A Look at the Federal Inflation Reduction Act

Voting along party lines, the U.S. Senate passed the Inflation Reduction Act on Sunday. This measure is a package that encompasses taxes, climate and health care issues.

Here’s a breakdown of what this landmark bill entails and how it may impact you/your business:

Corporation Alternative Minimum Tax

• Would increase taxes on corporations by imposing a new alternative minimum tax equal to 15% of income reported on financial statements by certain large corporations – specifically, those whose adjusted financial statement income exceeds $1 billion. The staff of the Joint Committee on Taxation (JCT) estimates that the provision would increase federal revenues by $313.1 billion over the 2023–2031 period (with $96.6 billion of that amount being generated in fiscal years 2023 and 2024). JCT has projected that approximately 150 corporations would be subject to the new tax each year and that just under half of the revenues would come from the manufacturing sector.

Excise Tax on Repurchase of Corporate Stock

• Institutes a 1% excise tax on stock buybacks. The measure could bring in roughly $125 billion; however, it doesn’t take effect until next year and many corporations may choose to repurchase shares before the end of the year.
• This was added to the bill to replace the revenue lost with the removal of language related to carried interest income at the request of Sen. Kyrsten Sinema (D-Arizona).

IRS Funding

• Appropriates approximately $80 billion over the next decade for IRS enforcement activities including the hiring and training of new auditors, IT systems modernization and taxpayer services. It’s estimated that this investment will provide revenues of $124 billion.

Clean Energy Tax Incentives

• Proposes to extend and modify existing incentives currently set to phase out or expire, including the Section 45 Production Tax Credit (PTC) and the Section 48 Investment Tax Credit (ITC):
  • The PTC is currently expired for projects with construction starting after December 31, 2021, but the Build Back Better Act would extend the credit to projects beginning construction prior to January 1, 2027. Solar PTC would be revived and extended through 2026.
  • The base rate of the PTC would be five cents per kWh of electricity produced, with a maximum credit of 2.5 cents per kWh of electricity produced when prevailing wage and apprenticeship requirements are met.
  • A 10% bonus credit would be available for projects that meet the domestic content requirements or those located in qualifying energy or low-income communities.
• Proposes to extend the ITC to projects beginning construction prior to January 1, 2027.
  • The base rate would be 6% with a maximum credit of 30% when prevailing wage and apprenticeship requirements are met.
  • A 10% bonus credit would also be available for projects meeting domestic content requirements or are in energy or low-income communities.
• Taxpayers owning clean energy facilities that would otherwise qualify for certain credits like the ITC and PTC could make an irrevocable direct pay election, which would be treated as tax paid in the amount of the credit. If taxpayer liability doesn’t exceed the amount considered paid, the excess could be refunded. Pass-through entities would be paid directly.
• The following alternative fuel credits would extend through 2026:
  • Biodiesel and biodiesel mixture credits
  • Alternative fuel and alternative fuel mixture credit
  • Second generation biofuel credit
  • Sustainable aviation fuel credit replacing existing credit with refundable blenders tax credit for each gallon of sustainable aviation fuel sold as part of a qualified fuel mixture
• These credits would extend through 2031:
  • Section 45Q carbon capture credit
  • Section 25C residential energy property credit increase to 30%
  • Section 25D residential energy-efficient property credit increased to 30% through 2031, phasing down in 2032 and 2033
  • Section 30C alternative fuel refueling property
• New credits and incentives would include:
  • Section 48D investment tax credit for certain transmission properties
  • Section 45BB clean electricity production tax credit for clean electricity produced at a qualified facility
  • Section 48F clean electricity investment tax credit for qualified investment in an electric-generating facility or any energy storage property
  • Section 45 clean hydrogen PTC for producing clean hydrogen
  • Section 45W zero-emission nuclear power PTC for electricity produced at a nuclear facility
  • Section 45CC clean fuel production credit for producing other clean fuels
• A conditional $4,000 tax credit for the purchase of used electric vehicles (EVs) and $7,500 for new ones:
  • New EVs will need to be built with minerals — such as high-demand lithium and cobalt — that are extracted or processed in a country with which the U.S. has a free trade agreement. And they must include a battery that features a large percentage of components that were manufactured or assembled in North America.
  • Includes a cap on the suggested retail price of eligible vehicles of $55,000 for new cars and $80,000 for pickups and SUVs. Credits would be capped to an income level of $150,000 for a single filing taxpayer and $300,000 for joint filers for new vehicles, and at $75,000 and $150,000 for used cars.

Resource: Greg Ellis at (317) 264-6881 or email: gellis@indianachamber.com