The Inflation Reduction Act of 2022 (the “Act”) makes several changes that impact businesses and individuals. The President signed the legislation into law on Tuesday, August 16, 2022. The following is a summary of some of the key tax provisions in the Act.
Corporate Tax Provisions
- 15% minimum tax for C corporations based on adjusted financial statement income. This only applies to companies with adjusted financial statement income over $1 billion (based on the prior 3-taxable year average). The new minimum applies to tax years beginning after December 31, 2022.
Section 179D Energy Efficient Building Deduction
- The current maximum deduction of $1.80 per square foot reduces to a range of $0.50 to $1.00 per square foot. The deduction may increase to a range of $2.50 to $5.00 per square foot if certain wage and apprenticeship requirements are met.
- The energy consumption reduction percentage required to qualify reduces from 50% to 25% but eliminates the partial allowance deduction.
- A new alternative deduction for energy-efficient retrofit building property exists based on the reduction in the building’s energy usage intensity.
- Deductions claimed in a tax year are reduced by the total deductions claimed over the three prior tax years rather than all tax years.
- The changes in Section 179D are effective for taxable years beginning after December 31, 2022.
Section 179D Energy Efficient Commercial Building Deduction: If you are thinking about doing new construction or a significant buildout, talk to your DHJJ CPA.
Energy Provisions
Clean Vehicle Credits
- The maximum credit for the purchase of a new qualified plug-in electric drive motor vehicle remains at $7,500 and is based on a combination of critical minerals used in the battery and the value of the battery components produced in North America.
- The credit is not available if purchaser income levels exceed certain thresholds and also not available if the MSRP of the vehicle exceeds certain thresholds.
- There is a credit equal to the lesser of $4,000 or 30% of the sales price when purchasing a previously owned clean vehicle. The maximum sales price is $25,000, and there are other limitations regarding the age of the vehicle and the purchaser’s income levels.
- Vehicles purchased after December 31, 2022, are eligible for this credit and transferred to the selling dealership after 2023. The IRS and Department of the Treasury expect to post information on the list of qualifying vehicles in the coming weeks and months.
Purchasing a Vehicle? There is a credit equal to the lesser of $4,000 or 30% of the sales price when purchasing a previously owned, clean vehicle. The maximum sales price is $25,000 and there are other limitations regarding the age of the vehicle and purchaser income levels.
Additional Energy Incentives
- Nonbusiness energy property credits up to $1,200 per year are allowable and not limited solely to the principal residence. This credit is available to property placed in service after December 31, 2022.
- Residential energy-efficient property credits (solar, wind, geothermal heat pump, etc.) are allowable up to 30% of the cost of the property and are not limited solely to the principal residence. This credit is available to property placed in service after December 31, 2021.
- For Contractors/Builders: Energy Efficient Home Credit is available to contractors for qualified new energy-efficient homes. The credit now ranges from $500 to $5,000 depending on the energy efficiency requirements met and certain wage requirements. This credit is available to homes sold after December 31, 2022.
For Contractors/Builders: Energy Efficient Home Credit is available to contractors for qualified new energy-efficient homes. The credit now ranges from $500 to $5,000 depending on the energy efficiency requirements met and certain wage requirements. This credit is available to homes sold after December 31, 2022.
Other Tax Provisions
- The excess business loss limitation for noncorporate taxpayers now extends through 2028. This provision limits business losses to $500k per year for Married Filing Joint taxpayers and $250k per year for all other noncorporate taxpayers.
- Eligible small taxpayers (those with less than $5m of current gross receipts and no gross receipts in the 5 prior years) are now eligible to claim $500k of research and development tax credits against their payroll tax liability rather than the current $250k. This change is for tax years beginning after December 31, 2022. Note: This provision is excellent for startups. For instance, if you own a technology company and do research, you can use your credits against payroll tax liability rather than personal tax.
- The IRS will receive $80 billion in funding over the next ten years, including funding for tax enforcement, operations support, system modernization, and taxpayer services. Approximately $46 billion of this total is expected to go to enforcement activities, including more IRS Exams. The majority of this funding is expected to increase exams of large businesses and high net worth taxpayers with little to no increase in the exams of taxpayers making less than $400,000 per year.
The majority of the funding the IRS receives from this Act is expected to increase exams of large businesses and high net worth tax payers with little, to no increase in the exams of taxpayers making less than $400,000 per year.
Non-Tax Provisions
The Act also has non-tax provisions for health care, energy, and climate. Read more about these provisions.
Contact DHJJ about the Inflation Reduction Act
DHJJ helps clients navigate changing tax situations and how changes impact their individual or business tax. If you have questions about this Act and how it impacts you or your business, contact us with the form below.
