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The Inflation Reduction Act (IRA) comes with promises to reduce greenhouse gas emissions in the United States by 40 percent over the next ten years. The legislation invests $385 billion in clean energy opportunities for both individuals and businesses. More specifically, it is intended to incentivize investment to transition the energy grid, strengthen the domestic supply chain, reduce carbon emissions, and diversify energy sources. Funding for the legislation comes from three main sources: a new corporate tax, a new excise tax targeting corporate stock buybacks, and sharply increased IRS enforcement activities. There are also a number of changes to existing incentives and credits, including Section 179d and Section 45L. To help clients, prospects, and others, JLK Rosenberger has provided a summary of the key details below.
Instead of raising the tax rate, the IRA imposes a new tax on corporate book income taking effect in 2023. The new 15 percent alternative minimum tax will affect about 150 corporations and is expected to net about $300 billion in tax revenue. It applies to corporations with an average annual adjusted financial statement income of at least $1 billion for the last three years. Some foreign corporations with $100 million in annual revenue in the past three years are also subject to the alternative minimum tax.
REITs, S-corporations, and regulated insurance companies are exempt, and there are exceptions for corporations that use accelerated depreciation and private equity-owned corporations.
An excise tax on stock buybacks will impact more businesses as the annual revenue threshold is lower and also takes effect in 2023. Buybacks of both common and preferred stock with an annual total value of more than $1M will be taxed at one percent. It is expected to net about $73 billion in new tax revenue. It’s meant to replace the carried interest tax on private equity income originally included in the IRA’s Senate version.
There are some exemptions to the excise tax. Some types of liquidations and reorganizations fall outside the tax’s scope. Buybacks related to SPACs, ESOPs, retirement plans, and cash distributions to dissenting shareholders aren’t affected, either.
And while none of the tax changes are explicitly aimed at California companies, the excise tax on stock buybacks is likely to affect Golden State companies like Apple, Alphabet, Meta, and Oracle. Combined, they were reported to have spent several billion dollars in stock buybacks in recent years.
R&D Tax Credit
The R&D tax credit, Section 41, has also been expanded. For start-ups, starting in 2023, its value, when taken against payroll taxes, is doubled to $500,000.
Pass-through Entity Cap
Pass-through entity shareholders and owners will have to wait another two years for a cap on the business loss deduction to expire. Through 2029, the limit on business losses that can offset non-business income remains at $250,000. This amount is adjusted annually for inflation.
Finally, the IRA allocates $80 billion over the next ten years to the IRS. In addition to enforcement, the IRS will also get more funding to upgrade and modernize its systems, improve taxpayer services, and bolster operations. The agency will spend most funds on collecting taxes, bringing criminal tax evaders to justice, and improving overall tax compliance.
Specific Business Green Energy Tax Provisions
The rest of the changes relate to energy tax incentives. Two energy-efficient building incentives, the Section 179D deduction, and the Section 45L credit have been extended and expanded for commercial and residential buildings, respectively.
Section 179D is a deduction of $0.50 to $1.00 per square foot for energy-efficient upgrades to the building envelope, HVAC, or lighting systems. Bonus deductions of $2.50 to $5.00 per square foot can be taken for projects that meet prevailing wage and apprenticeship requirements. In either case, buildings must achieve at least a 25 percent reduction in energy costs. REITs can now use Section 179D.
Section 45L is a per-unit tax credit for single- and multi-family homes, student and senior citizen housing, condos, and townhomes. The credit varies from $500 to $1,000 for multi-family units or $2,500 to $5,000 for single-family homes. Credits are doubled for projects with prevailing wage labor.
There are several production and investment tax credits for clean energy projects.
- Section 48C: advanced manufacturing investment tax credit
- Section 45Q: carbon capture and storage
- Production tax credits for wind, biomass, geothermal, solar, landfill gas, trash, qualified hydropower, and marine and hydrokinetic renewable energy projects
- Production tax credits are taken in the first ten years a facility is operational. They’re longer-term tax incentives.
- Solar power production tax credits previously expired in 2005.
- Investment tax credits for solar, fuel cells, waste energy recovery, combined heat and power, small wind property, and microturbine property
- Investment tax credits are taken against the upfront facility building costs at the beginning of the project. They are shorter-term tax incentives.
These credits require domestic production and sourcing for certain components, and there are generally bonus credits for projects using prevailing wage labor. Tax credits can be increased by 10 percent for projects that are established in communities that used to rely on fossil fuel production.
A tax credit for commercial electric vehicles (Section 45W) ranges from $7,500 to $40,000, depending on vehicle weight.
Finally, new tax credits target hydrogen (Section 45V), advanced manufacturing (Section 45X), nuclear energy (Section 45U), and clean electricity production and storage (Section 48E).
Impact On Industries
Over the next ten years, the Biden administration says the IRA will reduce the federal deficit by more than $300 billion, and they also predict that small businesses will benefit indirectly from a stronger, more stable economy, a more resilient domestic supply chain, extended Affordable Care Act subsidies, and lower energy and operational costs if they invest in energy-efficient systems.
Energy utilities and power providers are the clear winners from a tax bill that centers heavily on production and investment tax credits for clean and renewable energy. While power producers will directly benefit from several tax incentives, other ancillary industries, like construction, will be needed to build new facilities.
Construction and real estate companies are among the other big winners of the expanded energy-efficient building tax incentives, provided they can meet prevailing wage requirements. Even smaller contractors could see indirect benefits from a higher demand to install new energy-efficient systems and building upgrades. If nothing else, the IRA provides a roadmap for where increased demand is likely to be in the coming years.
Advanced manufacturers and suppliers that meet domestic production and sustainability requirements also stand to benefit from investment and production tax credits.
We’re here to help
The IRS is expected to issue additional guidance in the coming months. Since some incentives are retroactive and others do not phase in for a few months, businesses will likely need help identifying the best opportunities to leverage. If you have questions about the information outlined above or need assistance, call 949-860-9902 or click here to contact us. We look forward to speaking with you soon.