By Amy Sandlin, CPA, Tax Senior Manager

The Inflation Reduction Act of 2022 (the Act) passed in the Senate on Sunday, August 7, 2022, and is headed to the Democrat-controlled House where it is expected to pass on Friday, August 12. Experts expect this to be on President Biden’s desk by early next week. If you have been paying attention to the timing of tax legislation in recent years, you might notice that this August bill gives us something that we don’t see much of these days: a few months to analyze and plan before the tax changes take effect.

The bill is comprised of 755 pages covering a range of issues from climate change to drug costs, with a variety of tax changes interspersed throughout. I would be remiss if I did not mention this is widely considered to be a landmark bill.

This article focuses on the tax changes that are throughout. More specifically, it focuses on the following areas of the Act:

• Tax Credit for the Purchase of Electric Vehicles
• Increase in Research Credit Against Payroll Tax for Small Businesses
• Extension of the Affordable Care Act Premium Tax Credit
• Extension and Modification of the Business Energy Investment Tax Credit
• Extension, Modification, and Increase in Renewable Energy Tax Benefits (Business & Nonbusiness)
• Taxation of Assistance to Farmers
• Funding for the IRS
• Corporate Alternative Minimum Tax
• Excise Tax on Repurchase of Corporate Stock

Tax Credit for the Purchase of Electric Vehicles

The Act extends the $7,000 income tax credit for the purchase of new electric vehicles, and it adds a $4,000 credit for the purchase of used electric vehicles. Income thresholds are written into the Act to limit eligibility to taxpayers with income under certain amounts¹, which means, if you have an exceptionally good year and want to spend your bonus on an electric vehicle, you might want to think twice about when you actually buy the vehicle to ensure you get the benefit of the credit. 

The Act also includes a “manufacturer’s suggested retail price limitation”, which excludes vehicles over a certain price (for new vehicles: $80,000 for vans, pickup trucks & SUVs and $55,000 for all other vehicles; for used vehicles: $25,000 sale price). There are other additions in the Act that will impact manufacturers since they will have to modify their vehicles to meet the eligibility requirements for the credit (most notably the battery requirements for eligible vehicles).

Eligible vehicle buyers have the option to transfer the credit to the dealer which can reduce the amount of money buyers have to bring to the table. On the dealer side, The Act provides a couple options for how auto dealers can claim the benefit of a transferred credit.

The Act also contains a loosely similar provision for commercial vehicles: up to $7,500 credit for qualified vehicles.

If the intention of the Act is to get more electric vehicles on the road, presumably the country needs more infrastructure to support these vehicles. The Alternative Fuel Refueling Property Credit is extended through December 31, 2032 by the Act, with modifications to eligibility requirements and the underlying credit calculation. In general terms, eligible property is that which stores or dispenses clean fuel or recharges an electric vehicle.

Increase in Research Credit Against Payroll Tax for Small Businesses

The Credit for Increasing Research Activities is available for taxpayers who incur qualifying research expenditures. The most common way this credit is discussed is as an income tax credit. However, certain qualified small businesses are allowed to use this credit to offset payroll taxes instead of income taxes.

Depending on the specific facts of the business, it may allow them to use the benefit of the credit before they could if they used it to offset income taxes. The Act increases the amount of credit that can be claimed against payroll taxes by $250,000 (therefore up to $500,000) for taxable years beginning after December 31, 2022.

Extension of the Affordable Care Act Premium Tax Credit

The Premium Tax Credit (PTC) is a refundable tax credit intended to help individuals and families cover their health insurance purchased through the Affordable Care Act marketplace. This credit is available for certain low-income taxpayers (with an eligibility formula tied to the federal poverty line) and was set to expire at the end of 2022. This bill extends the credit through 2025.²

Extension, Modification, and Increase in Renewable Energy Tax Benefits (Business & Nonbusiness)

There are numerous tax benefits available for business and nonbusiness expenditures related to renewable and alternative energy.

Since the Act is a “climate change bill,” a significant amount of the tax changes relates to existing renewable energy tax benefits. These generally fall under IRC Sections: 45 (business production tax credit), 48 (business investment tax credit, including the advanced manufacturing credit), 179D (energy efficient commercial building deduction), 25C (nonbusiness energy property credit), and 25D (residential energy efficient property credit).

There are complicated rules for determining what is eligible for these incentives and how they are calculated (so many rules that Sec. 45 alone already has at least 6 subsections related to energy), which are far outside the scope of this article.

In general terms, elements of the existing alternative energy framework were set to phaseout and/or expire, so the Act extends the periods eligible for these tax benefits, increases percentages and amounts used in underlying formulas, and modifies and adds property eligible for the tax benefits. (Going back to my Sec. 45 credits example – this bill adds 6 more credit subcategories: 45U – 45Z.)

Generalizing, this should provide eligible taxpayers more bang (tax credits & incentives) for their buck (investments in alternative energy).

Taxation of Assistance to Farmers

Included in the American Rescue Plan Act of 2021 was assistance to farmers. The 2022 Act clarifies eligible assistance payments to farmers are not included in taxable income and deductions are allowed for expenditures paid for with these funds. This appears to be similar to the tax treatment of other COVID-related assistance such as PPP loan forgiveness.

Funding for the IRS

One of my favorite soap box topics is IRS funding, or more accurately, inadequate IRS funding. I will save the details on the everyday consequences of inadequate IRS funding for another day and focus only on what is in this bill – additional funding.

More precisely:  $79,621,533,803 in additional funding. The Act goes into great detail about how amounts are to be used covering taxpayer services, enforcement, IRS technology modernization, a task force to design an IRS-run free “direct efile” tax return system, and funding for specific sections of the government responsible for tax policy and enforcement.

I am choosing to be optimistic that additional funding for taxpayer services will help with the IRS backlog that has made dealing with the IRS an absolute nightmare for tax practitioners and taxpayers. For those of you who have learned the hard way what it is like to try to call the IRS in recent years, it is worth noting the Act is explicit that additional funding for technology modernization is not to be used for the operation and maintenance of legacy systems. If you have had to deal with those systems, you know they are painful to deal with – maybe it is time to get rid of them altogether.

The end of the IRS funding and enforcement section of the Act has a section that, to be honest, I think is intended only to provide a talking point for politicians: “No tax increases on certain taxpayers.” There is a very broad statement that the additional IRS funding in this bill is not intended to increase taxes on taxpayers and small businesses with taxable income below $400,000, and it is only intended to increase taxes on the top 1%.

Corporate Alternative Minimum Tax

This section is intended to target large corporations. I’m not going to pretend I have read all 755 pages in the last 24+ hours to say with certainty who will be subject to the tax, but I have read enough to confidently say it is a very small segment of corporate taxpayers: those that report $1 billion in income on their financial statements.

That very small group of headline-grabbing companies will be subject to a 15% tax on their “adjusted financial statement income” for taxable years beginning after December 21, 2022.

Of course, there are more rules to be considered:

• What qualifies as an “applicable financial statement” subject to this new tax
• Special rules for specific industries
• Rules for the calculation of financial statement income to determine if the corporation hits the $1B target (Notable since we’re talking about financial statement income, a concept that is decidedly not what the Internal Revenue Code generally addresses.)

This will not surprise anyone who is paying attention to recent changes in the tax code, but we can safely say this one certainly does not simplify it with the introduction of new methods for calculating income, net operating loss, and foreign tax credit limitations.

However, since it is highly unlikely to impact anyone who is reading this, I will spare you a ton of details on this one.

Just know corporate AMT is back but it’s different than the previous AMT, and if you have a group of related entities (including ownership in a pass-through entity) that could hit the $1B mark when their income is combined, you should reach out to your tax advisor to determine if this applies to you. And, if we later learn the Act signed by President Biden may apply to more taxpayers, we will, of course, provide a more thorough analysis.

Excise Tax on Repurchase of Corporate Stock

This new tax also appears to target large corporations that have made headlines in recent years for “behaving badly” by buying back stock. This new excise tax will levy a 1% tax on the value of stock repurchased by the corporation.

Only certain corporations with publicly traded stock are subject to this tax, and the tax doesn’t take effect until January 1, 2023. The most interesting consequence will likely be what happens between now and January 1, and how this tax changes corporate decisions going forward.

Predicting the stock market is not a skill I would list on the top of my resume, but from what I can tell, more qualified market analysts’ predictions are mixed.

What’s Next?

The Inflation Reduction Act is expected to pass the House and be signed by President Biden within the week. We will be keeping a close eye on any changes that are made as it makes its way to the finish line.

As soon as we have the final text of the legislation, we will start working on more in-depth analysis of its effect on taxpayers. In the meantime, please contact your Blue & Co. advisor if you have any questions about how this legislation will affect you and your business.

^[1] New vehicles credit: no credit is allowed for a tax year with Modified Adjusted Gross Income exceeding: $300,000 married filing joint & surviving spouse filers, $225,000 head of household filers, and $150,000 single filers. Used vehicles: no credit is allowed for a tax year with Modified Adjusted Gross Income exceeding: $150,000 married filing joint & surviving spouse filers, $112,500 head of household filers, and $75,000 single filers.

^[2] The PTP is one of many tax sections that are written to sunset at certain dates and end up being extended by Congress periodically. The 2022 expiration date came from a PTP extension that was part of the American Rescue Plan Act of 2021.