INFLATION REDUCTION ACT OF 2022 KEY TAX PROVISIONS

The Inflation Reduction Act (IRA), which was signed into law on August 16, 2022, has tax policies impacting corporations, people, the clean-energy sector, and the healthcare industry, among others. Let’s have a look:

Businesses

Sec. 461(l) Business Loss Limitation. Tax reform introduced the pass-through tax deduction for small business owners (sole proprietorships, certain limited liability companies, partnerships, and S-corporations) (TCJA of 2017). Individuals were restricted from deducting more than $250,000 ($500,000 for married taxpayers filing jointly) in business losses against their nonbusiness income. Effective for tax years 2021 through 2026, its duration has been extended until 2028.

Examine the Credit for Payroll Taxes. For tax years starting after December 31, 2022, the restriction amount for the Section 41(h) research credit against payroll tax for small enterprises increases by $250,000 to $500,000. The first $250,000 of the maximum credit will be applied to the FICA payroll tax due. The second $250,000 of the limits will be applied to the employer’s share of the Medicare payroll tax.

Alternative Minimum Tax for Big Businesses The corporate AMT, which was eliminated by the 2017 tax reform, has been resurrected but is now based on book income rather than taxable income. Book income is the amount of money that businesses publicly declare in their financial statements to shareholders. This new corporate AMT of 15% generally applies primarily to big firms with an average adjusted financial statement income above $1 billion for the three prior tax years.

Repurchases of corporate stock are subject to a nondeductible 1% excise tax. After December 31, 2022, corporate stock repurchases are subject to a new 1% excise tax. The tax is based on the stock’s fair market value (FMV); however, the excise tax does not apply if the total amount of shares repurchased in a given tax year is less than $1 million. In addition, it does not apply when repurchased stock is donated to an employer-sponsored retirement plan or employee stock ownership plan, or when stock is repurchased as part of a reorganization in which the shareholder does not report a gain or loss.

Healthcare

Tax credits for Affordable Care Act premiums. For taxpayers whose family income exceeds 400% of the poverty level, the premium tax credit is extended until 2025.

IRS Funding

About $80 billion is earmarked to finance IRS activities such as taxpayer services, enforcement against tax evasion by high-income individuals and businesses, operations, and the modernization of IRS business systems. The IRS has declared that it would not utilize these additional funds to “raise audit scrutiny on small enterprises or middle-income Americans.”

Pure Energy

Tax credits for fuel-efficient vehicles In addition to extending the clean car tax credit until 2032, a new credit for previously owned clean vehicles was added. However, for new clean cars acquired after August 16, 2022, the tax credit is often only accessible if the vehicle’s final assembly took place in North America (the “final assembly requirement”). Taxpayers should input the car’s 17-character vehicle identification number (VIN) into the National Highway Traffic Safety Administration’s VIN Decoder tool to check whether the vehicle fits the final assembly requirement. They may examine the “Plant Information” field, which specifies where the automobile was manufactured.

Buyers who entered into a signed, legally binding contract to acquire a qualified clean car before to August 16, 2022, but did not take ownership of the vehicle until on or after that date, must adhere to standards in place prior to August 16, 2022.

Credits for Clean Energy for Individuals. The noncommercial energy property credit has been renamed the energy-efficient home renovation credit and has been extended until 2032. It is now 30% of the sum of the amount paid or incurred by the taxpayer for energy-efficient improvements installed during the tax year, the amount paid or incurred by the taxpayer for residential energy property expenditures during the tax year, and the amount paid by the taxpayer for home energy audits.

In past years, the credit was equal to 10% of the amount paid or spent for eligible energy-efficiency improvements plus the amount of residential energy property expenses paid or incurred during the tax year.

The Section 25D home energy-efficient property credit was renamed (the residential clean energy credit) and prolonged (until 2034). In addition, the new energy-efficient housing credit under Section 45L has increased the number of homes purchased after December 31, 2022, and the credit has been extended until 2032.

Credits for clean energy use in manufacturing. Multiple new credits have been established: Section 45Y encourages zero-emissions clean energy generation at eligible facilities put in operation after December 31, 2024; Section 45X promotes the development of photovoltaic cells, solar and wind components in the United States. In addition, the Section 48C Manufacturers’ Tax Credit is enhanced to offer $10 billion in tax credits beginning January 1, 2023. The tax credit is equal to thirty percent of the amount spent in new or remodeled factories that manufacture designated renewable energy components.

Energy Credits for Corporations. Several energy credits for businesses have been created, extended, or modified by the Inflation Reduction Act, including a new sustainable aviation fuel credit, the Sec 48 energy credit (extended through 2024 and modified to increase the energy credit for qualified solar and wind facilities placed in service in conjunction with low-income communities), the Sec. 45 credit for electricity produced from renewable sources such as geothermal, solar, and wind facilities (extended through 2024), and the Sec. 45 credit for electricity produced from nuclear power plants (extended through (extended through 2024).

Assistance Is Just a Phone Call Away

As usual, tax law is complex, and it is prudent to consult a certified tax and accounting practitioner. If you have any queries concerning the Inflation Reduction Act and your tax position, please contact the office.

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Tetyana Ser-Manukyan | Glendale Location Manager

Tetyana is a 2nd generation accountant and the Founder of Integrity Accounting Solutions, Inc. She is a meticulously organized and detail-oriented professional with over 23 years of experience in accounting industry.

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