Making Sense of the Inflation Reduction Act of 2022: What You Need To Know Before Filing

More tax breaks and incentives will now be available to individuals and businesses through the Inflation Reduction Act of 2022 (IRA) - a landmark policy that promotes sustainable energy use.

More tax breaks and incentives will now be available to individuals and businesses through the Inflation Reduction Act of 2022 (IRA) – a landmark policy that promotes sustainable energy use.

President Joe Biden signed the Inflation Reduction Act of 2022 (IRA) on August 16, 2022, as a United States federal law that will hopefully deal with inflation, promote clean energy, and address climate change. The legislation is one of the largest investments in climate and clean energy, amounting to $370 billion. This investment is expected to have a significant impact on the US economy and environment.

The Inflation Reduction Act will have an impact on individuals and businesses, which includes:

 

  • Families who buy an electric vehicle can qualify for up to $7,500 of tax credits.
  • Small businesses that use solar panels can qualify for tax credits to reduce the cost of installing the system.

These are just some of the many ways that the Inflation Reduction Act will provide tax breaks and other incentives to the community of taxpayers in the US. 

Tax Provisions in the Act

15% alternative minimum tax (AMT)

Large corporations will now have to calculate the 21% corporate tax rate and the 15% corporate minimum tax rate, then pay whichever amount is higher. Corporations earning $1 billion for a three-year tax period will have to follow this ruling after the December 31, 2022 tax year period.

Stock buybacks

Repurchase of stocks is now imposed with a 1% nondeductible excise tax. This applies to publicly traded corporations with stock buybacks happening after December 31, 2022. Pensions and retirement accounts, however, are exempted.

Clean vehicle credit

A maximum tax credit of $7,500 will be available for plug-in electric vehicle purchases. It will apply to vans, SUVs, and pickups that retail for $80,000 and $55,000 for other vehicle types. Previously owned vehicles will also be eligible for vehicles that have a $25,000 sales price or less.

Increased R&D credit

Eligible small businesses can now claim up to $250,000 of qualified research expenses as a payroll tax credit. This will offset the 1.45% Medicare payroll tax. An alternative is using the $250,000 credit amount for the employer’s 6.2% Social Security tax payment.

Adjustment of energy-efficiency tax incentives under Section 179D

The deductible amount will now be increased, ranging from $2.50 or $5 per square foot depending on the energy cost-saving percentage of a building. Also, the eligibility is now extended to real estate investment trusts (REITs), allowing them to allocate the deduction to the building designer spearheading the energy-efficiency system.

Additional IRS funding

A total of around $80 billion in funding will go to the IRS and related agencies. This covers funding for up to 2031 to improve taxpayer services, enforce policies, upgrade business systems, and invest in operations support.

Impact on Businesses and Individuals

How the Act Affects Individuals and Households

  1. Electric Vehicle Tax Incentives – buying an electric vehicle will equate to tax credits, whether you’re still planning to buy one or need to claim credits for an existing electric vehicle purchase.
  2. Renewable Energy Tax Credits – home improvements that promote energy efficiency will have tax credits depending on the qualifying expenses.
Effects of the Inflation Reduction Act on Businesses

Effects of the Inflation Reduction Act on Businesses

Clean Energy Tax Incentives

Businesses that invest in clean energy production, renewable energy facilities, alternative fuels, and energy efficiency are entitled to credits and deductions. The amount will depend on the qualifying expenses, which can either be renewables or electric vehicles.

Eligibility Criteria for Clean Energy Tax Incentives

Owners and designers of commercial buildings, whose energy efficiency efforts reduce energy and power costs by up to 25%. The property has to meet energy-saving requirements for the credit and deduction. Businesses that also invest in electric vehicles are eligible if the electric vehicle purchase meets the credit requirements.

Refundable and Transferable Credits

There is also the option for businesses and tax-exempt organizations to use the tax credit in other ways. This can be through elective pay or a transfer credit, provided that the transaction follows eligibility requirements.

Making Sense of the Inflation Reduction Act of 2022

Common Questions About the IRA

What Are the Tax Credits and Rebates for the Inflation Reduction Act of 2022?

Investment Tax Credit – projects less than 1MWAC are entitled to a 30% tax credit, which includes energy storage technology in a facility or upgrading existing energy sources to heat pumps, use of microturbines, and interconnection costs. The ITC will amount to 6% if the project is greater than 1 MWAC.

 

Production Tax Credit – provides a 2.75¢/kWh base credit for projects with less than 1MWAC or a 0.5¢/kWh if it exceeds 1MWAC. However, the PTC is only applicable for biomass, landfill gas, and multiple clean energy technology installations.

 

Residential Clean Energy Tax Credit – this can cover around 30% of the expenses to install new clean energy systems in your house. The 30% tax credit has no maximum limit for battery storage systems or geothermal heating systems. Home weatherization projects, on the other hand, have a $1,200 tax credit cap and a $2,000 tax credit cap for heat pump HVAC systems.

 

Clean Vehicle Credit – a total tax credit can be granted amounting to $7,500 for buying a plug-in EV or fuel cell electric vehicle (FCV) for personal use. Meanwhile, there’s an up to $40,000 commercial clean vehicle credit for businesses planning to buy a qualified electric vehicle.

 

High-Efficiency Electric Home Rebate Act (HEEHRA) – providing discounts for home energy upgrades with varying amounts for qualifying-income households. This can be $840 for an electric stove or $4,000 for an electrical panel upgrade. The discount is capped at $14,000 for any given year.

 

Whole Home Energy Reduction Rebates – retrofitting the whole house for energy savings is entitled to $4,000 or 50% of the total project cost. For multifamily buildings, a $400,000 or 50% equivalent project cost rebate.

 

These are just some of the several credits and deductions from the Inflation Reduction Act of 2022 that you may qualify for. The IRS provides a comprehensive list of every single specific tax credit depending on the clean energy initiative for either individuals or businesses. More credits and rebates may still be underway as the policy is still in the works.

Do I Qualify for the Inflation Reduction Act of 2022?

If you’re planning to file for a Clean Vehicle Credit, your income must not be above $150,000 for single filers. A head of household earning $225,000 or less can also qualify. For joint or married filers, income must not exceed $300,000 to qualify.

Does the Inflation Reduction Act Apply to 2022 Taxes?

The tax provisions do not apply to 2022 taxes. There are exceptions, however, such as the clean vehicle tax credit. The clean vehicle tax credit took effect last August 16, 2022, so any vehicles purchased after the date may still be eligible.

 

Other tax provisions only apply to tax years beginning December 31, 2022, like the corporate alternative minimum tax (CAMT), stock buybacks, and energy efficiency tax credits.

Does the Inflation Reduction Act Give You Money?

No money will be given directly to individuals under the Inflation Reduction Act. You will only be entitled to several tax credits and rebates to help you save money on energy costs, healthcare, and other expenses.

New Ways to Receive Tax Credit

All of these developments under the Inflation Reduction Act of 2022 (IRA) are a great addition to incentivize the efforts of individuals and businesses in promoting the use of clean energy. If you need more directions about how to maximize the tax credit or want to qualify for the incentives and deductions, it’s best to trust a professional tax advisor. 

 

Consult with trusted professionals like the Positive Rate Tax Advisors. They are one of the best tax planners in Atlanta, GA to help you maximize the credits and rebates available to qualified individuals.

 

The Inflation Reduction Act of 2022 (IRA) is still a new policy that will have a lot of changes in the future. You have to know what credits, rebates, or discounts you’re qualified for. Positive Rate Tax Advisors will provide a workaround to identify which among your clean energy efforts are qualified for a tax credit or rebate

 

You’ll have a better way of understanding and complying with the provisions of the act, so you can fully benefit from this tax opportunity.

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