The Inflation Reduction Act was signed into law on August 16, 2022, and provides several new tax-saving opportunities that businesses and organizations need to consider. To help clients, prospects, and others, we have provided a summary of the key details below.
New Corporate Taxes
The limitation on excess business loss deductions is extended another two years. It will now expire on December 31, 2028, instead of 2026.
This tax provision limits pass-through entity shareholders and owners to $250,000 in business losses to offset non-business income. The deduction limit is indexed for inflation and rises to $500,000 for joint filers
Large C Corporations
A new corporate alternative minimum tax will be levied against the largest C Corporations starting in 2023. The new corporate AMT will be 15% for businesses required to pay it.
Corporations that are required to pay the AMT are those with financial statement income over $1 billion.
Once a corporation has met this threshold, it is subject to the tax in future years as well, unless it falls below $1 billion for a certain number of years.
S-corporations, real estate investment trusts (REITs), and regulated insurance companies are exempt from the corporate AMT.
In addition to the corporate AMT, more public companies will be subject to the new one percent non-deductible stock buyback excise tax. Both common and preferred stock buybacks are subject to the tax. The excise tax generally won’t apply for stock buybacks related to a tax-deferred reorganization, retirement plans, or employee stock ownership plans. Buybacks with an annual total value of less than $1 million and buybacks treated as dividends are exempt as well.
Both new taxes are set to take effect on January 1, 2023.
Business Tax Credits
Three tax incentives – the Research and Development (R&D) credit, Section 179 deduction, and Section 45L residential home tax credit – have been expanded.
First, the R&D credit will be able to offset as much as $500,000 in payroll taxes. This is double the current amount.
Next, the construction and real estate industry will benefit the most from the expanded Section 179D deduction for energy-efficient building design. While the base deduction amount will be lowered to $0.50 to $1.00 per square foot, a bonus deduction ranging from $2.50 to $5.00 per square foot is available to projects that utilize prevailing wage and apprenticeship requirements. The new rates will be in effect for qualifying property placed in service after December 31, 2022f. Finally, home builders will see a reinstated Section 45L residential energy efficiency tax credit. The credit had expired at the end of 2021. It is now reinstated and worth up to $500 for Energy Star manufactured homes or $5,000 for net zero single-family homes. Certain multi-family units can qualify for bonus credits of up to $2,500 or $5,000, depending on the level of energy efficiency.
New Tax Credit for Commercial Electric Vehicles
Businesses with fleet vehicles can receive generous tax credits, too. Section 45W applies to electrified commercial vehicles acquired before the end of 2032. The tax credit is either 30 percent of the vehicle sales price or the vehicle’s incremental cost, whichever is less. Vehicles less than 14,000 pounds have a maximum credit of $7,500 and vehicles more than 14,000 pounds have a maximum credit of $40,000.
If you have questions about the information outlined above or need assistance with an accounting or tax issue, Smith Schafer can help. We look forward to speaking with you.