George W. Karpus, BridgeTower Media Newswires
On Aug. 16, President Joe Biden signed into law the Inflation Reduction Act of 2022. This bill, which was initially written as a successor to the Build Back Better Act, had made it through both the House and the Senate a few days prior.
The Inflation Reduction Act (the “Act”) is a 273-page bill with provisions that cover lowered drug costs, an extension of the premium tax credit under the Affordable Care Act, revenue raisers and a slew of renewable energy incentives.
This bill covers a lot of ground. Let’s go over its major provisions.
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Energy
Investment and production credits
The Investment Tax Credit (ITC) under Code Section 48 and the Production Tax Credit (PTC) under Code Section 45 reward individuals and businesses for investing in renewable energy property. These credits were to phase out, but the Act restores these credits for projects that commence construction before 2025.
Eventually, the ITC and the PTC morphed into Section 48E, the Clean Electricity Investment Credit, and Section 45Y, the Clean Energy Production Tax Credit. These credits are for taxpayers who build or expand qualified facilities or energy storage facilities whose greenhouse gas emissions are not more than zero. The emissions-based credits will phase out in 2032 or when emissions targets are achieved.
Nonbusiness energy credits
Nonbusiness tax renewable energy credits found in Sections 25C and 25D have also been modified and extended.
The section 25C credit has been extended through 2032. Moreover, the bill changes the credit rate to 30% and extends the definitions for both qualified energy efficiency improvements and residential energy property expenditures. This includes things like energy-efficient exterior windows, doors, skylights, insulation, etc. The bill also replaces the $500 lifetime limit for Section 25C credits with a $1,200 annual limit – thus, taxpayers can continue to modify their homes with qualified energy efficient improvements, and continue to receive a credit up to $1,200 per year.
As for the Section 25D credit, the act extends the “residential clean energy credit” through 2034. Section 25D allows for up to a 30% credit for expenditures towards renewable energy property including, but not limited to, qualified solar electric expenditures, solar water heating expenditures, geothermal heat pump expenditures, and small wind energy property expenditures. The bill also expanded the definition to include battery storage technology expenditures.
New 45X credit
A new production credit under Section 45X rewards taxpayers for selling solar energy components that are manufactured in the US. Components eligible for the credit include:
• Thin film photovoltaic or crystalline photovoltaic cells, 4 cents multiplied by cell capacity
• Photovoltaic wafers, $12 per square meter
• Solar grade polysilicon, $3 per kilogram
• Polymeric backsheets, 40 cents per square meter
• Solar modules, 7 cents multiplied by module capacity
Availability of energy credits
The Act helps taxpayers with little or no tax liability benefit from nonrefundable energy credits in two unique ways.
• Elective direct pay. Taxpayers can elect to treat potential credits as a prior payment of tax rather than a credit, allowing them to claim “overpayments” as a refund.
• Transferrable credits. If taxpayers can’t use their energy credits, they can sell them to another taxpayer. Not all taxpayers will benefit from these new credit options, but many will. Below is a chart that shows which taxpayers are eligible for a direct pay election, and which are eligible for credit transfers.
Credit for clean vehicles
The Act changed the credit for electric vehicles in a few ways.
• Extending the credit
The new clean vehicles credit is extended through 2032. There are some requirements that taxpayers should be aware of. For example, the credit is only eligible for vehicles assembled in North America. Thus, Tesla and General Motors electric vehicles (which weren’t eligible for the credit due to the sales cap restrictions) are now eligible for the credit, while Kia and Porche cars are not currently eligible. The Act also prohibits a credit for electric vehicles made with any battery components manufactured by “foreign entities of concern” (e.g., China). Taxpayers and car dealers will need to check vehicle identification numbers to determine whether a car qualifies.
• Removing the sales cap for manufacturers
Under current law, only the first 200,000 vehicles from each manufacturer are eligible for the credit. The Act removed this restriction.
• Expanding the credit to used vehicles
Taxpayers can claim the credit when purchasing a used electric vehicle or qualified fuel cell vehicle. The credit is worth 30% of the sales price, with a max credit of $4,000.
• Adding income limitations
For new qualifying vehicles, income caps also apply, meaning those earning over $150K ($225K head of household, $300K filing jointly) will not qualify. As for used cars, individuals with adjusted gross incomes above $75,000 and joint filers with incomes above $150,000 would be ineligible for the credit.
• Adding price restrictions
New vehicles would only be eligible for the credit if they were priced below a certain threshold. The cost threshold for sedans is $55,000 and the cost threshold for SUVs, trucks, and vans is $80,000.
• Extending other incentives
The Act extended and modified many more green energy credits and incentives, including the alternative fuel refueling property credit, the energy efficient commercial buildings deduction, the biodiesel and renewable diesel credits, and — most notably for the oil and gas industry — the credit for capturing and sequestering CO2 under 45Q. It also extended the new energy efficient home credit under Section 45L.
The Act enhances the Section 45Q tax credit to $85 per ton. This incentivizes businesses to construct new carbon capture projects, and makes natural gas processing facilities and power plants more financially viable.
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Taxes
Minimum tax on corporations. The Act imposes a 15% minimum tax on corporations’ book income if they have profits over $1 billion. This provision kicks in for tax years that begin after Dec. 31, 2022. There are exceptions for S corporations, regulated investment companies, REITs, and companies with an average income of less than $1 billion.
Pass-through business losses. Since 2018, businesses have only been able to offset up to 80% of taxable income with Net Operating Losses (NOLs). The Act extended this restriction through the year 2028.
Excise tax on stock repurchases. To discourage corporations from engaging in stock buybacks, the Act imposes a 1% excise tax on the stock buybacks of publicly traded domestic corporations and domestic subsidiaries of publicly traded foreign corporations. The excise tax is only imposed on stock buybacks net of new issuances.
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Health Care
ACA subsidies. The annual premium assistance for certain Affordable Care Act enrollees was set to expire at the end of this year. The Act extends this assistance program through the end of 2025, allowing those who purchase insurance through the ACA marketplace to save up to $700 annually on out-of-pocket premiums.
Negotiating drug prices. The Act gives the government power to negotiate certain drug prices with pharmaceutical companies beginning in 2026. And, to discourage hefty price hikes, drug makers must pay a penalty beginning in 2023 if they raise the price of Medicare-covered drugs faster than inflation.
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Promising future
Energy Innovation, a well-respected think tank on climate policy, asserted that the Inflation Reduction Act is “the most significant federal climate and clean energy legislation in U.S. history.” Only time will tell how this new law will impact businesses, particularly those in the energy sector.
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Micah J. Stewart is a tax director at LaPorte CPAs & Business Advisors and leads the firm’s efforts in timely legislative and regulatory guidance. She can be reached at mstewart@laporte.com
