4 Ways the Inflation Reduction Act Can Help Your Business

The tax code is an unwieldy beast that isn’t fun to tangle with. Lucky for us, we got our latest addition to the code in August. This means we get to parse through it to find opportunities for planning. After all, an integral part of tax planning is being PROACTIVE.

This blog may help you understand the new Inflation Reduction Act or IRA, including possible opportunities for planning that may apply. However, the entire list of possible programs would lead to a blog longer than anyone would like to read. So, we are going to focus on two key areas: individuals and business owners.

In this blog, we are going to cover:

• New Corporate Taxes
• ACA Premium Credit Extensions
• New Tax Credits for Energy Efficiency
• New Tax Credits for Electric Vehicles
• Additional IRS Funding
  

New Corporate Taxes

The larger headline for corporate taxes is more about what was excluded than what was included in this bill. The bill didn’t include an additional tax on S-Corps, increased income tax rates, increased capital gains rates, a surtax on people earning $5mm, an increase in Social Security Taxes, and much more. What it did include was much more limited in scope:

• Excess Loss Limitations – the bill extended the excess loss limitations through 2028. These were originally passed as part of the 2017 tax bill and were scheduled to expire in 2025. An operating loss exceeding $262,000 for single and $524,000 for MFJ is not allowable.
• Buyback Tax – an additional 1% excise tax was added to corporate buybacks. This may not affect you directly but will affect decisions companies make in your portfolio.
• Corporate Minimum Tax – a 15% minimum tax on corporations making more than $1 billion on average was instituted.
  

Planning Opportunities:

These are fairly mundane. I see no major planning opportunities here for business owners outside of large corporations.

ACA Premium Credit Extensions:

A small yet important area of this bill that could affect a broad swath of the country are the extensions to ACA Credit eligibility. As part of COVID relief bills, ACA premium tax credit eligibility was enhanced and this enhancement was set to expire at the end of 2022. The new bill doesn’t change this but does extend the increased eligibility through 2025.

Planning Opportunities:

A creative way to consider the use of these credits is if you are considering retiring before you are eligible for Medicare. If you can keep your income low (for example, by living off of savings that are non-taxable). You can qualify and take full advantage of the credits. This can help bridge the gap to Medicare!

IRA Energy Efficiency Tax Credits—What Are They and How Can I Qualify?

Bear with me here, folks. This could be a long section because there’s a lot to chew on! The Inflation Reduction Act doesn’t create a new tax credit. Instead, it makes significant changes to tax credits related to home energy efficiency.

Before the IRA:

• $ 500 lifetime credit for home efficiency
• 10% of eligible expenses were credited
  

After the IRA:

• $1,200 annual credit for home efficiency
• 30% of eligible expenses can be credited.
  

As you can see, this is a substantial improvement! Not only does the amount go up, but the lifetime value is significantly higher with the change to an annual credit. So how does it work?

Date: The new credit goes into effect 1/1/2023 and is in effect through 12/31/2032.

Limits: First, the good news: while this credit only applies to your primary home, there are no income limits!

Types of Property: Eligible expenses for the credit include energy efficiency improvements, residential energy property expenditures, and home energy audits. This is fairly broad, but there are technical requirements underlying the law that must be in place to qualify.

There are also various types of property with sub-limits under the $1,200 annual maximum. The following chart shows various types of property and their associated limit.

To see this in action, let’s say that you spent $10,000 installing skylights. Rather than qualifying for the $1,200 maximum credit, you would only qualify for $600. You could then couple this with another type of property, but the skylights would not count.

If you look at the above chart, you’ll notice that Heat Pumps have a credit of $2,000 while the total maximum is $1,200. Heat Pumps are an exception and do not go towards the $1,200 annual maximum. They can be installed separately.

Planning Opportunities:

There are two major items to review with regard to planning. First, if you have a major project that will result in a credit higher than $500 that you are considering this year, maybe do a portion of it this year and then save the remainder for next year when the credit increases to $1,200. Second, staggering projects across years to maximize the credit will help you save the most in taxes. For example, if you start a project in December, maybe hold off on doing part two if it is separable for January.

Residential Clean Energy Credits (Solar for most people) –

This is another credit that is not new. The current credit for solar installment expires at the end of 2023. The IRA extends the clean energy credit through 2034. It also broadens the definition of what type of battery technology can qualify.

Qualifying Technology:

• Qualified solar electric property expenditures
• Qualified solar water heating property expenditures
• Qualified fuel cell property expenditures
• Qualified small wind energy property expenditures
• Qualified geothermal heat pump property expenditures
• Qualified biomass fuel property expenditures
• Qualified battery storage technology expenditure.
  

Eligibility:

The only requirement for eligibility (outside of qualifying technology) is that the installation occurs at a residence. Fuel cells are required to be at a primary residence, but the others can be at a primary or secondary residence. The basis of your home will be reduced by the credit received.

Business Use:

If your home is also used for business, your credit may be affected.

• If your home is less than 20% business use, there is no change.
• If your home is greater than 20% business, your credit will be reduced by the portion of the home used for business purposes and may need to be classified as a depreciable asset.
  

Planning Opportunities:

No major planning opportunities here. If you have thought about solar, your window just increased by ten years!

Clean Vehicle Credit—What Is the EV Credit?

As with most other credits we have discussed, the EV Credit starts as a modification of an existing credit but then adds new credits as well. We are going to focus more on the qualities of the credit moving forward rather than comparing it to the old credit.

How much is the new EV Credit?

The new credit is $7,500.

You receive $3,750 for the critical minerals being sourced properly and $3,750 for the battery, meeting certain requirements for a total of $7,500.

What are the requirements?

There are 3 main requirements for the new EV Credit.

1. The final assembly of the vehicle must take place in the USA
2. Certain critical minerals must have been sourced from the USA or a free trade partner
3. Certain battery components must be sourced from the USA or a free trade partner

A DOE Guide to which cars are assembled in America is linked here. Right now, I cannot speak to the battery and minerals components, but the dealers should inform you as you consider a new vehicle.

Limits:

There are two main limits with this credit – income & MSRP.

Income – must be below the following:

• $300,000 for Married Filing Joint or surviving spouse
• $225,000 for Head of Household
• $150,000 for all others (single, married filing separately)
  

MSRP – sales price must be below:

• $80,000 for vans, SUVs, trucks
• $55,000 for all others
  

As you can see, these credits not only limit certain buyers but also limit certain car companies’ pricing decisions.

Additional Notes

• The new credit goes into effect on 1/1/2023.
• Some cars may not qualify due to material sourcing for a year or two
• Starting in 2024, you may transfer your credit directly to your dealer during purchasing rather than waiting until tax returns are filed to receive your credit.
  

Planning Opportunities:

I see two main options with regard to planning. The first would be timing your purchases based on your income that year. Second, would be to weigh the benefits of filing separately and not jointly for the year you purchase a car.

For example, if one spouse works and the other stays at home, you could file separately and have the lower-earning spouse claim the credit. This decision would have to be weighed as part of your total tax picture but could be beneficial.

Used EV Credit:

The new bill also creates a new tax credit for used cars.

How much is the used EV Credit:

30% of the sales price up to $4,000.

What are the requirements for the used EV Credit?

There are several requirements related to the credit that are not present in the new credit.

• Model Year must be at least 2 years prior to the year of purchase. To qualify in 2023, the car must be a 2021 model or earlier.
• Vehicle must be sold by a dealer. You will not qualify by buying from a friend or off Craigslist.
• Sales Price cannot exceed $25,000.
• Cannot be purchased for resale.
• Cannot have claimed same credit within last 3 years
• Cannot be a dependent
• First transfer since 8/16/2022 other than to original owner
• One requirement that does not apply are the battery and mineral requirements
  

Income Limits:

The income limits for this credit are as follows:

• $150,000 for Married Filing Joint or surviving spouse
• $112,500 for Head of Household
• $75,000 for all others (single, married filing separately)
  

Commercial Vehicle Credit: How Much is commercial EV Credit?

The final EV credit in the bill is the commercial EV credit. This credit could prove to be very beneficial for business owners.

How much is the Commercial EV Credit?

There is a two-step calculation for this credit.

First, the credit is based on the lesser of the following two items:

• 30% of the cost basis of a fully electric vehicle or 15% of an electric vehicle with gas/diesel components, or
• Incremental cost of the electric model vs. the gas model (if the F-150 gas model cost $30,000 and the F-150 Lightning model cost $45,000, the incremental cost would be $15,000).
  

Second, there is a maximum cap based on weight:

• Under 14,000 pounds, the maximum credit $7,500
• Over 14,000 pounds, the maximum credit is $40,000
  

To arrive at your final number, you need to calculate your maximum eligible credit in step 1 and then apply your applicable cap in step 2.

Requirements

The requirements for the commercial credit are as follows:

• Made by a qualified manufacturer
• Original use by the taxpayer (aka no used sales)
• Must NOT be purchased for resale (aka have to use this in business)
• Treated as a vehicle under Clean Air act
• Subject to Depreciation
• Must be fully electric and battery must meet standards (15 Kw hours over 14,000 lbs and 7 Kw hours under 14,000 lbs
  

Why Is the Commercial Cap Better?

One thing that you will notice from the requirements list is that there are several items missing from the commercial list when you compare it to the individual list. It appears that the commercial credit has much fewer limitations, assuming you are operating a business and the vehicle will be used in the business.

1. Income Limit – there is no income limit on owners/business
2. MSRP Limit – there is no MSRP limit on sales price
3. Battery Components – the new battery components rules do not apply
4. Minerals – the new minerals rules do not apply
5. Manufacturing Rules – manufacturing in NA rules do not apply
   

When you take a step back and look at it, the rules for business credits look much more favorable than the individual credits. To me, it appears that the income limit and MSRP limits don’t apply because they want to encourage corporate use which makes sense. The item that I am confused about is that corporations appear to be exempt from the new component rules. While it doesn’t make sense to me, this would allow businesses to access a much wider range of vehicles for use with the credits. If I see an update on this, I will update this article.

Planning Opportunities:

The major planning opportunity that arises from the difference in the commercial and individual credits is to purchase vehicles through the business. However, the keynote is that there has to be a legitimate business purpose and use to the decision to purchase the vehicle through the business.

Other Business/Uncommon Credits:

There are also a few credits that are new that I wanted to mention, but do not believe they are widespread enough to focus on. They are the following:

• Renewable Electricity Product Credit – credit for renewable electricity that is sold to an unrelated party
• Energy Investment Credit – credit for energy property placed in service and eligible for depreciation
• Energy Efficient Home Credit – credit for developing energy efficient homes & apartments (this can be a big one if you are a Real Estate Developer)
• R&D Credit for Startups – improved amounts
• Alternative Fuel Refueling Credit – credit for qualified refueling property placed in service (EV stations at gas stations, etc.)
  

IRS Funding: What is it and should I be worried?

The last item I wanted to address was the prospect of further IRS funding. There’s been noise, misleading statements, and maybe even a little hysteria over the prospect of 87,000 armed IRS agents knocking on your doors and demanding their tax dollars. As you can tell by my tone…I think this is… overdone to say the least. I wanted to wrap this blog up by going through the funding and showing you how the money is allocated to be spent.

Some Spending Figures –

• 3.18 billion for taxpayer services
• 4.75 billion for systems modernization (this one could be very helpful)
• 45.6 billion for enforcement
• 25.3 billion for operations
• Other miscellaneous funds
  

These funds are sorely needed. Specifically, some of the IRS programs run on COBOL, a coding language that isn’t in use by today’s modern applications. According to this Washington Post story, there’s one machine that operates on 1970s technology, and the company who manufactured it went out of business. One employee knows how to fix it and that’s it.

The second item is enforcement. It’s everywhere in the news that 87,000 new IRS employees will be gunning for you and coming to get your money. Over the next 5 years, 50,000 IRS employees will be eligible for retirement! These new hires will increase the workforce but are also needed to supplement those retirees.

The reality is that these new employees will be a mixture of customer service hires, revenue agents, and operations staff. Revenue agents will be trained to look at your tax returns, not through the barrel of a gun. I would imagine that in some extremely rare cases they will have to raid a recalcitrant taxpayer’s business but this would be a vanishingly small amount of cases with a correspondingly small amount of hires related to them. The average case would be handled via mail, phone, and email and the new staff will hopefully make that faster.

An additional note is that the IRS commissioner has stated they are specifically going to target certain areas like conservation easements, cryptocurrency, and other various listed transactions ripe for abuse. Secretary Yellen has also stated that audit rates for those under $400,000 should not increase. This can obviously change, but the intention to go after larger tax shelters is apparent.

While this is good, as it helps prevent abuse, it will most likely take new agents several years to get trained on how to handle these. Complex topics won’t be handled by an entry-level staff with minimal training. While I am personally not worried about the bill, I do think that if you are taking aggressive positions on tax shelters, you would be advised to review whether you wish to continue with those positions.

All in all, if you’ve had a notice sent out in error in the last few years, or you’ve had to call the IRS for customer service, you probably didn’t have a great experience. This bill should hopefully fix some of those issues.

Summary:

The Inflation Reduction Act or IRA will have a significant impact on the United States over the next 10 years. For planning purposes, this bill puts together a clear program of tax credits and incentives that can benefit you. To take advantage of them, you need a Proactive Plan to identify which ones apply to you (and how best to benefit from them).

For more information, contact me at pgmoore@ironcladwm.com.

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