Inflation Reduction Act of 2022

August 25, 2022

You’ve probably heard by now that last week President Biden signed into the law the Inflation Reduction Act of 2022. This legislation is a remnant of President Biden’s Build Back Better Plan. The proposal seemed dead for nearly a year; however, a compromise on a scaled back plan was finally reached, surprising nearly everyone

So, what does this mean for you?

The Inflation Reduction Act of 2022 is massive, with more than 300 pages of tax related changes. In this newsletter we attempt to cover the most relevant portions affecting the majority of our clients.  

IRS Funding

A key strategy in generating revenue for this legislation is through improved funding of the IRS to close the “tax gap.” The tax gap refers to the difference between what should be collected by the IRS and what is actually collected. It is believed that this small investment in IRS resources will help close the gap by allowing the IRS to enforce already existing tax laws in a more effective manner.

This provision only increases the IRS budget, so there could be an increase in examinations (IRS audits) due to the budget increases. Treasury Secretary, Janet Yellen, has issued a directive that the IRS should implement new programs in such a way as not to increase examinations of taxpayers making less than $400,000 per year. This directive also complies with President Biden’s campaign promise to not increase taxes on taxpayers earning less than that amount.

Green Energy

The majority of the surviving expenditures in the Inflation Reduction Act of 2022 come in the form of tax credits for green energy initiatives. There is a large variety of these initiatives in this legislation, but here is an overview of the items we think may be most relevant to our clients:

Residential Energy Incentives

The credit for non-business properties implementing certain energy efficient improvements has been extended through 2032. This credit applies to energy efficient windows and doors, as well as certain HVAC systems and heat pumps. Previously this credit had a lifetime limit which has been replaced with an annual limit of $1,200.

The residential energy efficient property credit, which provides a credit for the installation of equipment like solar panels and wind turbines, has been renamed the clean energy credit and been extended through 2034.

Clean Vehicles

The credit for the purchase of “clean vehicles”, which includes both plug-in electric vehicles and fuel cell vehicles, is extended and modified through 2032. The modifications require the final assembly of the vehicle to take place in North America and includes sourcing requirements for critical components of the vehicle and battery systems.

The maximum amount of the credit remains at $7,500, but includes income limitations, as well as limitations on the manufacturer’s suggested retail price.

Elective Direct Payment

In lieu of a tax credit, entities can elect to claim a direct payment for certain energy projects. Some examples of a credit for which a direct payment can be claimed include the alternative fuel refueling property credit, the renewable electricity production credit, the carbon oxide sequestration credit, the energy investment tax credit and qualifying advanced energy project credit. A penalty will apply if the taxpayer receives a larger direct payment than the credit to which it is entitled.