The Inflation Reduction Act, legislation aiming to lower inflation and reduce the deficit over the next decade, became law in August. Here’s a look at some key insights on the Act’s provisions to lower healthcare costs, combat climate change, and reform the US tax code. As the end of the year quickly approaches, there are several new considerations for individual and business taxpayers to factor into the year-end tax planning process.
The Inflation Reduction Act allocates $288 billion for prescription drug pricing reform. First, the Act limits annual out-of-pocket costs of prescription drugs for seniors on Medicare. By 2024, the out-of-pocket limit is estimated to be $4,000 or less, and the limit is set to drop to $2,000 by 2025. The Act also includes a provision allowing Medicare to negotiate with drugmakers on prescription prices and requires the drug companies to issue rebates for price increases higher than inflation.
In addition, the Act extends the Affordable Care Act (ACA) program through 2025 and infuses $64 billion into expanding the ACA. The Senate estimates these amendments could lower ACA premiums for millions of Americans.
The Inflation Reduction Act infuses $369 billion into clean energy initiatives to combat climate change and bolster US energy production. To promote these efforts, the Act includes several expanded and new tax credits.
The Clean Vehicle Credit
Eligible individuals may still claim a credit of up to $7,500 against the purchase of a new electric vehicle under the Clean Vehicle Credit, as they did under the Electric Vehicle Credit previously. However, starting January 1, 2023, individuals who purchase used electric vehicles may be eligible (depending on their income) for a tax credit of up to $4,000 or 30% of the sales price, whichever is less. The Act also adds a tax credit for business owners of up to $7,500 for new commercial clean vehicles placed in service after December 31, 2022.
As of August 17, 2022, electric vehicles must receive final assembly in North America to qualify for the credit. Previously, the credit was only available until a manufacturer had sold 200,000 vehicles, with a phaseout thereafter. However, for cars sold after December 31, 2022, the Act eliminates the manufacturer limitation and establishes new battery and critical mineral requirements instead. Starting January 1, 2023, the manufacturer’s suggested retail price for vans, SUVs, and pickups is limited to $80,000, while other cars are limited to $50,000.
For new cars, a purchaser’s modified adjusted gross income (MAGI) cannot exceed $150,000 ($300,000 married filing jointly, $225,000 Head of Household). For used cars, MAGI cannot exceed $75,000 (150,000 married filing jointly, $112,500 head of household).
For further details on the Clean Vehicle Credit, including information for auto dealerships, check out our previous article, The Clean Vehicle Credit: What Dealerships Need To Know.
The Alternative Fuel Vehicle Refueling Property Credit
The Act expands the credit for electric vehicle charging stations to include those put into service before January 1, 2033. Eligible taxpayers may qualify for a tax credit of up to 30% of the cost of a residential installation (excluding permitting and inspection fees) up to $1,000.
Beginning January 1, 2023, electric vehicle charging stations installed by businesses through December 31, 2032, may be eligible for a credit of 30% of the business’ cost or 6% in the case of property subject to depreciation (not to exceed $100,000). However, eligibility requirements are complex and include specific prevailing wage, census tract, and apprenticeship requirements.
Nonbusiness Energy Property Tax Credit
Prior to the Inflation Reduction Act, individuals could take a credit of up to 10% of the amount paid for nonbusiness energy property, such as doors, windows, and skylights, placed in service before January 1, 2022, subject to a lifetime credit limit.
The Act increases the credit amount to up to 30% of the amount paid for nonbusiness energy property in service before January 1, 2033, and limits the credit per taxpayer per year.
The Residential Clean Energy Credit
The Act increases the tax credit available for purchases of residential energy-efficient property like solar panels from 26% of the purchase to 30% for purchases made from January 1, 2022, through December 31, 2032. Energy.gov estimates the credit could cut the homeowner’s installation cost for an average rooftop solar system by more than $7,500.
The eligible tax credit remains at 26% for systems installed in 2020 and 2021, and the credit will drop back to 26% after December 31, 2032. The credit will reduce to 22% in 2024; unless Congress renews the tax credit, it will expire in 2035.
Investment Tax Credit
The Act extends the 30% investment tax credit (ITC) to qualified renewable energy projects beginning construction by December 31, 2024, and provides for increased credit amounts for specific projects. The extension applies to solar energy generation property, qualified fuel cell property, waste energy recovery property, and geothermal property, and it now applies to standalone energy storage technology.
With the exception of certain projects placed in service before January 1, 2022, the Act eliminates previously applicable credit phase-downs, such as those for solar energy generation properties.
Production Tax Credit
The Act extends the production tax credit (PTC) to qualified renewable energy projects with construction beginning by December 31, 2024, and it provides increased credit amounts for certain projects. The extension applies to wind, landfill gas, closed-loop and open-loop biomass, trash, geothermal, and qualified hydropower facilities.
With the exception of certain projects placed in service before January 1, 2022, the Act eliminates previously applicable credit phase-downs, such as those for wind facilities.
Tax Credit for Energy-Efficient New Homes
The Inflation Reduction Act extends this credit through December 31, 2032. The base level tax credit depends on the ENERGY STAR certification and ability to meet specified program requirements.
Beginning in 2023, the Act increases the credit amount of $2,500 for single-family and manufactured homes when constructed according to the standards set by the ENERGY STAR New Construction Program or the Manufactured Homes Program. The base credit for eligible multi-family homes will be $500 (or $2,500 if prevailing wage requirements are met) when constructed according to the standards set by the ENERGY STAR Multifamily New Construction Program.
The new construction program includes site-built and modular single-family homes, duplexes, and townhomes acquired on or after January 1, 2023. All homes permitted on or after January 1, 2023, and constructed before January 1, 2025, must meet the National Version 3.1 program requirements. All homes constructed thereafter must meet the National Version 3.2 program requirements.
Other new construction multi-family homes, manufactured homes, and single-family homes may still qualify if undergoing gut rehab. In addition, certain multi-family projects permitted before July 1, 2021, may be eligible to participate in the ENERGY STAR Certified Homes program, the ENERGY STAR Multifamily High Rise program, or this ENERGY STAR Multifamily New Construction Program, as long as the project meets the specific program’s eligibility requirements.
Some states (ME, MA, and NJ, among others) have already implemented Version 3.1, while others (CA, FL, HI, OR, and WA) have regional program requirements in place. Manufactured homes must meet the National Version 2 program requirements (or regional requirements). Version 2.1 is currently proposed to be implemented in May 2023.
Additional Tax Credits
The Act also creates the Clean Electricity Investment Credit and the Clean Electricity Production Credit, which apply to qualified facilities placed in service after December 31, 2024.
In addition, the Act expands, extends, and adds new tax credits related to Biodiesel, renewable diesel, alternative fuels, clean hydrogen production, advanced energy projects, and more.
Federal Tax Reform
Several similar iterations of this legislation stalled prior to the enactment of the Inflation Reduction Act. There was much debate over how to fund these initiatives over time. However, a number of previously proposed changes in tax law were excluded in this round of legislation. For example, the $10k state and local tax (SALT) cap is unchanged. The carried interest loophole also survived, which means, for now, certain investment managers still pay a top federal tax rate of 20% on carried interest. In addition, the rules for 1031 like-kind exchanges and Section 174 research and experimental costs remain unchanged. But the Inflation Reduction Act does reform certain aspects of the US tax code.
Limitation on Net Business Losses for Individuals
The Inflation Reduction Act extends the limitation on net business losses for individuals through tax years beginning before January 1, 2029. This limit applies to deductions attributable to trades or businesses that exceed the aggregate gross income and gains attributable to those trades or businesses.
15% Corporate Alternative Minimum Tax
The most significant revenue-raising tax provision included in the Inflation Reduction Act is a 15% minimum tax that will apply to the domestic profits of large corporations with average adjusted financial statement income (AFSI) greater than $1 billion over any consecutive three years. AFSI generally includes the corporation’s net income or loss reported on its financial statements, with adjustments as specified in the Act. And it may include income of related corporations and partnerships.
The Act outlines special rules for determining whether a domestic corporation is subject to this tax and for calculating AFSI if it has a foreign parent or foreign activities. The 15% tax will be effective beginning after December 31, 2022.
1% Excise Tax on Stock Repurchases
The Inflation Reduction Act establishes a 1% excise tax on the value of stock of a publicly traded corporation that is repurchased by the corporation or certain subsidiaries after December 31, 2022. The value of the repurchased stock subject to the tax will be reduced by the value of any stock the corporation issues in the same taxable year. The Act includes several exclusions to the new tax. For example, certain repurchases in connection with reorganizations and repurchases treated as dividends may be excluded.
Additional IRS Enforcement
The Act provides $80 billion in additional funding to the Internal Revenue Service’s budget. These funds are intended to help the IRS upgrade outdated technologies, hire thousands of agents, and buckle down on compliance enforcement. This will likely result in more frequent and extensive audits.
Contact Albin, Randall & Bennett
Additional guidance is expected from the Secretary of the Treasury with respect to some of the tax credits included in the Inflation Reduction Act. ARB’s Individual and Business Tax Teams are monitoring the situation closely as it unfolds, and we are here to help our clients plan accordingly.
If you have any questions or want to discuss how this legislation could affect your year-end tax planning efforts, please contact me today.
by Meagan Pritchard, CPA
Meagan Pritchard has nearly ten years of experience in public accounting. She is a senior tax manager at ARB and provides domestic, international, state, and local tax, compliance, and advisory services to individuals and businesses. Meagan specializes in business tax and advisory services, primarily for corporations, nonprofits, and automotive dealerships.