On August 16, 2022, President Biden signed The Inflation Reduction Act of 2022 (Public Law 117-169) into law. The Inflation Reduction Act (The Act) provides for large investment in making healthcare more affordable to more Americans and fighting climate change by reducing carbon emissions. Of major importance to CPAs, there is increased funding for the IRS to update its infrastructure to enable it to be more efficient and effective in its duties to the taxpayer. To help fight climate change, The Act will be providing taxpayers incentives in the forms of various tax credits. The legislation intends to cover the cost of these items using several resources. The Act is expected to raise more than $700 billion in revenue from enhanced IRS enforcement activities, a 15% corporate alternative minimum tax based on “adjusted financial statement income,” and a 1% tax on stock buybacks by certain publicly traded corporations.

Additional IRS Funding

The Act appropriates $78.9 billion to the IRS over the next 10 years. The Act allocates significant resources to the IRS for the purposes of tax enforcement, taxpayer service and business systems modernization. The IRS predicts that the additional funding will result in increased revenues of $203.7 billion over the next 10 years.

What does this increased funding mean to CPAs and their clients?  For one, the likelihood of being audited has gone up. Thus, the CPA should ensure that the client’s recordkeeping is in good order; this means more resources must be committed to recordkeeping. Additionally, each year the IRS publishes a list of “potentially abusive arrangements the taxpayer should avoid.” The CPA should be aware of this list because there will be certain deductions from the list that the IRS will be more likely to audit.

Energy Efficient Home Improvement Credit

The Nonbusiness Energy Property Credit (which technically expired at the end of 2021) was “extended” (with substantial improvements) through 2032 and renamed the Energy Efficient Home Improvement Credit. Starting in 2023, the credit will be equal to 30% of the costs for all eligible home improvements made during the year with an annual limit of $1,200.  The credit replaces the $500 lifetime limit. The credit includes the cost of installing certain energy-efficient water heaters, heat pumps, central air conditioning systems, furnaces, hot water boilers, and air circulating fans.

Beginning in 2023, annual limits for particular types of qualifying alterations were improved. For example, it is $250 for one exterior door, or $500 for all exterior doors; $600 for exterior windows and skylights, and central air conditioning units; and $2,000 for electric or natural gas heat pumps and water heaters. (The latter $2,000 category is the exception to the $1,200 annual limit.) It will also be expanded to cover the cost of certain biomass stoves and boilers, electric panels and related equipment, and home energy audits. Roofing and air circulating fans, however, will no longer qualify for the credit, though.

Residential Clean Energy Credit

The Residential Clean Energy Credit, which is now extended through 2034, was previously called the Residential Energy Efficient Property Credit. The credit that was previously worth 26% jumps to 30% from 2022 to 2032. It then reverts to 26% in 2033 and 22% in 2034.

Equipment that qualifies for the Residential Clean Energy Tax Credit includes solar, wind, geothermal and fuel-cell technology:

• Solar panels, or photovoltaic, for generating electricity. The electricity must be used in the home.
• Solar-powered water heaters. The water heated by the system must be used inside the home, and at least half of the home's water-heating capacity must be solar. (Solar heaters for swimming pools and hot tubs do not qualify.)
• Wind turbines that generate up to 100 kilowatts of electricity for residential use.
• Geothermal heat pumps that meet federal Energy Star guidelines.
• Fuel cells that rely on a renewable resource (usually hydrogen) to generate power for a home. The equipment must generate at least 0.5 kilowatts of power.
  

Clean Vehicle Credit

The Act extends the Clean Vehicle Credit until the end of 2032 and creates new credits for previously owned clean vehicles and qualified commercial clean vehicles. The amount of the credit will be the lesser of:

• 15% of the vehicle’s cost (30% for vehicles not powered by a gas or diesel engine); or
• The “incremental cost” of the vehicle over the cost of a comparable vehicle powered solely by a gas or diesel engine.
  

The credit applies to new vehicles with an MSRP of $80,000 or less for vans, sports utility vehicles and pickup trucks. The limit is $55,000 for all other types of vehicles. The act also provides for a smaller credit of $4,000 (or 30% of the vehicles sales price, whichever is less), for used vehicles.

The maximum allowable tax credit is up to $7,500. There are also limitations for the new vehicle credit based on adjusted gross income (AGI) thresholds – for single or married filing separately taxpayers, the limit is $150,000; for taxpayers filing as head of household, the limit is $225,000; and for married filing jointly, or surviving spouse taxpayers, the limit is $300,000. Reduced AGI limitations apply to the used vehicle credit.

In addition, taxpayers will be able to claim a much larger credit ($40,000) for qualifying vehicles over 14,000 pounds, such as various makes and models of new electric school buses that have an MSRP of approximately $400,000. 

Before making a significant investment in technology, one should consider the useful life and repair costs of the technology in which they are investing. The cost of battery replacement on an electric vehicle could be many thousands of dollars if not covered under a warranty. Warranties typically cover electric vehicle batteries for a minimum of eight years or up to 100,000 miles.

Corporate Alternative Minimum Tax

In tax years beginning after December 31, 2022, The Act introduces a 15% corporate alternative minimum tax (AMT) on the “adjusted financial statement income” (as “book” income) of certain large corporations [IRC Sec 55 (b)(2)]. This newly enacted AMT will apply to any corporation, other than an S corporation, regulated investment company, or real estate investment trust with average annual adjusted financial stated income that exceeds $1 billion for any three‑year period ending with one year prior to the current taxable year and after December 31, 2021. Additionally, the AMT only applies if it is in excess of the taxpayer’s regular liability, including its base erosion and anti-abuse tax (BEAT) for the year. The AICPA has repeatedly reached out to congressional committee leaders about their concern about basing tax liability on the nontax criterion of book income.

The Act will also have an effect on the current bonus depreciated regime under Code Section 179. While the Act does not directly change Code Section 179, the Act does target accelerated depreciation deductions of large corporations. The Act penalizes companies that have a large book-tax income disparity. These disparities often arise from depreciation deductions. Now, large companies that otherwise would owe limited annual taxable income due to bonus depreciation, will be subject to a 15% minimum tax regardless of the amount of depreciation deduction available per year.

The application of a minimum tax for large corporations is not a new introduction into the tax Code. The corporate alternative minimum tax was previously introduced in the Tax Reform Act of 1986. The theory behind a minimum tax is to close tax breaks for large corporations that may give rise to a little to no tax liability.

1% Excise Tax on Stock Buybacks

The excise tax generally consists of a non-deductible 1% tax on the value of stock of a “covered corporation” that is either repurchased by, or acquired by certain affiliates of, such covered corporation during a taxable year (reduced by the fair market value of its stock issued). A “covered corporation” is a domestic corporation (or certain non-U.S. corporations treated for tax purposes as a domestic corporation under the “inversion” rules) the stock of which is publicly traded on an “established securities market.” Established securities markets including the NYSE, NASDAQ and the London Stock Exchange.

The Act excludes the following repurchases from the excise tax:

• To the extent the repurchase is part of a tax-free reorganization under Section 368(a) of the Code, and no gain or loss is recognized by the shareholder by reason of the reorganization.
• The repurchased stock, or an amount of stock equal to the value of such repurchased stock, is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan.
• The total amount of repurchases within the taxable year does not exceed $1 million.
• Under regulations prescribed by Treasury, the repurchase is by a dealer in securities in the ordinary course of business.
• The repurchase is by a regulated investment company or a real estate investment trust.
• To the extent the repurchase is treated as a “dividend” (as opposed to being treated as a “sale or exchange”) for U.S. federal income tax purposes.
  

In conclusion, the information provided above was just a brief summary of some of the significant content from the new law. The act contains several other items and incentives relating to healthcare, climate change and tax-related matters and CPAs should review the legislation in more detail for possible applications to their practice and their client base.

The author thanks Steven Parzen, CPA, for his assistance with this article.

David Silverstein, CPA, just retired from his 30-year career in the New York City Comptroller’s Office. During the first half of this career, he performed audits that resulted in more than $30 million in savings to New York City; during the second half, he administered the City’s system for keeping in compliance with the IRS. He has also been running his own tax practice for more than 25 years.