Business Tax Provisions in the Inflation Reduction Act

Earlier this month, President Biden signed the Inflation Reduction Act (Act) into law. It was a significant step forward in accomplishing the Administration’s climate change agenda. Passed through the Senate budget reconciliation process, it’s much less expensive than the non-starter Build Back Better Act but includes several provisions which originated with that legislation. Still, it is the single biggest climate action bill to date with additional measures to lower healthcare costs. Controlling two highly volatile cost centers – healthcare and energy – is the central focus and is expected to help control inflationary pressures. The good news is there are several tax incentives and other saving opportunities available to Atlanta businesses. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key provisions below.    

Business Energy Tax Credits and Extenders

To stimulate individual and business energy efficiency, the Inflation Reduction Act makes changes to several existing energy tax credits, extends others, and adds new energy tax incentives. Most of the revenue to pay for the extra tax breaks will come from a minimum corporate tax on book income and stepped-up IRS enforcement.

Commercial Buildings, R&D, and Contractors

Starting in 2023, there will be a higher deduction amount for Sec. 179D, with new prevailing wage requirements.

The R&D tax credit has been expanded for small businesses. Currently, small businesses and startups can claim Sec. 41 against up to $250,000 in payroll taxes; the Inflation Reduction Act increases that amount to $500,000.

The Section 45L energy efficient home tax credit has also been increased to $2,500, or $5,000 for net zero energy homes. The bonus amount for multi-family homes is still available but will be tied to prevailing wage requirements.

Production and Investment Tax Credits

Production tax credits for renewable power sources have been extended and, in some cases, enhanced. “Current law provides a[n inflation-adjusted] production tax credit (PTC), at a rate of 2.5 cents or 1.3 cents per kilowatt hour (kWh) depending on the technology used, for the first 10 years of production at qualifying renewable electricity production facilities that began construction before 2022.”

The PTC has been extended to 2025 for wind, biomass, geothermal, solar, landfill gas, trash, qualified hydropower, and marine and hydrokinetic resources. Solar power PTCs previously expired in 2005.

Investment tax credits (ITCs), which are based on the upfront capital cost to build the facility, are currently available on a temporary basis for certain types of energy property. Generally, investment tax credits are now extended through 2024 at a base rate of six percent for solar, fuel cells, waste energy recovery, combined heat and power, small wind property, and two percent for microturbine property. ITC amounts can be increased substantially for projects paying the prevailing wage.

Onshore and offshore wind facilities can also qualify for both types of tax credits if construction starts before 2034. Smaller facilities may also become eligible.

Stand-alone energy storage also qualifies for the investment tax credit by allowing the taxpayer to elect out of public utility property status.

Hydrogen

Section 45V, a new production tax credit for qualified clean hydrogen, applies to eligible facilities producing or selling qualified clean hydrogen starting in 2023. The Sec. 45V tax credit would apply for ten years beginning on the date the facility is placed in service. The amount of the credit depends on the facility’s lifecycle greenhouse gas emissions and ranges from 20 percent to 100 percent. Any credit amount can be increased by up to five times its original value if the facility adheres to federal wage and apprenticeship standards.

Hydrogen facilities also have the option to claim an ITC instead.

Carbon Capture & Storage

Section 45Q, a tax credit for carbon capture and storage, has been extended and expanded. It is now available for projects that start construction before 2033 at a higher rate. Further, the threshold for carbon dioxide capture has been decreased, allowing more facilities to potentially claim the credit. Direct air capture systems can result in a higher tax credit.

Advanced Manufacturing

Section 48C, an investment tax credit, and Section 45X, an advanced manufacturing production tax credit, have been reinstated and added, respectively, to spur production on advanced energy and manufacturing projects. Eligibility would require companies to produce and source certain components in the U.S.

Business Taxes

Finally, the largest corporations will be subject to a new 15 percent tax on book income. Corporations with an average of $1 billion in financial statement income for three consecutive years are subject to the tax, as well as certain foreign corporations with $100 million or more in revenue.

There are two exceptions:

• Manufacturers and other corporations that use accelerated depreciation for any type of tangible, depreciable property
• Corporations owned by private equity funds

Proponents say that most corporations sidestep the flat 21 percent tax rate, while critics point to the possible discrepancies between materiality and compliance challenges.

The new corporate tax will take effect for tax years beginning in 2023.

Corporations will see another tax in the form of a one percent stock buyback excise tax. This new non-deductible tax is expected to raise about $73 billion in revenue and replaces the carried interest tax on private equity income, which was scrapped in the final Senate version. It also takes effect in 2023.

Pass-through entities weren’t entirely spared, either. The limitation on business loss deduction has been extended for two years. Originally set to expire in 2027, it prohibits owners and shareholders of pass-through entities to use more than $250,000, adjusted for inflation, in business losses to offset non-business income.

Contact Us

While these changes will not impact taxpayers until 2023, it is essential to understand the upcoming changes to determine how your Atlanta business will be impacted. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.