The Inflation Reduction Act of 2022: An Overview
The recently enacted Inflation Reduction Act of 2022 (IRA) is a complex measure that impacts laws governing taxes, health care, and, most significantly, climate action. Through a combination of tax credits and direct spending, the IRA makes a $369 billion investment in clean energy and climate protection – the largest in U.S. history.
The IRA includes many provisions affecting businesses and individuals and sets effective dates ranging from 2022 to 2029. Below is an overview of the most significant provisions. As more details about the legislation become available, we will provide further analysis.
Corporate and Business Provisions:
- Alternative Minimum Tax: A new 15% minimum tax on corporations with over $1 billion or more in average annual income/profit in the previous three years. Effective for taxable years beginning after 12/31/2022.
- Excise Tax: A new 1% excise tax on publicly traded companies that repurchase their own shares with a fair market value of more than $1 million. Effective 1/1/2023.
- Excess Business Losses for Noncorporate Taxpayers: The act extends the limitation on excess business losses of noncorporate taxpayers through 2028.
- Cost Recovery for Clean Electricity and Energy Storage: The IRA now allows Investment Tax Credit (ITC) for stand-alone energy storage, rather than requiring inclusion in another project. Effective for projects beginning construction before 1/1/2025.
- Energy-Efficient Commercial Building Property Deduction: The IRA made several changes to these eligibility requirements. Effective 1/1/2023.
- Credit for New Energy-Efficient Homes: The IRA extended this credit through 2032. Beginning in 2023, the IRA provides an increased credit of $2,500 for single family and manufactured homes when constructed according to the standards set by the Energy Star Residential New Construction Program or the Manufactured Homes Program. The credit is expanded to $5,000 for homes certified as zero energy.
- Business Credit for Commercial Clean Vehicles: The IRA created a new credit for qualified Commercial Clean Vehicles. The credit is 15% (30% for vehicles not powered by gasoline or diesel). The credit cannot exceed $7,500 for vehicles weighing less than 14,000 pounds or $40,000 otherwise. Effective 1/1/23 through 12/31/2032.
- Clean Fuels Credits: The Act creates a new tax credit of 20 cents per gallon (nonaviation) or 30 cents per gallon (aviation) for domestically produced fuels meeting emissions standards. Applies to fuels produced after 1/1/2025 and sold before 12/31/2027.
- Clean Electricity Production Credits: This creates a new business credit to produce clean electricity that produces no rate of greenhouse gas emissions. Effective for facilities placed in service after 12/31/2024.
- Elective Payments and Transferability of Credits for Energy Property and Electricity from Renewable Resources: Extends the beginning-of-construction deadline for certain renewable electricity production facilities through the end of 2024.
- Research & Development: For qualifying small businesses, the IRA increases this credit from $250,000 to $500,000. In addition to the $250,000 of credit that could previously be applied toward their Social Security payroll tax liability, the IRA permits up to $250,000 of the credit to be applied against the Medicare Hospital Insurance payroll tax. This is effective for taxable years beginning after 12/31/2022.
Individual Tax Credits:
- Energy-efficient Home Improvement Credit: The prior rules, which expired at the end of 2021, have been extended to 2032. Effective 1/1/2023, the IRA increases the credit rate to 30% of the cost for all eligible home improvements, applying varying specific annual credit limitations, and replacing the lifetime limitation with various annual limitations up to $1,200.
- Residential Clean Energy Credit: The IRA extended the credit through December 31, 2034, restored the 30% credit rate through 2032 and then reduces the credit rate to 26% in 2033 and 22% in 2034. Starting in 2023, qualified battery storage technology is added to the list of eligible property, but biomass furnaces and water heaters are removed.
- Clean Vehicle Credit: The act includes a credit of up to $7,500 for taxpayers purchasing new electric vehicles. The act eliminates the previous “per-manufacturer” limits that applied to the new vehicle credit, but imposes new domestic content and assembly requirements, as well as caps on the retail price of new vehicles, and the income of the taxpayers purchasing the vehicle. Starting in 2024, taxpayers can elect to transfer this credit to a qualified dealer. Effective 8/16/2022 through 12/31/2032.
- Previously Owned Clean Vehicle Credit: The IRA contains a new nonrefundable tax credit for buyers of previously owned qualified clean (plug-in electric and fuel cell) vehicles. The credit is up to $4,000 limited to 30% of the vehicle purchase price but is disallowed for taxpayers above modified AGI thresholds. Beginning 1/1/2024, the credit may be transferred to a qualified dealer. Effective 1/1/2023 through 12/31/2032.
Health Care Provisions:
- Medicare Prescription Drug Pricing Reform: Individuals on Medicare are no longer required to pay 5% of their drug’s total cost after their out-of-pocket spending exceeds a certain threshold, which is $7,050 in 2022. Also, Medicare will be able to negotiate pricing for a maximum of 10 negotiation-eligible drugs, with those new prices taking effect in 2026. The number of drugs that can be price negotiated will increase to 20 starting in 2029. The IRA imposes a new excise tax on drug manufacturers, producers and importers who fail to enter into drug pricing agreements.
- Medicare Beneficiaries Out-of-Pocket Cap: The IRA changed certain features of Medicare Part D by capping out of pocket payments for drugs at $2,000 annually starting in 2025.
- Medicare Coverage of Adult Vaccines: Beginning in 2023, the IRA gets rid of cost sharing for adult vaccines for Medicare Part D.
- Medicare Insulin Cap: Starting in 2023, the IRA imposes a copay of $35 per month on insulin products for Medicare beneficiaries, but not for those with private insurance.
- Health Insurance Premium Credit: IRA extends the reduced percentage of household income used to calculate the premium contribution for individuals and suspends the 400% of poverty level cap on income. Effective 2023 through 2025.
- Health Savings Account Safe Harbor: The IRA provides a safe harbor that permits employer plans not to lose their high deductible health plan (HDHP) status because the plan covers certain insulin products before the individual meets the plan’s deductible. This is effective for years beginning after December 31, 2022.
Non-Tax Provisions (selected items):
- IRS Funding: The IRA authorizes $80 billion to the IRS to hire more agents and upgrade technology. The IRS has stated that it will not increase the audit rate for taxpayers earning less than $400,000 per year.
- Transferable Credits: The IRA allows eligible taxpayers that do not elect the direct pay option to transfer certain credits to unrelated taxpayers including, among others, the ITC, PTC, clean hydrogen and carbon capture credits. The transferred credit must be exchanged for cash. Credits may only be transferred once.
- Other areas of funding included in the act: Conservation; Rural Development and Agriculture; Climate Change, Residential Efficiency, and Resilience; Building Efficiency and Resilience; Infrastructure; Public Lands; Offshore Wind; Drought Response and Preparedness; Air Pollution; Affordable Housing Resilience; Hazardous Materials, and Homeland Security.
Items Discussed but Not Included in IRA:
- No changes were made to the individual income tax rates.
- No change was made to the state and local tax (SALT) deduction limitation. It is currently scheduled to expire after 2025.
The above was a quick overview of some of the key provisions of the Inflation Reduction Act of 2022. We will update and expand information about the IRA as new details become available. If you have any questions, please contact your Adams Brown tax advisor.