Inflation Reduction Act of 2022

9/2/2022 - By David W. Uslan, CPA

President Biden signed the Inflation Reduction Act into law at a White House ceremony on August 16, finalizing legislation intended to address inflation by paying down the national debt, lowering consumer energy costs, providing incentives to the production of clean energy and reducing healthcare costs. The Act contains several credits that would be of interest to individuals and businesses.

Favorable ARPA premium tax credit rules remain in effect for 2023-2025.

The Act extends the refundable premium tax credit for individuals who purchase health insurance on state health care exchanges for three additional years – for tax years beginning in 2023-2025.

Extension, Increase and Modifications of Nonbusiness Energy Property Credit

Before the enactment of the Act, a tax credit was allowed for specified nonbusiness energy property expenditures made by individuals. The credit applied only to property placed in service before January 1, 2022. Now a credit can be taken for energy-efficient property if it is placed in service before January 1, 2033.

The Act increases the credit for a tax year to an amount equal to 30% of the sum of (a) the amount paid or incurred for qualified energy efficiency improvements installed during that year, and (b) the amount of the residential energy property expenditures paid or incurred during that year. The credit is further increased for amounts spent for a home energy audit. The amount of the increase due to a home energy audit can't exceed $150.

The Act also repeals the lifetime credit limitation and instead limits the allowable credit to $1,200 per taxpayer per year. In addition, there are annual limits of $600 for credits with respect to residential energy property expenditures, windows and skylights, and $250 for any exterior door ($500 total for all exterior doors). Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, biomass stoves and boilers.

Extension and Modification of Residential Clean-Energy Credit

Before the enactment of the Act, a tax credit, known as the residential energy efficient property (REEP) credit, was allowed for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump and biomass fuel property installed in homes in years before 2024.

The Act makes the credit available for property installed in years before 2035 and for qualified battery storage technology expenditures.

Before the enactment of the Act, a New Energy Efficient Home Credit (NEEHC) was available to eligible contractors for qualified new energy-efficient homes acquired by a homeowner before Jan. 1, 2022. A home had to satisfy specified energy-saving requirements to qualify for the credit. The credit was either $1,000 or $2,000, depending on which energy efficiency requirements the home satisfied.

The Act now makes the credit available for qualified new energy-efficient homes acquired before January 1, 2033. The amount of the credit is increased and can be $500, $1,000, $2,500 or $5,000, depending on which energy efficiency requirements the home satisfies and whether the construction of the home meets prevailing wage requirements.

New Clean-Vehicle Credit

Before the enactment of the Act, a credit could be claimed for each new qualified plug-in electric drive motor vehicle (NQPEDMV) placed in service during the tax year.

The Act, among other things, retitles the NQPEDMV credit as the Clean Vehicle Credit and eliminates the limitation on the number of vehicles eligible for the credit. Also, final assembly of the vehicle must take place in North America.

No credit is allowed if a taxpayer’s modified adjusted gross income for the year of purchase or the preceding year exceeds $300,000 for a joint return or surviving spouse, $225,000 for a head of household, or $150,000 for others. In addition, no credit is allowed if the manufacturer's suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans or SUVs).

Credit for Previously Owned Clean Vehicles

A qualified buyer who acquires and places in service a previously owned clean vehicle after 2022 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle's sale price. No credit is allowed if the buyer’s modified adjusted gross income for the year of purchase or the preceding year exceeds $150,000 for a joint return or surviving spouse, $112,500 for a head of household or $75,000 for others. In addition, the maximum price per vehicle is $25,000.

New Credit for Qualified Commercial Clean Vehicles

There is a new qualified commercial clean-vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022.

The credit per vehicle is the lesser of 1) 15% of the vehicle's basis (30% for vehicles not powered by a gasoline or diesel engine) or 2) the "incremental cost" of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles.

Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities

Under pre-Inflation Reduction Act law, 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.

Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit, for tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can't exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.

Extension of Incentives for Biodiesel, Renewable Diesel and Alternative Fuels

Under pre-Act law, a credit could be claimed for sales and use of biodiesel and renewable diesel that are used in a trade or business or sold at retail and placed in the fuel tank of the buyer for such use and sales on or before December 31, 2022. Now a credit can be claimed for sales and use of biodiesel and renewable diesel fuel, biodiesel fuel mixtures, alternative fuel and alternative fuel mixtures on or before December 31, 2024.

A refund of excise tax can also be claimed for use of 1) biodiesel fuel mixtures for a purpose other than for which they were sold or for resale of such mixtures on or before December 31, 2024, and 2) alternative fuel that is used in a motor vehicle, motorboat or as, aviation fuel for a purpose other than for which they were sold or for resale of such alternative fuel mixtures on or before December 31, 2024.

Questions?

If you have any questions or concerns about the Inflation Reduction Act, please contact our Tax team!

About the Author | David Uslan, CPA

David is a shareholder and technical leader of the Tax & Accounting Services practice at Saltmarsh, Cleaveland & Gund. With more than 30 years of experience, he works with growth-oriented companies and business owners in a variety of industries, including software, real estate, private equity, professional services, technology and creative services. David’s primary areas of experience include state and federal tax compliance, as well as multi-state and federal consulting, including merger and acquisition issues, accounting method changes and equity and deferred compensation arrangements. Prior to joining Saltmarsh, he held several management positions with national firms KPMG and Ernst & Young and was a shareholder at a large, local firm based in Portland, Oregon.