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:

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.