President Biden earlier this week signed the Inflation Reduction Act of 2022 (Act), which contains a number of tax and spending provisions impacting a broad range of businesses and individuals. These changes include a 15% corporate minimum tax, a 1% tax on certain corporate stock repurchases, an extension of the excess business loss limitation, and expansion of renewable energy and energy efficiency incentives. Following is a summary of some of the key tax provisions of the Act. While the Act contains significant incentives for certain investments in clean energy infrastructure, it defers many of the eligibility specifics and implementation details to federal agencies, leaving significant questions for businesses seeking to understand the short and medium term impacts. We will continue to provide updates as these details are clarified.
New Corporate Alternative Minimum Tax
The Act establishes a 15% corporate alternative minimum tax (CAMT) on certain domestic corporations that report average adjusted financial statement income in excess of $1 billion for any consecutive three-tax-year period. The tax is imposed based on an applicable corporation’s adjusted financial statement income (AFSI). An applicable corporation’s AFSI generally is the corporation’s net income or loss reported on the corporation’s financial statements, with certain adjustments specified in the Act, and may include income of related corporations and partnerships. Special rules apply for purposes of determining whether a domestic corporation is subject to the CAMT and for calculating AFSI if the corporation has a foreign parent or foreign activities, including a reduction of applicable CAMT to the extent any tax is imposed under the base erosion and anti-abuse tax (BEAT). The CAMT is effective for taxable years beginning after December 31, 2022. A number of aspects of the CAMT are subject to guidance to be provided by the Secretary of the Treasury.
New Excise Tax on Certain Corporate Stock Repurchases
The Act establishes a 1% excise tax on the value of stock of a publicly traded corporation that is repurchased by the corporation (or certain subsidiaries). The value of the repurchased stock subject to the tax is reduced by the value of any stock issued by the corporation in the same taxable year. There are also a number of exclusions to the new tax, including for a corporation that purchases stock during a taxable year having a value of $1 million or less, certain repurchases in connection with reorganizations, repurchases treated as dividends, and repurchases by a dealer in securities, a regulated investment company or a real estate investment trust. The tax applies to repurchases of stock after December 31, 2022.
New and Existing Renewable Energy Incentives
As further discussed in our prior alert, the Act extends the full production tax credit under Section 45 of the Internal Revenue Code (the PTC) and the 30% investment tax credit under Section 48 of the code (the ITC) to qualified renewable energy projects beginning construction by December 31, 2024.
The PTC extension applies to wind facilities, closed- and open-loop biomass facilities, landfill gas facilities, trash facilities, geothermal facilities, and qualified hydropower facilities. The ITC extension applies to solar energy generation property, geothermal property, qualified fuel cell property, and waste energy recovery property, among others. The ITC is also expanded to apply to standalone energy storage technology. The previously applicable phase-down of the PTC and the ITC, including the phase-down applicable to the PTC for wind facilities and the ITC for solar energy generation properties, is eliminated, except in the case of certain projects placed in service before January 1, 2022.
The Act also provides for increased amounts of PTC and ITC for certain projects, including any project that satisfies domestic content standards or is located in an energy community, certain low-income communities, or on Indian land. The Act also creates two new credits, the Clean Electricity Production Credit and the Clean Electricity Investment Credit, which operate similarly to the PTC and the ITC, respectively, for qualified facilities placed in service after December 31, 2024. The Act includes credit monetization provisions that permit certain tax-exempt owners to elect for “direct payment” of the PTC, ITC, Clean Electricity Production Credit, and Clean Electricity Investment Credit, and that permit other taxpayers to transfer these credits for cash.
In addition, the Act extends and adds new tax credits related to:
- Qualified carbon oxide sequestration facilities,
- Zero-emission nuclear power production facilities,
- Biodiesel, renewable diesel, and alternative fuels,
- Clean hydrogen production,
- Advanced energy projects,
- Advanced manufacturing of certain renewable energy products, such as solar modules, and
- “Alternative refueling property” (including electric vehicle charging).
A number of aspects of the extensions of and modifications to the PTC and ITC, and the application of the Clean Energy Production Credit and Clean Energy Investment Credit are subject to further guidance from the Secretary of the Treasury. Some of the extensions of the existing credits also are applicable only to projects that are placed in service after December 31, 2023.
Extension of Limitation on Excess Business Losses
The Act extends the limitation on the use of excess business losses for noncorporate taxpayers through tax years beginning before January 1, 2029. This provision limits the deductibility of deductions attributable to trades or businesses that exceed the aggregate gross income and gains attributable to those trades or businesses.
Electric Vehicle Tax Credits
The Act extends the existing refundable tax credit for the purchase of electric vehicles to vehicles placed in service before 2033, but limits the credit to vehicles assembled in North America. Beginning in 2023, the credit will be further limited to qualified electric vehicles that cost up to $80,000 for vans, SUVs, and trucks and up to $55,000 for other vehicles, and taxpayers with adjusted gross income over $300,000 (for married filing jointly), $225,000 (for head of household) and $150,000 (for single taxpayers) will not be eligible to claim the credit. Additional battery sourcing and manufacturing limitations will apply after applicable guidance has been issued.
The Act also provides a new refundable tax credit for purchases of used electric vehicles that are at least 2 years old and purchased before 2033. The credit is equal to the lesser of $4,000 or 30% of the purchase price. Taxpayers with adjusted gross income over $150,000 (for married filing jointly), $112,500 (for head of household) and $75,000 (for single taxpayers) are not eligible to claim the credit. This new tax credit will be available for vehicles acquired after December 31, 2022.
Individual Energy Incentives
The Act includes several energy tax incentives for individuals, including:
- An increase of the nonbusiness energy property credit (renamed the Energy Efficient Home Improvement Credit) from 10 % to 30% for qualified energy efficiency improvements and energy property expenditures, including improved windows and doors, water heaters, heat pumps, and central air conditioners.
- An extension of the residential clean energy credit (renamed the Clean Energy Credit), which allows taxpayers to claim a 30% credit for qualified residential energy efficient property purchases, including solar electric property, solar water heating property, and small wind energy property.
Additional IRS Funding
The Act provides an additional $80 billion in funding to the IRS over the next 10 years for tax enforcement and compliance and technology upgrades. This funding is expected to significantly increase IRS audits and other enforcement activities.
