The Inflation Reduction Act is a $430 billion climate, health care, and tax package. More than $300 billion will be invested in energy and climate reform, the largest federal clean energy investment in U.S. history. The bill also allows the Health Secretary to negotiate prices for prescription drugs for Medicare and extends the Affordable Care Act health care benefits for three years through 2025. Here are the key tax provisions.
Summary of Provisions
- Extends the excess business loss limitations for non-corporate taxpayers for two years through 2028.
- Extends the non-business energy property credit (which expired at the end of 2021) through 2032, modifies the credit for expenditures after 2021 to be 30%, and replaces the $500 lifetime credit with a $1,200 annual maximum credit, with certain limitations, such as $600 for exterior windows and skylights, $250 for exterior doors (annual maximum of $500 for all exterior doors) and $2,000 for heat pumps, heat pump water heaters, and biomass stoves and boilers.
- Extends tax credits for energy production and investment in technologies including wind, solar and geothermal energies through 2024. Adds new credits for battery storage and biogas.
- Creates or extends tax credits for additional technologies and energy sources including nuclear energy, clean hydrogen energy, biofuels, and technology that captures carbon from fossil fuel power plants generally through 2032.
- Extends the $7,500 clean vehicle credit through 2032 with major modifications including eliminating the number of manufacturer-specific vehicles rule and replacing it with a sourcing requirement for the critical components and battery systems (primarily US-produced vehicles would qualify), imposing income and MSRP limits on the new vehicle credit, and adding a new credit of up to $4,000 for purchasing a previously-owned clean vehicle (only 1 credit allowed per previously-owned vehicle), subject to income limits.
- Creates a credit for up to $4,000 or 30% of the basis (cost) of a qualified commercial clean vehicle acquired after 2022 and through 2032.
- Modifies requirements for energy efficient commercial buildings under Internal Revenue Code Section 179D for years beginning after 2022.
- Allows entities to claim a direct payment in lieu of tax credit for certain energy projects after 2022.
- Increases the research credit that can be used against payroll taxes for qualified small businesses from $250,000 to $500,000 for tax years beginning after 2022. (Reminder: The 2017 Tax Cuts and Jobs Act requires that beginning in 2022, research and development costs must be capitalized and amortized over 5 years. Although changes to the capitalization rule have been proposed, none of those proposals have been enacted at this time, thus capitalization is currently required.)
- Extends and increases the alternative fuel refueling property credit through 2032.
- Extends larger premium subsidies related to the Affordable Care Act for three years through 2025 and allows taxpayers with income above 400% of the federal poverty line to qualify for the premium tax credit.
- Large C Corporations (with $1 billion or more in annual earnings): Adds a 15% minimum tax on book income beginning in 2023. Accelerated depreciation is exempt. Expected to impact only 150 large companies.
- Publicly Traded U.S. Corporations: Adds a 1% nondeductible excise tax on stock buybacks beginning 2023.
- IRS: Allocates $80 billion to the IRS for enforcement, operations support, business systems modernization, and taxpayer services.
- After 2022, an election will be made available whereby taxpayers can elect to transfer all or a portion of an eligible credit to an unrelated taxpayer. The transferred credit must be exchanged for cash and is not included in the transferor’s income, nor is it deductible by the transferee. This provision applies only to certain tax credits.
Solar Provision Details
Home Solar Energy Credit Extended and Increased – Before the passage of the Inflation Reduction Act, a resident of a home was entitled to a non-refundable tax credit for the use of solar electric panels, solar hot water, fuel cells, small wind energy, geothermal heat pumps, and biomass fuel property they had installed for the residence. However, that credit was in the process of being phased out by slowly reducing the credit percentage from 30% to 22%, and the credit was scheduled to end after 2023. With this law change, the credit retroactively returns to 30% for the years 2022 through 2032 when it again begins to phase out and ends after 2034. This means those who qualify for the credit in 2022 benefit from a 30% credit rather than the expected 26% under prior law.
Energy Savings Credit Details
Credit For Energy Efficient Home Modifications – This provision provides a non-refundable tax credit for certain energy-saving improvements to a taxpayer’s home. The credit previously expired at the end of 2021, but under the Inflation Reduction Act has been extended and modified through 2032.
The previous lifetime credit limit of $500 has been replaced with an annual maximum credit of $1,200, and the credit percentage increased from 10% to 30%. Although not a complete list, the following are credit limits that apply to various energy-efficient improvements:
- $600 for credits with respect to residential energy property expenditures, windows, and skylights.
- $250 for any exterior door ($500 total for all exterior doors).
- $300 for residential qualified energy property expenses
- Notwithstanding these limitations, a $2,000 annual limit applies with respect to amounts paid or incurred for specified heat pumps, heat pump water heaters, and biomass stoves and boilers.
- The $1,200 credit amount increased by up to $150 for a home energy audit. A home energy audit is an inspection and written report with respect to a dwelling unit located in the United States and owned or used by the taxpayer as the taxpayer’s principal residence, which identifies the most significant and cost-effective energy efficiency improvements with respect to such dwelling unit.
- The new law eliminates treatment of roofs as creditable after 2022
- The new law adds Air sealing insulation as a creditable expense.
Under the new law, the one making the improvements and claiming the credit need only be a resident of the home and not necessarily the owner.
Tax Credits Highlights
25D – Residential Energy Efficient Property
- Projects in Place 2022-2032 – 30% credit
- Projects in Place 2033 – 26% credit
- Projects in Place 2034 – 22% credit
25C – Non-Business Energy Property Credit
- Up to 30% of qualifying energy efficiency projects cost
- $500 lifetime cap is replaced by $1,200 allotted credit per year starting in 2023
- $150 credit for a home energy audit
- Allotted credit of $2,000 for heat pumps
45L – Energy Efficient Home and Multifamily Credit
- Incentives up to $5,000 per dwelling unit beginning in 2023
- $2,500 for ENERGY STAR certified homes
- $5,000 for Zero Energy Ready certified homes
Summary of Rebates
High Efficiency Electrified Homes
- Up to $14,000 in rebates for families below 150% of Area Median Income for upgrades including $8,000 for heat pumps, $1,750 for water heaters, $1,600 for insulation and air-sealing and $6,500 for electrical upgrades.
- HOMES Program (Homeowner Managing Energy Savings Program)
- Projects that achieve a minimum of 20% energy savings will qualify for rebates, with larger rebates available for energy savings over 35% with a maximum rebate of $8,000.
Inflation Reduction Act FAQ
Q: How do we claim these Inflation Reduction Act benefits?
A: The Inflation Reduction Act offers mostly income tax credits and income tax reductions to individuals and corporate taxpayers. You will claim these on your state and federal tax returns. There are a few exceptions, such as the new EV Rule for 2024. The Inflation Reduction Act lets a buyer transfer their tax credit to a car dealer. A dealer — which must register with the U.S. Department of the Treasury — would get an advance payment of the consumer’s tax credit from the federal government.
Q: What are tax credits versus a tax deduction?
These are tax credits and not deductions. Unlike tax deductions, tax credits reduce your tax liability dollar for dollar. You can only use a tax credit when you have taxable income. However, unused credits can be carried forward to future years.
Q: When will the rebates be available?
A: The rebates will likely not be available until the second half of 2023 or even later. The Energy Department has to first issue rules that govern these new programs. The states that will administer the rebate programs, must then apply for the federal grants and after approval. They may then start issuing rebates to customers. Some states may decide not to apply for the grants. Which means the rebates will not be available to homeowners in those states. I would think that almost all states would apply.