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.
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.
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:
- 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.
- 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.
- 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.
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.
Melissa G. Dunham?>
CPA, MTax, MBA
Michael A. Hydell?>
About the Authors
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