier models.

Energy Efficient Commercial Building Deduction

A revamped §179D accelerated deduction for qualifying buildings is provided beginning in 2023. Energy-efficiency qualifications are modified, the maximum deduction is greatly increased, partial deductions are repealed, allocation of the credit by tax exempt organizations is expanded, a new alternative deduction for retrofit property is added, and the timing of REIT deductions is modified.

New Energy Efficient Home Credit

The credit for eligible contractors is extended through 2032 and reinstated for 2022. Additionally, the amount of the maximum credit per single-family or multi-family home acquired is increased after 2022 depending on various energy-efficiency requirements met.

Nonbusiness Energy Property Credit

The credit is reinstated for 2022 and extended through 2032 for individuals who place in service qualifying residential energy-efficient property, including windows and doors. The IRA increased the credit to 30 percent of qualifying amounts paid or incurred during the year, modifies eligible property, and replaces the credit’s $500 lifetime limitation with higher annual limitation amounts.

Residential Clean Energy Credit

The “residential energy efficient property credit” that provides a personal tax credit for the installation of solar, fuel cell, wind, geothermal, and biomass property installed is renamed the “residential clean energy credit” and extended through 2034.

New Clean Vehicle Credit

The IRA renames the “new qualified plug-in electric drive motor vehicle” as the “clean vehicle credit” and makes several program changes. The credit is extended through 2032, there will no longer be a limitation per manufacturer on the number of eligible cars, and the credit calculation and eligibility are modified but max credit remains. Additionally, MSRP limitations are imposed at $80,000 for large vehicles and $55,000 for others, and modified adjusted gross income (MAGI) limitations of $300,000 for MFJ, $225,000 for heads of household, or $150,000 for all others apply to be eligible for the credit. Finally, a buyer may transfer the credit to the dealer in exchange for payment from the deal in the amount of the credit (with recapture applying if MAGI limits are exceeded) beginning in 2024; only one credit is allowed per vehicle. Many rules apply beginning with tax year 2023, but certain changes take effect upon the IRA’s enactment.

Previously-Owned Clean Vehicle Credit

Beginning in 2023 through 2032, buyers of qualifying pre-owned clean vehicles costing $25,000 or less can now receive a tax credit equal to the lesser of $4,000 or 30 percent of sale price. Modified adjusted gross income (MAGI) limitations of $150,000 for MFJ, $112,500 for head of household, or $75,000 for others apply. Dependents (including those who are allowed to be dependents for tax purposes) and those purchasing the vehicle for resale do not qualify for the credit.

Premium Tax Credit

Favorable changes made by the American Rescue Plan (ARP) to the Affordable Care Act (ACA) are extended through 2025. The Premium Tax Credit (PTC) is available to help low-income households afford healthcare where it’s not otherwise offered at affordable rates, with required taxpayer contributions depending on their income level relative to the federal poverty line for the year. Through 2025, the IRA lowers the amount qualifying taxpayers will have to contribute towards their healthcare by increasing the PTC and suspending the income limitation to receive a credit.

Additional Information

A chart summarizing the IRA's significant tax provisions can also be found here.

Please contact your RubinBrown representative with questions.

 

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