The Inflation Reduction Act of 2022 (IRA ’22) is generally considered to be ‘Build Back Better Light’ (note: we briefly covered the President’s ‘Build Back Better’ proposal in 2021 Year-End Tax-planning Tips for Business Owners here on the SWC blog.). Many of its provisions are clearly intended to offset the costs of transitioning to green energy for consumers, as explained in Part 1 and Part 2 of this four-part series.

However, the IRA ’22 also contains several provisions that apply specifically to businesses and corporations — some of which provide similar incentives for adopting green energy alternatives and others which clearly target businesses and corporations to increase tax revenue — presumably to help cover the cost of this Act.

In this, Part 3 of our series, we get down to business as we highlight what business owners and corporate leaders need to know about the IRA ’22.

Inflation Reduction Act's Tax Implications for Businesses and Corporations

 

Green Energy Tax Incentives: Extended and Revised

Many of the energy credits available to businesses before the enactment of the Inflation Reduction Act of 2022 have been extended and revised by the Act. Below are highlights of some of the changes made to existing business energy credits and incentives:

  • Revises the Internal Revenue Code (IRC) §179D Energy Efficient Commercial Buildings deduction as follows:
    • The deduction is increased for taxpayers who meet specified prevailing wage and apprenticeship requirements (see below) and decreased for taxpayers who do not. (For additional information on prevailing wages, visit the U.S. Department of Labor’s prevailing wages webpage.)
    • Allows additional increases for achieving specified energy savings targets.
    • Replaces the lifetime cap on the deduction with a three-year cap.
    • Updates the efficiency standards that must be met.
    • Allows tax-exempt entities, including governmental agencies, to allocate the deduction to the designer of the building or the qualified retrofit plan.
  • Modifies the Renewable Electricity Production Credit in the following ways:
    • Extends it to facilities that begin construction before 2025.
    • Expands it to cover solar and geothermal energy facilities and to provide a full credit for wind facilities, hydropower, marine, and hydrokinetic facilities.
    • Reduces the credit by 80 percent for taxpayers who fail to meet the prevailing wage and apprenticeship requirements (discussed later in this post).
    • Increases the credit to taxpayers who use U.S. steel, iron, or other manufactured products or are in certain energy communities (for example, brownfield sites, or locations where fossil fuel employment has suffered).
  • Modifies the IRC §48 Energy Investment Tax Credit (which businesses use to claim solar credits and other energy efficiency-related credits) in the following ways:
    • Extends the credit for an additional year to apply to property for which construction begins prior to 2025.
    • Expands the credit to a broader range of energy property, such as energy storage technology and microgrid controllers.
    • Reduces the credit from 30 percent to 6 percent for taxpayers who fail to meet the prevailing wage and apprenticeship requirements discussed later in this post.
    • Increases the credit for taxpayers who meet the domestic content / component requirement or are in certain energy communities (for example, brownfield sites and sites where coal mines were closed) and for projects that receive an environmental justice allocation from the U.S. Secretary of the Treasury.
    • Restores the Qualified Advanced Energy Property Credit component of the Investment Tax Credit.
  • Increases the New Energy Efficient Home Improvement Credit for eligible contractors and manufactured home builders from a maximum of $2,000 to $5,000 per unit. (For multifamily homes, contractors / manufacturers must meet prevailing wage rate requirements to qualify for the maximum credit.)
  • Revises the Alternative Fuel Vehicle Refueling Property Credit as follows:
  • Extends it through 2032.
  • Limits the availability of the credit beginning in 2023 to property placed in service in low-income or rural census tracts.
  • Decreases the credit by 80 percent unless the taxpayer meets specified wage and apprenticeship requirements.
  • Increases the credit by replacing the $30,000 per-location limit for depreciable property to $100,000 per item.
  • Expands the definition of eligible property.
  • Extends various biodiesel and alternative fuel credits as well as the Carbon Oxide Sequestration Credit.

Wage and Apprenticeship Requirements

To qualify for the maximum tax benefits described in the previous section, you must ensure that:

  • Any laborers and mechanics your business employs directly or any contractors or subcontractors involved with construction, repair, or alteration of the facility are paid the prevailing wage for the area where the facility is located.
  • Qualified apprentices perform at least 10 percent (12.5 percent in 2023; 15 percent thereafter) of total labor hours of the project. If your business or a contractor/subcontractor you hire employs at least four individuals to work on the project at least one of them must be a qualified apprentice.

You can be relieved of the apprenticeship requirement if you apply to a registered apprenticeship program and either are denied or fail to receive a response. You can “cure” compliance issues by coming into compliance and paying significant penalties to the Secretary of the Treasury.

Selling Your Business Energy Tax Credits

Beginning after December 31, 2022, if you’re eligible for any of these business energy tax credits, you can elect to sell your credits or a portion of them to another taxpayer.

Credits you can sell include, but are not limited to, the following:

  • Renewable Electricity Production Credit
  • Clean Electricity Production Credit
  • Energy Investment Credit
  • Clean Electricity Investment Credit

See IRC section 6418(f) for a complete list of eligible credits.

If you sell credits, the money you receive is not reported as income. If you’re buying credits, you can’t deduct the cost as an expense.

A credit can only be transferred once. An irrevocable election must be made by the extended due date for the return for the taxable year for which the credit is determined, but in no event earlier than 180 days after August 16, 2022 (the date the Inflation Reduction Act of 2022 was enacted).

Beginning with the 2023 taxable year, eligible taxpayers may elect to be treated as having made a payment of tax equal to the value of the credit they would otherwise be eligible for, which would essentially turn these otherwise nonrefundable credits into refundable credits. This option may apply only to certain credits and is not available for most for-profit businesses.

New Business Energy Credits

The Inflation Reduction Act of 2022 makes available the following new business energy credits:

  • Qualified Commercial Clean Vehicle Credit up to $40,000 ($7,500 for vehicles weighing less than 14,000 pounds) for depreciable qualified vehicles meeting specified energy standards that are purchased after December 31, 2022. To qualify, a vehicle must meet the following criteria:
    • Acquired for use or lease by the taxpayer, and not for resale.
    • Manufactured for use on public streets, roads, and highways, or be “mobile machinery.”
    • Have a battery capacity of not less than 15-kilowatt hours (7-kilowatt hours for vehicles weighing less than 14,000 pounds).
    • Charged by an external electricity source. Qualified commercial fuel cell vehicles are also eligible for the credit.
    • Must be depreciable property.
    • Made by qualified manufacturers, who have written agreements with and provide periodic reports to the Treasury.
  • Sustainable Aviation Fuel Credit
  • Credit for Production of Clean Hydrogen
  • Advanced Manufacturing Production Credit

Research Credit

The Inflation Reduction Act of 2022 doubles the Research Credit from $250,000 to $500,000 per taxable year beginning with the 2023 taxable year. You can apply this credit against your business’s payroll taxes, which makes it very attractive to startups that may have limited income but significant payroll expenses.

Qualified Small Business? A qualified small business is a business with gross receipts for the taxable year of less than $5 million and that did not have gross receipts for the preceding five taxable years.

The Corporate Minimum Tax

To raise funds to help pay for the other provisions in the Inflation Reduction Act of 2022, the legislation includes a new corporate minimum tax of 15 percent to be imposed on corporations with an average book income of over $1 billion. This provision is projected to raise $258 billion over 10 years.

The Excise Tax on Corporate Stock Buybacks

Stock buybacks occur when a company repurchases shares in the company that it sold in the past, resulting in fewer outstanding shares. This tends to benefit corporate executives by increasing the value of the shares they own. It does not generally result in increasing worker wages, driving research and development, or funding other productivity-boosting investments. The Inflation Reduction Act of 2022 imposes a 1 percent excise tax on stock buybacks. This provision is projected to raise $74 billion over 10 years.

The excise tax does not apply to any of the following:

  • A reorganization (g., merger or consolidation), in which no gain or loss is recognized by the shareholder(s).
  • Instances in which the stock repurchased, or an amount of stock equal to the value of the stock repurchased, is contributed to an ESOP (employee stock ownership plan), ESPR (employer-sponsored retirement plan), or similar plan.
  • Any case in which the total value of the stock repurchased during the taxable year does not exceed $1 million.

Extension of Excess Business Loss Limitation

The Inflation Reduction Act of 2022 extends the excess business loss limitation an additional two years through the 2028 taxable year. The excess business loss limitation limits the amount of noncorporate business losses that can offset nonbusiness income to $270,000 ($540,000 for those who are married and file jointly).

Although you can certainly make a case for referring to the Inflation Reduction Act as Build Back Better Lightor the Green Energy Bill, it has some additional provisions that go beyond encouraging the transition to clean energy, stimulating research and development, and trying to make U.S. businesses more competitive. Tune in next week for Part 4 in this series, to find out more about these other provisions.

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Disclaimer: The information in this blog post about tax implications for businesses and corporations as a result of the passage and signing into law of Inflation Reduction Act of 2022 is provided for general informational purposes only and may not reflect current financial thinking or practices. No information contained in this post should be construed as financial advice from the staff at SWC (Stees, Walker & Company, LLP), nor is this the information contained in this post intended to be a substitute for financial counsel on any subject matter or intended to take the place of hiring a Certified Public Accountant in your jurisdiction. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate financial planning advice on the particular facts and circumstances at issue from a licensed financial professional in the recipient’s state, country or other appropriate licensing jurisdiction.