If you have not heard, President Biden signed the Inflation Reduction Act 2022 into law in mid-August. Known more simply as the IRA, this sweeping legislation was described by the president himself as “one of the most significant laws in our history.” Although too early to tell if that is true, It is certainly one of the broadest.
Provisions within the IRA focus on climate change and energy, healthcare access and costs, and taxation, with an overall goal of reducing the federal deficit and inflation, as the law’s name implies. But what does it all mean for individuals and businesses?
Here are the key tax-related provisions and their ramifications. Remember that tax deductions apply when calculating the amount of tax you owe, whereas tax credits are reductions, so that amount directly reduces your tax liability.
Climate and Energy
Climate and Energy The IRA includes several incentives to produce or use green energy. Some are extensions of existing tax credits, but there are new tax credits as well for both individuals and businesses.
Thinking of purchasing an alternative fuel vehicle?
The popular tax credits for these have been extended – still $7,500 for a new vehicle and $4,000 for a used one. They will remain in effect until the end of 2032. You can find a list of eligible vehicles on the U.S. Department of Energy website.
For businesses, there is a new tax credit that applies to qualified commercial clean vehicles in one of two ways:
- 15% of basis – that doubles to 30% if you choose a vehicle that does not have a gas or diesel internal combustion engine, or
- The incremental cost of the vehicle (the difference between the purchase price of your vehicle compared to the cost of a non-qualifying comparable vehicle)
This credit remains in effect until the end of 2032.
Thinking of investing in renewable energy?
For homeowners, the IRA restores the 30% residential clean energy tax credit for solar panel installations and other qualifying projects. The credit is retroactive to January 1, 2022 and applies through 2032.
The IRA also reinstates and extends the 30% business solar tax credit with these same provisions. Solar projects completed in 2033 will receive a 26% credit, and those completed in 2034 will a 22% credit.
For businesses, tax credits for both New Investment credits for solar and onshore wind projects start at 30%. However, that amount could rise to 50% for certain large projects and to 70% for small projects less than 5 megawatts.
The IRA also includes a variety of new or renewed tax credits for businesses that build alternative fuel refueling facilities or renewable energy production facilities, and for facilities that produce and distribute clean electricity or clean fuel.
And the Superfund excise tax that sunsetted back in 1995 has been reinstated permanently, at a significantly higher rate – 16.4 cents per gallon of domestic crude oil and imported petroleum products versus 9.7 cents previously. After 2023, the amount will be adjusted for inflation annually. This money is expected to fund the Hazardous Substance Superfund Trust through 2032.
1% Excise Tax on Stock Buybacks
Any publicly traded US corporation that buys back its own stock during the taxable year will now be assessed a 1% tax based on the stock’s fair market value. This applies to:
- IRC 317b redemptions and financially similar transactions
- Stock that is acquired from another person by a specified affiliate of the corporation
- Stock of publicly traded foreign corporations
The new law also identifies a number of situations in which the 1% excise tax does not apply.
Increased Funding for the Internal Revenue Service
Not a tax but potentially of great interest to taxpayers, the Inflation Reduction Act includes $80 billion in new allocation for the IRS over the next 10 years to fund enhanced enforcement. This underscores the need to align yourself with a knowledgeable, experienced firm such as ProAdvisor CPA, to ensure your taxes are handled properly and there will be a professional at your side should you be audited.
Corporate Alternative Minimum Tax (AMT)
Will this provision apply to your business? Probably not, considering it affects only C corporations that have average adjusted financial statement income (AFSI) of more than $1 billion over three taxable years. Still, it’s nice to be aware, depending on your firm’s projected growth trajectory.
Summary
Details about the Inflation Reduction Act will continue to unfold over the next weeks and months. Be sure to watch our blog for further information to help you fully understand how your personal and/or business taxes might be affected and what opportunities may be available to reduce your taxes. Meanwhile, we know you have questions and our ProAdvisors are here to help, so don’t hesitate to contact us.
Disclaimer:
This publication is designed to provide information on federal tax and accounting laws and/or regulations. It is presented with the understanding that the author is not rendering legal or accounting services.
This text is not intended to address every situation that arises or provide specific, strategic tax and/or accounting planning advice. This text should not be used solely to answer tax and/or accounting questions and you should consult additional sources of information, as needed, to determine the solution to tax and/or accounting questions.
This text has been prepared with due diligence. However, the possibility of mechanical or human error does exist and the author accepts no responsibility or liability regarding this material and its use. This text is not intended or written by the practitioner to be used and cannot be used by a taxpayer or tax return preparer, for the purpose of avoiding penalties that may be imposed.
