In August, President Joe Biden signed the Inflation Reduction Act of 2022 into law. While the legislation is focused primarily on fighting climate change and making health care and prescription drugs more affordable, it also has some significant tax impacts.
Here are a few key impacts of the Act:
- Nonbusiness Energy Property Credit
Before the Act, taxpayers were allowed a personal credit for specified nonbusiness energy property expenditures. The credit only applied to property placed in service before January 1, 2022. This deadline has now been extended to January 1, 2023, and the credit has been increased to an amount equal to 30% of the sum of (a) the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during that year, and (b) the amount of residential energy property expenditures paid or incurred by the taxpayer during that year. The amount of the increase due to a home energy audit cannot exceed $150. The act also repeals the lifetime credit limitation, and instead limits the allowable credit to $1,200 per taxpayer per year, with some additional limits to specific property types.
- New Energy Efficient Home Credit
Before the Act, the New Energy Efficient Home Credit (NEEHC) was available to eligible contractors for qualified new energy efficient homes acquired by a homeowner before January 1, 2022. The credit was previously either $1,000 or $2,000 depending on which energy efficiency requirements the home satisfied. The Act makes extends the deadline to January 1, 2023, and the amount of the credit has increased. Currently, a qualified home can be eligible for either $500, $1,000, $2,500, or $5,000.
- Clean Vehicle Credit
Prior to the new legislation, a taxpayer could claim a credit for each new qualified plug-in electric drive motor vehicle (NQPEDMV) placed in service during the tax year. The NQPEDMV credit has been retitled to the Clean Vehicle Credit, and is now calculated differently. Taxpayers are now able to receive a credit of $3,750 for meeting the critical minerals requirement and an additional $3,750 for meeting the battery component requirement. The new credit requires that final assembly of the vehicle occurs in North America. These terms apply to vehicles sold after December 31, 2022. The Inflation Reduction Act also adds a credit for the purchase of a previously-owned clean vehicle, as well as a new credit for qualified commercial clean vehicles.
- Small Business Payroll Tax Credit
Prior to the Act, a Qualified Small Business (QSB) with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax. Now, QSB’s may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
- Corporate Alternative Minimum Tax Rate
The Inflation Reduction Act imposes a new 15% corporate alternative minimum tax on the adjusted financial statement of corporations with at least $1 billion in income.
- 1% Excise Tax on Repurchase of Corporate Stock
The Act imposes a tax of 1% of the fair market value of any stock of a corporation which is repurchased during the tax year.
- Prescription Drug Price Reform
Significantly, the Act will allow Medicare to negotiate the price of certain prescription drugs, which will in turn lower medication costs for beneficiaries. Starting in 2025, Medicare recipients will have a $2,000 cap on annual out-of-pocket costs for prescription drugs.
- New Credit for Zero-Emission Nuclear Power Production
The Inflation Reduction Act provides a credit of $0.03 per kilowatt hours of electricity produced and sold by a qualified nuclear power facility. A qualified nuclear power facility is one that is owned by the taxpayer, is not an advanced nuclear power facility, and was placed in service before ethe act was signed into law.
- Clean Hydrogen Production Credit
The Act also introduces a new credit for clean hydrogen production. The credit is available for the first 10 years that a qualified clean production facility is in service, and the amount depends on how clean the production facility is, ranging from $0.12 - $0.60 per kilogram of clean hydrogen produced after December 31, 2022.
These are just a few of the key provisions included in the Inflation Reduction Act. If you have any questions on how the new legislation will impact you or your business, leave a comment below, or feel free to contact me directly. I’m happy to help!