Inflation Reduction Act – New & Expanded Tax Credits

On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. The major impact of the IRA is the government’s investment in clean energy and sustainability through incentives and tax credits. The credits are designed to incentivize and accelerate the buildout of renewable energy, advance the adoption of EV technologies and improve the energy efficiency of buildings and communities. Another focus of the IRA is additional IRS funding to increase its effectiveness.

15% minimum tax and applicable corporations

The IRA introduced a new 15% minimum tax on any corporation whose average annual adjusted financial statement income (AFSI) exceeds $1 billion for any three consecutive tax years preceding the tax year. In general, AFSI includes all entities in consolidated financial statements and is then adjusted for various items, including covered benefit plan items, AFSI net operating loss carryovers and tax depreciation deductions.

Carried Interest Removed

The proposed rules related to extending the carried interest time frame from three to five years were removed from the final package.

IRS Funding

The IRA increases the IRS enforcement funding by $80 billion over the next ten years. The funding is designated for the following initiatives to increase the effectiveness of the IRS:

  • Enforcement, including examinations, collections, criminal investigations, legal and litigation support, and digital asset monitoring
  • Operations support, including legacy information technology systems and telecommunications
  • Business systems modernization, including technology to improve customer service
  • Taxpayer services, including pre-filing assistance and education, filing and account services, and funding for the Taxpayer Advocate Service

Since over 50% of the funding is for more enforcement, it will likely result in more audits of high-wealth and high-income individuals, as well as complex partnerships and large corporations. Taxpayers could also see an increase in the quality of IRS customer service over the next decade as the IRS agency modernizes.

Energy Credits

The IRA extended the period of certain credits, extended the carryback for certain credits from one year to three years, expanded credits and created new credits. There is specific requirements that need to be met for each credit before it can be claimed. Additionally, a direct pay and transfer election are available for certain credits.

Below are highlights from several new and expanded credits:

Production Tax Credit (PTC)
The IRA extended the PTC projects, including solar projects, which begin construction before January 1, 2025. The credit is now subject to a two-tier credit structure with a base of .52 cents per kWh, and a bonus amount to increase it to 2.6 cents per kWh. A content bonus is available if the taxpayer meets domestic content requirements or if the facility is located within applicable energy communities.
Investment Tax Credit (ITC)
The IRA extended the ITC for most projects that begin construction before January 1, 2025. The ITC was expanded to include three new technologies: standalone energy, qualified biogas property and microgrid controllers. A two-tiered investment base applies with credit amounts as follows: 6% (base) / 30% (top, bonus rate) for:
  • qualified fuel cell property;
  • solar energy used to produce electricity, heat or cool a structure, providing solar process heat;
  • equipment that uses solar energy for certain lighting applications;
  • qualified small wind energy property;
  • waste energy recovery property;
  • combined heat and power systems; and
  • geothermal 2% (base) / 10% (top, bonus rate) for other energy property.
Additionally, taxpayers are eligible for a 10% bonus rate for domestic content if applicable requirements are met, similar to the PTC.
Advanced Energy Project Credit
This section generally provides for a credit for projects that equip or expand manufacturing facilities that produce specified renewable energy equipment (such as solar, wind, geothermal, CCUS, fuel cells and microgrids). In 2023, the IRA extends the energy project credit to include a variety of facilities, including:
  • those that manufacture energy storage systems and components;
  • property used to produce energy conservation technology;
  • electric grid modernization equipment;
  • equipment that re-equips a manufacturing facility with equipment designed to reduce greenhouse emissions by at least 20%; and
  • electric and hybrid vehicles.
Advanced Manufacturing Production Credit
Starting in 2023, a new advanced manufacturing credit is available for eligible components a taxpayer produces in the US and sells to an unrelated person. An eligible component means:
  • any solar energy component such as photovoltaic cells, photovoltaic wafers, solar grade polysilicon, etc.; any wind energy component;
  • an inverter;
  • any qualifying battery component; and
  • any applicable critical mineral.
Electric and clean vehicles
The Electric Vehicle Credit was changed to a Clean Vehicle Credit. The credit can now apply for used vehicles in addition to new vehicles. The potential credit is $7,500, if the sourcing requirements are satisfied for each of the specified requirements.The credit on new vehicles is required to not be for resale, made by a qualified manufacturer and the final assembly of the clean vehicle must occurs in North America. The amount of the credit depends on the critical minerals contained in the vehicle’s battery and its components.The credit for the used clean vehicle is the lesser of $4,000 or 30% of the sale price and can be used once every three years on for clean vehicles sold for $25,000 or less.
Energy Efficient Buildings
The credits for energy efficient commercial buildings, nonbusiness energy property credit, residential clean energy credit and the new energy efficient homes credit have also been modified and extended under the IRA.

Implications and next steps

Now that the IRA has been enacted into law, the government’s focus will turn to implement regulations and guidance. Taxpayers should contact their advisors and explore how some of the changes could impact current, pending or potential transactions and investments.

About the Authors

Melissa G. Dunham
Melissa G. Dunham
Partner, Taxation Services
Michael A. Hydell
Michael A. Hydell
Senior Manager, Taxation Services


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