Tom Talks Taxes - August 18, 2022

An overview of the tax provisions of the Inflation Reduction Act of 2022

This is an overview of the major provisions of the new law. If you’d like in-depth education on this new law, please join me for a 2 CE/CPE webinar available on-demand. You can purchase it here. -Tom

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022. While some tax provisions will not impact the average tax professional, others provide valuable tax credits to individuals and businesses. Below is an overview of what the average tax professional needs to know.

The law creates two new taxes and extends an existing loss limitation provision:

• It reinstates the corporate alternative minimum tax for tax years beginning after December 31, 2022. The minimum tax is 15% of adjusted financial statement income and only applies to corporations with an average annual adjusted financial statement income of $1 billion over three tax years.

• It adds a 1% excise tax on the stock repurchases of publicly traded corporations.

• The §461(l) excess business loss limitation, which applied through tax year 2026, now applies through tax year 2028.

The law gives the IRS additional funding:

• $3.18 billion for taxpayer services,

• $4.75 billion for business systems modernization,

• $45.6 billion for enforcement,

• $25.3 billion for operations support, and

• $675.5 million for non-IRS tax administration.

A note about IRS funding: it is desperately needed. Read Commissioner Rettig’s letter about what the IRS plans to do with the funds. I believe a lot of the enforcement monies will be spent on sophisticated tax transactions (e.g. syndicated conservation easements), cryptocurrency (which is specifically mentioned in the text of the law), and entities. Entity examination rates are shockingly low, so they have no where to go but up, and many high-income individuals are self-employed. It is time to work with clients to address long-standing issues; for example, getting S corporations compliant with reasonable compensation using a tool like as RCReports.

The law extends two American Rescue Plan Act enhancements of the §36B premium tax credit through tax year 2025:

1. Taxpayers with household income exceeding 400% of the federal poverty line may be eligible for a premium tax credit, and

2. The amount that taxpayers are expected to contribute toward their health insurance premiums is lower.

Existing tax credits used by individuals for home improvements are expanded and extended:

• The §25C nonbusiness energy property credit is extended through tax year 2032 and goes from a lifetime $500 limit to a $1,200 per year limit. The rate increases from 10% to 30%. Roofs will no longer be qualified property, but the credit is now allowed for home energy audits. It is renamed the energy efficient home improvement credit. This change applies to property placed in service after December 31, 2022.

• The §25D residential energy efficient property credit, mostly used for solar electric systems, is extended through tax year 2034 and the rate goes back to 30% starting in tax year 2022. It is renamed the residential clean energy credit.

There are major changes to vehicle tax credits. There are now three credits available:

1. Expanded §30D renamed to the clean vehicle credit,

2. New §25E previously-owned clean vehicle credit, and

3. New §45W qualified commercial clean vehicle credit.

The details to the vehicle credits will put you to sleep, so I’ll give you some key points:

• For the existing §30D qualified plug-in vehicle credit, which is mostly in effect through the end of 2022, any vehicle placed in service after August 16, 2022 must have final assembly in North America to qualify. The Department of Energy provided information on this. However, there is a transition rule that if you entered into a contract between January 1, 2022 and August 15, 2022, and receive the vehicle on or after August 16, 2022, a taxpayer can elect to treat it as placed in service on August 15, 2022.

• Starting in 2023, the clean vehicle credit and the previously-owned clean vehicle credit are limited based on modified AGI, which is AGI plus the §911, §931, and §933 amounts. The MAGI limitations are cliffs, and a married filing separately taxpayer can claim the credits. In addition, to apply the limit, the taxpayer uses MAGI from the LESSER of MAGI in the year of purchase or MAGI in the year immediately preceding the purchase. This helps to avoid surprise credit qualification problems during the purchase tax year. The MAGI limits are:

  • $300,000 (§30D) / $150,000 (§25E) for married filing jointly or surviving spouses,

  • $225,000 (§30D) / $112,500 (§25E) for heads of household, and

  • $150,000 (§30D) / $75,000 (§25E) for all other filing statuses.

• Starting in 2024, a taxpayer can elect to transfer their tax credit to their dealer to be applied to the purchase of the car. While this has the potential to be complicated, it will help taxpayers from a cash flow perspective, and taxpayers with lower incomes will avoid credit utilization issues since it is a nonrefundable tax credit.

• Starting in 2023, there will be new vehicle price limits: for §30D, it is $55,000 (or $80,000 for pickups, SUVs, and vans). For §25E, it is $25,000 for all cars. On the plus side, the manufacturer limits will no longer apply.

• Starting in 2023, the commercial vehicle credit is a great option for a business, especially for a business owned by a higher-income individual, as there are no income limits for this tax credit. The maximum credit amount is $7,500 for vehicles weighing less than 14,000 pounds, and $40,000 for all other vehicles. It qualifies as a business vehicle by being subject to depreciation.

Two other items to briefly mention:

1. For tax years beginning after December 31, 2022, the §41 research credit allowed against payroll tax liabilities for certain start-up businesses increases from $250,000 to $500,000.

2. For tax years beginning after December 31, 2022, the §179D additional first-year deduction for energy efficient commercial building property is updated and expanded.

There are also over two dozen expanded and additional niche credits and deductions related to energy production and efficiency that we do not have space to discuss in this edition.

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