Weekend Vote-a-Rama Ends with Senate Passing Healthcare/Tax/Climate Bill

(Parker Tax Publishing August 2022)

On Sunday, after a 27-hour vote-a-rama, the Senate passed H.R. 5376, the Inflation Reduction Act of 2022 (2022 IRA), by a vote of 51 - 50, with Vice President Kamala Harris casting the tie-breaking vote. With the exception of an amendment from Senator John Thune (R, SD), which was modified by Senator Mark Warner (D, Va), the legislation remained otherwise intact from what the Senate Finance Committee released late last week after it scaled back the minimum tax provision on large corporations and replaced the carried interest provision with an excise tax on repurchases of corporate stock in order to get Senator Kyrsten Sinema (D, AZ) to support the legislation. H.R. 5376 (final Senate version).

Executive Summary

On August 7, the Senate passed the Inflation Reduction Act of 2022 (2022 IRA), a scaled down version of the Build Back Better Act the Democrats tried to pass last year. Several changes had to be made to the original Senate Finance Committee (the Committee) bill released late last month in order to gain Senator Kyrsten Sinema's support. Specifically, the Committee (1) axed the provision that would have closed the carried interest loophole and replaced it with a 1 percent excise tax on the fair market value of corporate stock repurchased during the year by certain corporations, and (2) modified the definition of "adjusted financial statement income" upon which a minimum tax must be paid to include a reduction for tax depreciation instead of being limited to a book depreciation deduction.

Additionally, during the vote-a-rama that stretched into Sunday morning, one amendment to the Bill got through - a change by Senator John Thune (R, SD) which provides that adjusted financial statement income for purposes of the minimum tax is determined without regard to certain modifications that might negatively affect certain small businesses. Thune's amendment would have paid for this change by extending the state and local tax (SALT) deduction limitation an extra year. Instead, Senator Mark Warner (D, VA) made an amendment to Senator Thune's amendment that substituted a two-year extension of the Code Sec. 461(l) limitation on losses of noncorporate taxpayers for the SALT cap extension.

As mentioned above, there were several major changes from the 2022 IRA text originally released by the Committee at the end of July to which all of the Senators except Senator Sinema had expressed their support.

Last year, it was Senators Manchin and Sinema who nixed the Build Back Better Act, which otherwise had unanimous Democratic support. Democrats were thus surprised when Senator Manchin expressed his support for the 2022 IRA at the end of July. Senator Sinema, however, requested that several changes be made in order to secure her support.

I. BUSINESS-RELATED PROVISIONS

Corporate Alternative Minimum Tax

The 2022 IRA imposes a corporate alternative minimum tax (AMT) of 15 percent on adjusted financial statement income (AFSI) for corporations with such income in excess of $1 billion. An applicable corporation's minimum tax would be equal to the amount by which the tentative minimum tax exceeds the corporation's regular tax for the year. The provision does not apply to S corporations, regulated investment companies, or real estate investment trusts.

Tentative minimum tax is determined by applying a 15 percent tax rate to the AFSI of the corporation for the tax year (after taking into account the AMT foreign tax credit and the financial statement net operating losses). While the original definition of AFSI in the Senate Finance Committee's report did not include an adjustment for accelerated depreciation, a change was made to allow the reduction of AFSI by the depreciation deductions allowed for computing the taxpayer's taxable income for the tax year.

The provision would apply to tax years beginning after December 31, 2022.

Excise Tax on Stock Repurchases

The original version of the 2022 IRA would have narrowed the carried interest loophole in Code Sec. 1061. That loophole allows private equity fund managers to pay capital gains tax rates rather than the higher income tax rates on their compensation. However, in order to get Senator Sinema on board with the 2022 IRA, the carried interest provision was eliminated and replaced with a new excise tax on the repurchase of stock by a publicly traded corporation. This new provision imposes a 1 percent excise tax on stock repurchases by publicly traded corporations. The excise tax applies to purchases of corporation stock by a subsidiary of the corporation (i.e., a corporation or partnership that is more than 50 percent owned by the parent corporation). The tax also applies to purchases by a U.S. subsidiary of a foreign-parented firm and to newly inverted (after September 20, 2021) or surrogate firms (i.e., firms that merged to create a foreign parent with the former U.S. shareholders owning more than 60 percent of shares). This excise tax is paid by the corporation, not by shareholders.

The excise tax does not apply if repurchases are less than $1 million or if contributed to an employee pension plan, an employee stock ownership plan, or other similar plans. The excise tax also does not apply if repurchases are treated as a dividend; nor does it apply to repurchases by regulated investment companies or real estate investment trusts. It also does not apply to purchases by a dealer in securities in the ordinary course of business.

The legislation specifies that this excise tax is not deductible. The provision would apply to tax years beginning after 2022.

Two-Year Extension of the Limitation on Losses of Noncorporate Taxpayers

The 2022 IRA amends Code Sec. 461(l) to extend by two years (through December 31, 2028) the limitation on deductions by C corporations of excess farm losses and excess business losses. This extension was necessary to pay for Senator Thune's amendment limiting the application of the corporate minimum tax.

II. Funding the IRS and Improving Taxpayer Compliance

Enhancement of IRS Services

The 2022 IRA provides almost $3.2 billion to the IRS through September 30, 2031, for taxpayer services, including pre-filing assistance and education, filing and account services, taxpayer advocacy services, and other services.

Tax Enforcement Activities

The 2022 IRA provides almost $45.7 billion to the IRS through September 30, 2031, for expenses relating to the enforcement activities related to violations of internal revenue laws and other financial crimes, to purchase and hire passenger motor vehicles, and to provide other services.

Operations Support

The 2022 IRA provides approximately $25.3 billion through September 30, 2031, to pay for expenses to support taxpayer services and enforcement programs, including rent payments; facilities services; printing; postage; physical security; headquarters and other IRS-wide administration activities; research and statistics of income; telecommunications; information technology development, enhancement, operations, maintenance, and security; and the operations of the Internal Revenue Service Oversight Board.

Business Systems Modernization

The 2022 IRA provides $4.75 billion through September 30, 2031, to pay for expenses to modernize the IRS's business systems, including the development of call-back technology and other technology to provide a more personalized customer service but not including the operation and maintenance of legacy systems.

Task Force to Design an IRS-Run Free "Direct eFile" Tax Return

The 2022 IRA provides an additional $15 billion through September 30, 2023, for necessary expenses of the IRS to deliver to Congress, within nine months following the date of the enactment of the 2022 IRA, a report on (I) the cost (including options for differential coverage based on taxpayer adjusted gross income and return complexity) of developing and running a free direct efile tax return system, including costs to build and administer each release, with a focus on multi-lingual and mobile-friendly features and safeguards for taxpayer data; expenses to develop a direct efile tax return and provide a report to Congress on the cost of developing and running a free direct efile tax return system.

Treasury Inspector General for Tax Administration

The 2022 IRA provides $403 million to carry out the Inspector General Act of 1978 which, among other things, established the Office of Treasury Inspector General for Tax Administration.

Office of Tax Policy

The 2022 IRA provides almost $105 million for the necessary expenses of the Office of Tax Policy to carry out its function of issuing regulations.

III. Energy-Related Provisions

A main focus of the 2022 IRA is the enactment of tax credits aimed at reducing the negative impact of climate change while also providing jobs. With respect to the clean energy and energy efficiency tax incentives, The 2022 IRA generally provides two different credit values: a base rate and an alternative, or bonus rate. The bonus rate equals five times the base rate and applies to projects that meet certain wage and apprenticeship requirements. A taxpayer must satisfy both requirements to receive the bonus credit rate. Otherwise, they may claim the relevant credit at the base rate.

The wage requirements require that the taxpayer ensure laborers and mechanics are paid prevailing wages during the construction of a qualifying project, and, in some cases, for the alteration and repair of the project for a defined period after the project is placed into service. The prevailing wage rates are the most recently published prevailing wages for the locality in which the project is located. The apprenticeship requirements require that the taxpayer ensure that qualified apprentices perform no less than the applicable percentage of total labor hours of the project. The applicable percentage for purposes of this requirement is 10 percent for projects for which construction begins in 2022. This rate is increased to 12.5 percent in 2023, and 15 percent thereafter. The taxpayer and any contractor or subcontractor that employs four or more individuals to perform construction on a qualifying project must employ at least one qualified apprentice to perform such work. The wage and apprenticeship requirements apply to projects that begin construction 60 days after the Treasury Secretary has published relevant guidance with respect to the requirements.

The 2022 IRA also contains domestic content requirements which require that, with respect to the project for which a tax credit is claimed, the taxpayer must ensure that any steel, iron, or manufactured product that is part of the project at the time of completion was produced in the United States. For purposes of these requirements, steel and iron must be 100 percent produced in the United States. Manufactured products are deemed to have been manufactured in the United States if the "adjusted percentage" of the total cost of the components and subcomponents of the project is attributable to components that are mined, produced, or manufactured in the United States. Generally, the adjusted percentage is: (1) 40 percent for projects that begin construction before 2025, (2) 45 percent for projects that begin construction in 2025, (3) 50 percent for projects that begin construction in 2026, and (4) 55 percent for projects that begin construction thereafter. The domestic content requirements generally apply for purposes of the production and investment tax credits.

Credit for Electricity Produced from Certain Renewable Resources

The 2022 IRA extends the production tax credit (PTC) under Code Sec. 45 for five years, for facilities that begin construction before January 1, 2025. The PTC provides a tax credit for each kilowatt of electricity produced from qualifying facilities and sold to an unrelated party. Qualifying resources are generally sources of renewable electricity, including wind, biomass, municipal solid waste (including landfill gas and trash), geothermal, hydropower, and marine and hydrokinetic energy. The provision also revives the PTC for solar energy (previously sunset in 2006) for facilities which commence construction before January 1, 2025.

For wind facilities, the credit reduction and phaseout under current law is eliminated for any facility that is placed in service after December 31, 2021. Under the provision, those facilities are thus eligible to receive tax credits at full value.

The provision provides taxpayers the option of a base credit rate of 0.5 cents/kilowatt hour, or a bonus credit rate of 2.5 cents/kilowatt hour (inflation adjusted values) for those facilities that meet the prevailing wage and apprenticeship requirements. If a facility meets the domestic content requirements, the credit rate is increased by 10 percent. For facilities that do not meet the domestic content requirements, the amount of the credit that is eligible for a direct pay election under new Code Sec. 6417 is reduced. The credit rate may also be increased by 10 percent for any facility placed in service in an energy community, defined as a brownfield site, an area with significant fossil fuel employment, or a census tract or any immediately adjacent census tract in which, after December 31, 1999, a coal mine has closed, or, after December 31, 2009, a coal-fired electric generating unit has been retired.

The provision also modifies the rules governing projects that use both tax-exempt financing and claim the tax credits. Under current law, the credits would be reduced by the lesser of 50 percent or the fraction of the basis of the facility that is financed with tax-exempt debt. Under the provision, for facilities that begin construction after the date of enactment and are financed with tax-exempt debt, the amount of credit is reduced by the lesser of 15 percent or the fraction of proceeds of a tax-exempt obligation used to finance the facility over the aggregate amount of additions to the capital account of the facility.

The modified credit rates generally apply to facilities placed in service after December 31, 2021. The modifications related to the use of tax-exempt bonds apply to facilities that commence construction after the date of enactment. All other amendments made by this provision generally apply to facilities placed in service after December 31, 2022.

Energy Investment Tax Credit

The 2022 IRA extends the Code Sec. 48 energy investment tax credit (ITC), which allows taxpayers to claim a tax credit for the cost of energy property. In most cases, the provision extends the credit for property for which begins construction before January 1, 2025.

The provision provides a base credit rate of 2 or 6 percent of the basis of energy property or a bonus credit rate of 10 or 30 percent of the basis of energy property. These credit rates apply with respect to facilities placed into service after December 31, 2021. The 6 percent base and 30 percent bonus rate is provided for solar energy property, geothermal property, fiber-optic solar property, fuel cell property, microturbine property, small wind property, offshore wind property, combined heat and power property, and waste energy recovery property that begins construction before January 1, 2025.

The ITC is extended with 6 percent base and 30 percent bonus rates for geothermal heat pump property that begins construction before January 1, 2033. The base credit rate phases down to 5.2 percent for property that begins construction in 2033 and 4.4 percent for property that begins construction in 2034. The bonus credit rate phases down to 26 percent in 2033 and 22 percent in 2034. No credit is allowed for property that begins construction after December 31, 2034.

The ITC for microturbine property is extended, providing a base credit rate of 2 percent or a bonus credit rate of 10 percent, for property that begins construction before January 1, 2025.

The ITC is expanded to include energy storage technology, biogas property, microgrid controllers, dynamic glass, and linear generators. These technologies are eligible for a 6 percent base credit rate or a 30 percent bonus credit rate for any property that begins construction before January 1, 2025.

Taxpayers may claim an increased credit with respect to energy property placed into service after December 31, 2022, if such property meets the domestic content requirements. The increase is 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements). For any energy property that is placed in service within an energy community, the credit percentage is increased by 2 percentage points (or 10 percentage points if the taxpayer meets the prevailing wage and apprenticeship requirements). An energy community is defined as a brownfield site, an area with significant fossil fuel employment, or a census tract or any immediately adjacent census tract in which, after December 31, 1999, a coal mine has closed, or, after December 31, 2009, a coal-fired electric generating unit has been retired.

In the case of energy property financed using tax-exempt bonds that begins construction after the date of enactment, the basis of such energy property will be reduced by the proceeds of a tax-exempt obligation in a manner similar to the rule under Code Sec. 45(b)(3).

The amendments made by this provision generally apply to property placed in service after December 31, 2022, but only to the extent the basis of such property is attributable to the construction, reconstruction, or erection after December 31, 2022. The extension of credits and modification of credit rates (including the higher rates for projects meeting the wage and apprenticeship requirements) apply to property placed in service after December 31, 2021. The modifications to rules relating to tax-exempt bonds apply to property that begins construction after the date of enactment.

Energy Credit for Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities

The 2022 IRA provides for an enhanced incentive for solar and wind facilities qualifying for the Code Sec. 48 ITC with respect to which the Treasury Secretary makes an allocation of environmental justice solar and wind capacity limitation. Property eligible for the credit includes energy storage technology related to such solar or wind property. The amount that may be allocated is limited to an annual capacity limitation of 1.8 gigawatts for each of calendar year 2023 and 2024 (zero for calendar years thereafter). Any unused allocations are carried over, increasing the capacity limit for the following year. Any excess capacity limitation after 2024 is carried over to the annual capacity limitation under Code Sec. 48D, the clean electricity investment tax credit. This provision takes effect on January 1, 2023.

Credit for Carbon Oxide Sequestration

The 2022 IRA extends the credit for carbon oxide sequestration under Code Sec. 45Q for facilities that begin construction before the end of 2032. The provision also modifies the minimum capture requirements for qualified facilities. To qualify for the credit, direct air capture facilities must capture no less than 1,000 metric tons of carbon oxide per year. Electricity generating facilities must capture no less than 18,750 metric tons of carbon oxide and 75 percent of the baseline carbon emissions from each generating unit on which carbon capture equipment is installed. Other facilities must capture no less than 12,500 metric tons of carbon oxide.

The provision provides a base credit rate of $17 or a bonus credit rate of $85 per metric ton of carbon oxide captured and sequestered in geological storage and a base credit rate of $12 or a bonus credit rate of $60 per metric ton of carbon oxide captured and utilized in an enhanced oil recovery project or for a commercial use that results in permanent sequestration. The provision provides an enhanced credit for direct air capture facilities at a base rate of $36 or a bonus rate of $180 per metric ton of carbon oxide captured for geological storage and a base rate of $26 or a bonus rate of $130 per metric ton of carbon captured and utilized for an allowable use by the taxpayer.

In the case of carbon capture equipment financed using tax-exempt bonds which begins construction after date of enactment, the amount of credit allowed with respect to such equipment will be reduced by the lesser of (1) 15 percent or (2) the fraction of proceeds of a tax-exempt obligation used to finance such project over the aggregate amount of additions to the capital account of such project.

These amendments generally apply to facilities or equipment placed in service after December 31, 2022.

Zero-Emission Nuclear Power Production Credit

The 2022 IRA provides a credit under Code Sec. 45U for the production of electricity from a qualified nuclear power facility. The provision provides a base credit rate of 0.3 cents/kilowatt hour and a bonus credit rate of 1.5 cents/kilowatt hour for electricity produced by the taxpayer and sold to an unrelated person during the tax year. A qualified nuclear power facility is any nuclear facility that is owned by the taxpayer, uses nuclear energy to produce electricity, and is placed in service before the date of enactment. The provision applies to electricity produced and sold after December 31, 2023, and terminates on December 31, 2032.

Incentives for Biodiesel, Renewable Diesel and Alternative Fuels

The 2022 IRA extends the income and excise tax credits for biodiesel and biodiesel mixtures under Code Sec. 40A(g) at $1.00 per gallon through December 31, 2024. The provision also extends (1) the $0.10-per-gallon small agri-biodiesel producer credit and (2) the $0.50 per gallon excise tax credits for alternative fuels and alternative fuel mixtures through December 31, 2024. This provision applies to fuels sold or used after December 31, 2021, and directs the Treasury Secretary to establish procedures for credit claims for periods after December 31, 2021 and before the date of enactment.

Second-Generation Biofuel Incentives

The 2022 IRA extends the second-generation biofuel credit under Code Sec. 40(a) for fuel produced and sold before January 1, 2025, effective for fuel produced and sold after December 31, 2021.

Sustainable Aviation Fuel Credit

The 2022 IRA provides a new refundable blenders tax credit under Code Sec. 40B for each gallon of sustainable aviation fuel sold as part of a qualified fuel mixture. The value of the credit is determined on a sliding scale, equal to $1.25 plus an additional $0.01 for each percentage point by which the lifecycle emissions reduction of such fuel exceeds 50 percent (as compared to petroleum-based jet fuel). Taxpayers may elect to claim this credit as an excise tax credit against Code Sec. 4041 excise tax liability.

To claim the credit, taxpayers must certify that such fuel reduces lifecycle greenhouse gas emissions by at least 50 percent, determined in accordance with the requirements of the most recent Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) adopted by the International Civil Aviation Organization (ICAO) with the support of the United States, or under any similar methodology which satisfies the criteria under Section 211(o)(11) of the Clean Air Act. Taxpayers must also register with the Treasury Secretary and provide third-party verification that they meet the relevant requirements of the CORSIA scheme (or other similar regime), including reporting and traceability requirements.

In addition, the provision terminates the $1.00 tax credit under Code Sec. 40A for aviation fuel produced from biodiesel beginning after December 31, 2022. Sustainable aviation fuel does not include any fuel that is produced from palm fatty acids or by co-processing lipids with fuels derived from oil, natural gas, or coal. This provision applies for fuel sold or used after December 31, 2022. The credits allowed under this provision expire after December 31, 2026.

Credit for Production of Clean Hydrogen

The 2022 IRA creates a new credit under Code Sec. 45V for the production of clean produced by a taxpayer at a qualified clean hydrogen facility during the 10-year period beginning on the date such facility is placed in service. The amount of the credit is equal to the applicable percentage of the base rate of $0.60 or the bonus rate of $3.00, indexed to inflation, multiplied by the volume (in kilograms) of clean hydrogen produced by the taxpayer at a qualified facility during the tax year. In order to claim the hydrogen production credit at the bonus credit rate, taxpayers must satisfy the prevailing wage requirements for the duration of the construction of the project and for each year during the 10-year credit period and satisfy the apprenticeship requirements during the construction of the project.

Taxpayers may claim the Code Sec. 45 PTC or Code Sec. 45U zero-emission nuclear PTC for electricity produced by the taxpayer if the electricity is used at a qualified clean hydrogen facility to produce qualified clean hydrogen. A taxpayer may elect to treat a qualified clean hydrogen facility as energy property for purposes of the Code Sec. 48 ITC in lieu of the credit for the production of clean hydrogen. For taxpayers making such an election, the credit allowed under Code Sec. 48 equals the applicable percentage multiplied by the energy percentage. With respect to facilities for which the taxpayer elects to claim the Code Sec. 48 ITC in lieu of the hydrogen production credit, the provision provides a base credit rate of 6 percent, or a bonus credit rate of 30 percent, of the basis of qualified energy property.

No credit will be allowed for clean hydrogen produced at a facility which includes property for which a credit is allowed under Code Sec. 45Q. Taxpayers may only claim the credit under Code Sec. 45Q or the clean hydrogen production credit but not both with respect to the same facility.

In the case of a facility financed using tax-exempt bonds which begins construction after date of enactment, the amount of credit allowed under this provision with respect to the facility will be reduced by the lesser of 15 percent or the fraction of proceeds of a tax-exempt obligation used to finance such project over the aggregate amount of additions to the capital account of such project.

No credit will be allowed for facilities which begin construction after December 31, 2032.

Nonbusiness Energy Property Credit

The 2022 IRA extends the nonbusiness energy property credit under Code Sec. 25C to property placed in service before the end of 2032. Beginning in 2022, the provision modifies and expands the credit, including by: (1) increasing the percentage of the credit for installing qualified energy efficiency improvements from 10 percent of the cost to 30 percent; (2) replacing the lifetime cap on credits with a $1,200 annual credit limitation, with a higher, $2,000 limitation for heat pumps and biomass stoves; (3) updating various standards and associated limits to reflect advances in energy efficiency and removing eligibility of roofs, advanced main air circulating fans, and certain windows; (4) requiring that manufacturers and taxpayers comply with reporting the identification number of certain property placed into service in order to access the credit; and (5) expanding the credit to cover the costs of home energy audits, up to a maximum credit of $150, and electrical panel upgrades necessary for other efficiency improvements, up to a maximum credit of $600.

Residential Clean Energy Credit

The 2022 IRA extends the credit under Code Sec. 25D for the cost of qualified residential clean energy property expenditures, including solar electric, solar water heating, fuel cell, and small wind energy, and geothermal heat pumps. The provision extends the full 30 percent credit for eligible expenditures through the end of 2032, then phases down to 26 percent in 2033 and 22 percent in 2034. The credit expires after the end of 2034. The provision also expands the definition of eligible property to include battery storage technology.

Energy Efficient Commercial Buildings Deduction

The 2022 IRA updates and expands the energy efficient commercial buildings deduction under Code Sec. 179D, starting in 2022, by increasing the maximum deduction, determined on a sliding scale. It also changes this maximum from a lifetime cap to a 3-year cap. The provision updates the eligibility requirements so that property must reduce associated energy costs by 25 percent or more in comparison to a building that meets the latest American Society of Heating, Refrigerating, and Air-Conditioning Engineers 90.1 standard affirmed by the Treasury Secretary as of 4 years prior to the date such building is placed into service.

The maximum value of the base deduction is $0.50 per square foot, increased by $0.02 per square foot for every percentage point by which the designed energy cost savings exceed 25 percent against the reference standard, not to exceed $1.00 per square foot. The value of the bonus deduction is $2.50 per square foot, increased by $0.10 per square foot for every percentage point by which designed energy cost savings exceed 25 percent against the reference standard, not to exceed $5.00 per square foot.

This provision allows taxpayers to elect to take an alternative, parallel deduction for energy efficient lighting, HVAC, and building envelope costs placed into service in connection with a qualified retrofit plan. The value of the base deduction is determined by the reduction in a building's energy usage intensity (EUI) upon completion of the retrofit, equal to $0.50 per square foot, increased by $0.02 per square foot for every percentage point by which the reduction in EUI exceed 25 percent, not to exceed $1.00 per square foot. The value of the bonus deduction is $2.50 per square foot, increased by $0.10 per square foot for every percentage point by the reduction in EUI exceeding 25 percent against the reference standard, not to exceed $5.00 per square foot. In order to qualify for the alternative deduction, a building retrofit project must reduce a building's EUI by no less than 25 percent.

The amendments made by this provision expire after December 31, 2031.

New Energy Efficient Home Credit

The 2022 IRA extends the Code Sec. 45L new energy efficient home credit through 2032. In the case of new homes acquired after 2022 that are eligible to participate in the ENERGY STAR Residential New Construction Program or Manufactured Homes Program, the provision provides a $2,500 credit for energy efficient single-family and manufactured new homes meeting certain energy star requirements.

Single-family homes must meet the most recent Energy Star Single-Family New Homes Program requirements applicable to such dwelling location as in effect on (1) the latter of January 1, 2022, or January 1 of two calendar years prior to the date the home is acquired and(2) National Program Requirement Version 3.1 for homes acquired before 2025 and Version 3.2 thereafter. Manufactured homes must meet the most recent Energy Star Manufactured Home National Program requirements as in effect on the latter of January 1, 2022, or January 1 of 2 calendar years prior to the date the dwelling is acquired. The provision also provides a higher tier credit of $5,000 for eligible single-family and manufactured new homes certified as a zero energy ready under the Department of Energy Zero Energy Ready Home Program.

In the case of new multifamily homes acquired after 2022 which are eligible to participate in the ENERGY STAR Multifamily New Construction Program, the provision provides a base credit of $500 and a bonus credit of $2,500 for multifamily units which meet: (1) the most recent Energy Star Manufactured Home National Program requirements as in effect on the latter of January 1, 2022, or January 1 of 2 calendar years prior to the date the dwelling is acquired; and (2) the most recent Energy Star Manufactured Home Regional Program requirements applicable to such unit as in effect on the latter of January 1, 2022, or January 1 of two calendar years prior to the date the dwelling is acquired. The provision provides a higher tier base credit of $1,000 or a bonus credit of $5,000 for eligible multifamily units certified as a zero-energy ready under the Department of Energy Zero Energy Ready Home Program.

Clean Vehicle Credit

The 2022 IRA amends the existing Code Sec. 30D credit to apply to new clean vehicles placed into service by the taxpayer during the tax year. The amount of credit allowed by this provision with respect to a qualified vehicle is equal to a maximum of $7,500 with respect to a vehicle propelled primarily by electricity, with a battery of at least 7 kilowatt hours, or with respect to a hydrogen fuel cell electric vehicle. Eligible vehicles must meet the critical mineral or battery component requirements. Vehicles which meet one of the requirements, but not both, are eligible for a credit of $3,750.

To meet the critical mineral requirement, the applicable percentage of critical minerals contained in the battery must be extracted or processed in a country with which the United States has a free trade agreement, or have been recycled in North America. The applicable percentage is: (1) for calendar years prior to 2024, 40 percent; (2) for calendar year 2024, 50 percent; (3) for calendar year 2025, 60 percent; (4) for calendar year 2026, 70 percent; and (5) for calendar years after 2026, 80 percent. To meet the battery content requirement, the applicable percentage of the components contained in the battery used in the vehicle must be manufactured or assembled in North America. The applicable percentage is: (1) for calendar years prior to 2024, 50 percent; (2) for calendar years 2024 and 2025, 60 percent; (3) for calendar year 2026, 70 percent; (4) for calendar year 2027, 80 percent; (5) for calendar year 2028, 90 percent; and (6) for calendar years after 2028, 100 percent.

Under the provision, clean vehicles must be assembled in the United States. For calendar years after 2023, a clean vehicle may not contain any battery components which were manufactured by a foreign entity of concern (as defined in 42 U.S.C. Section 18741(a)(5)), and, after calendar year 2024, a clean vehicle may not contain any critical minerals that were extracted, processed, or recycled by a foreign entity of concern.

Clean vehicles must also be sold by a qualified manufacturer. A qualified manufacturer is one which enters into written agreement with the Treasury Secretary to ensure each vehicle manufactured meets the requirements of this provision and is labeled with a unique vehicle identification number, and requires the manufacturer to periodically provide such vehicle identification numbers to the Treasury Secretary in such a manner as the Treasury Secretary may prescribe.

No credit will be allowed for vehicle by which the manufacturer's suggested retail price exceeds the applicable limitation, which is: (1) $80,000 for vans, SUVs, and pickup trucks; and (2) $55,000 for any other vehicle. In addition, no credit is allowed to a taxpayer with a modified adjusted gross income in excess of the threshold amount of $300,000 for married filing jointly, $225,000 for head of household, and $150,000 in any other case. For a given tax year, the taxpayer may use modified adjusted gross income for that year or the immediately preceding year, whichever is lower. The provision repeals the current per-manufacturer limitation.

The provision allows a taxpayer to elect to transfer the credit to the vehicle dealer, provided the dealer is registered as an eligible entity with the Treasury Secretary, discloses the MSRP, credit amount, associated fees, and the amount to be paid to the taxpayer in the form of a down payment or otherwise with respect to the transfer of credit. The Treasury Secretary will establish a program to make advance payments to any eligible dealer equal to the cumulative amount of transferred credits.

This provision generally applies to vehicles placed in service after December 31, 2022. The requirement that vehicles be assembled in North America applies to vehicles sold after the date of enactment. The provision allowing transfers of the credit applies to vehicles sold after December 31, 2023. The credit is not allowed for any vehicle placed in service after December 31, 2032.

Credit for Previously-Owned Clean Vehicles

The 2022 IRA creates a new credit under Code Sec. 25E for the purchase of used plug-in and fuel-cell electric cars after the date of enactment through 2032. Buyers can claim a credit of up to the lesser of $4,000, or 30 percent of the sale price. To qualify, used clean vehicles must generally meet the eligibility requirements in the existing Code Sec. 30D credit for new clean vehicles, not exceed a sale price of $25,000, and be a model year that is at least two years earlier than the date of sale.

Buyers with up to $75,000 ($150,000 for married couples filing jointly and $112,500 for head of household filers) in adjusted gross income can claim the credit. Buyers must purchase the vehicle from a dealership and cannot claim the credit more than once every three years. The credit only applies to the first resale of a used vehicle and includes restrictions on sales between related parties.

Under the provision, the credit may be transferred to the seller of the previously-owned vehicle to allow the purchaser to access the value of the credit at the time of sale. The rules governing transfers of the credit are the same as those established for Code Sec. 30D.

Credit for Qualified Commercial Clean Vehicles

The 2022 IRA creates a new credit under Code Sec. 45W for qualified commercial electric vehicles placed into service by the taxpayer. The amount of credit allowed with respect to a qualified commercial electric vehicle is equal to 30 percent of the cost of the vehicle, up to $7,500 in the case of a vehicle that weighs less than 14,000 pounds, and up to $40,000 for all other vehicles. Tax-exempt entities have the option of electing to receive direct payments.

For purposes of the credit, a qualified commercial electric vehicle means any vehicle: (1) the original use of which commences with the taxpayer, (2) which is acquired for use or lease by the taxpayer and not for resale, (3) which is made by a qualified manufacturer, (4) which is treated as a motor vehicle for purposes of the Clean Air Act or mobile machinery for purposes of Code Sec. 4053(8), (5) which is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than 15 kilowatt hours (7 kilowatt hours for vehicles that weigh less than 14,000 pounds) and is capable of being recharged from an external source of electricity, or is a fuel cell vehicle based upon the requirements of Code Sec. 30B, and (6) is of a character subject to the allowance for depreciation. Under the provision, vehicles powered by an internal combustion engine are eligible for a reduced credit of 15 percent.

This provision takes effect after December 31, 2022. No credit will be allowed under this provision for a vehicle acquired after December 31, 2032.

Alternative Fuel Refueling Property Credit

The 2022 IRA extends the alternative fuel vehicle refueling property credit under Code Sec. 30C through 2032. Beginning in 2022, the provision expands the credit for zero-emissions charging and refueling infrastructure by providing a base credit of 6 percent and a bonus credit level of 30 percent for expenses up to $100,000 for each charging station or refueling pump installed. This provision also clarifies that bidirectional charging equipment is eligible property and expands the list of eligible property to include electric charging stations for electric 2- and 3- wheeled motor vehicles manufactured for use on public street, roads, and highways, but only if such stations are intended for use on public roads. In addition, starting in 2023, charging or refueling property is eligible only if it is placed in service within a low-income or rural census tract.

Advanced Energy Project Credit

The 2022 IRA revives the Code Sec. 48C qualified advanced energy property credit, allowing the Treasury Secretary to allocate an additional $10 billion in tax credits to qualifying projects, starting in 2023. The provision sets aside $4 billion for qualifying projects in census tracts in which a coal mine or coal power plant has closed and in which no project received a Code Sec. 48C credit allocation in prior years.

Under the provision, projects receive a base credit rate of 6 percent of qualified investments in qualified advanced energy projects. To receive a bonus rate of 30 percent, taxpayers must satisfy the prevailing wage requirements for the establishment, expansion, or re-equipping of a manufacturing facility and for five years after the project is placed into service, and satisfy the apprenticeship requirements during the construction of the project.

Under the provision, eligibility for the credit is modified to include projects to establish, expand, or re-equip facilities for the production, manufacturing, or recycling or advanced grid, energy storage, and fuel cell equipment; equipment for the production of low-carbon fuels, chemicals, and related products; renewable energy and energy efficiency equipment; equipment for the capture, removal, use, or storage of carbon dioxide; and advanced light-, medium-, and heavy-duty vehicles and related components and infrastructure. The credit is also allowed for projects to reduce carbon emissions at existing industrial facilities by at least 20 percent.

The Treasury Secretary will determine allocations to projects each year with a requirement that property is placed in service within four years of the date of the allocation.

Advanced Manufacturing Production Credit

The 2022 IRA provides a production credit under Code Sec. 45X for each eligible component that is produced and sold. Eligible components include solar polysilicon, wafers, cells, modules, backsheets, longitudinal purlins, and structural fasteners; wind blades, nacelles, towers, and offshore foundations; inverters; battery electrode active materials, cells, and modules; and critical minerals. The credits are provided based on mass, watt-capacity, sales price, or production cost.

The credits are provided for eligible components produced and sold before January 1, 2030. For components sold after that date, the credit is reduced by 25 percent each year, and is unavailable for components sold in 2033 and beyond. This phaseout does not apply to the credits for critical minerals.

Reinstatement of Superfund

The 2022 IRA reinstates the Hazardous Substance Superfund Financing Rate on crude oil and imported petroleum products at the rate of 16.4 cents/per gallon, indexed to inflation, and reinstates the tax on taxable chemicals.

This provision is effective after December 31, 2022.

Clean Energy Production and Investment Credits

The 2022 IRA create an emissions-based incentive that would be neutral and flexible between clean electricity technologies. Taxpayers are able to choose between a production tax credit (PTC) under Code Sec. 45Y or an investment tax credit (ITC) under Code Sec. 48D, which is provided based on the carbon emissions of the electricity generated - measured as grams of carbon dioxide equivalents (CO2e) emitted per KWh generated. Any power facility of any technology can qualify for the credits, so long as the facility's carbon emissions are at or below zero.

Taxpayers electing the PTC will receive a credit equal to up to 2.5 cents per kilowatt hour (KWh) of electricity produced and sold in the 10-year period after a qualifying facility is placed in service. Taxpayers electing the ITC will receive a credit worth up to 30 percent of the investment in the year the facility is placed in service. All taxpayers are eligible for a PTC or 0.5 cents per kilowatt hour or an ITC of 6 percent. Taxpayers who pay wages at not less than local prevailing rates and utilize registered apprenticeship programs are eligible to receive elevated credits of 2.5 cents per kilowatt hour or 30 percent. The prevailing wage and apprenticeship provisions apply in the same manner as for the Code Sec. 45 PTC and Code Sec. 48 ITC.

For combined heat and power systems (CHP), the emissions rate is calculated using both electrical and useful thermal energy. Under the proposal, the British thermal units (BTUs) of useful thermal energy in a CHP system are converted to kilowatt hours using the facility's heat rate (the number of BTUs required to generate 1 KWh). These converted KWhs are also accounted for as production for purposes of the PTC.

Standalone energy storage property is also eligible for the full 30 percent ITC. Energy storage property is defined as under Code Sec. 48, as modified under 2022 IRA Section 13102. Clean electricity projects smaller than 5 megawatts (MW) are allowed to include the costs of interconnection under the clean electricity ITC.

Taxpayers may receive larger credits under certain circumstances, including investments in clean electricity or energy storage property in energy communities. Projects that comply with certain domestic content requirements similarly qualify for elevated credit rates, including using steel, iron, and manufactured products that are mined, produced, or manufactured in the United States. These rules apply in a similar manner to those applied to Code Secs. 45 and 48.

The elevated credits are generally equal to a 10 percent increase to the value of the PTC or a 10-percentage point increase to the value of the ITC. The provision directs the Treasury Department to publish emission rates for similar technologies each year for taxpayers to use for purposes of determining their eligibility. The credits are set to phase out the latter of 2032 or when emission targets are achieved: when the electric power sector emits 75 percent less carbon than 2022 levels, the incentives will be phased out over three years. Facilities will be able to claim a credit at 100 percent value in the first year, then 75 percent, then 50 percent, and then 0 percent.

Taxpayers are similarly provided the same ability to elect direct pay for the clean electricity PTC and ITC as for current Code Sec. 45 and 48 PTC and ITC, including limitations with respect to domestic content.

The provision applies to facilities placed in service after December 31, 2024.

Cost Recovery for Qualified Facilities, Qualified Property, and Energy Storage Technology

The 2022 IRA provides that any facility described in the clean electricity production credit and any qualified property or grid improvement property described in the clean electricity investment credit will be treated as 5-year property under the general depreciation system for purposes of Code Sec. 168.

This provision applies to facilities and property placed in service after December 31, 2024.

Clean Fuel Production Credit

The 2022 IRA creates a technology-neutral incentive for the domestic production of clean fuels. The level of the incentive depends on the lifecycle carbon emissions of a given fuel. Lifecycle emissions take into account the "well to wheel" emissions profile, from production of the feedstock for the fuel through to its use in a vehicle. Fuels may qualify for the credit if the fuel's lifecycle emissions are at least 25 percent less than the current U.S. nationwide average. Zero-emission fuels qualify for a base incentive of $0.20 per gallon or gallon equivalent. Sustainable aviation fuel that meets certain American Society for Testing and Materials standards and is not derived from palm oil qualifies for a base incentive of $0.35 per gallon or gallon equivalent.

Qualifying production is restricted to production in the United States of fuel that is used or sold. No credit shall be allowed at a facility that includes property for which a credit is allowed under Code Secs. 45Q, 45X, or the Code Sec. 48 ITC for clean hydrogen production facilities during the taxable year.

The base incentive amounts are increased to the extent a fuel's lifecycle emissions are below zero and reduced to the extent they are above zero, phasing out ratably between zero and the baseline emissions rate. Between now and 2030, qualifying fuels must become increasingly cleaner in order to qualify for the credit. Fuels produced before 2027 may qualify if the fuel's lifecycle emissions are less than 50 kilograms of carbon dioxide equivalents per million British thermal units.

Fuels must be at least transportation grade - suitable for use in a highway vehicle or aircraft - but may be used for any business purpose, including as transportation fuel, industrial fuel, or for residential or commercial heat. All taxpayers are eligible for credits of up to $0.20 per gallon ($0.35 in the case of aviation fuel). Taxpayers who pay wages at not less than local prevailing rates and utilize registered apprenticeship programs are eligible for elevated credit rates of $1.00 per gallon ($1.75 in the case of aviation fuel).

No credit is allowed for non-aviation fuel that is derived from coprocessing biomass with a feedstock that is not biomass. Taxpayers are provided the ability to elect direct payment of the credits, in a similar manner to other provisions.

The Treasury Department is to annually publish emissions rates for fuels that are produced using similar feedstocks and production pathways that taxpayers will use for purposes of determining their credit rates.

The credit is not allowed for fuel produced and sold or used after December 31, 2027.

Elective Payment for Energy Property and Electricity Produced from Certain Renewable Resources, etc. and Transferability of Applicable Credits Elective Payment

The 2022 IRA allows eligible taxpayers to elect to be treated as having made a payment of tax equal to the value of the credit they would otherwise be eligible for under:

(1) Code Sec. 48 ITC,

(2) Code Sec. 45 PTC,

(3) Code Sec. 45Q credit for carbon capture and sequestration,

(4) Code Sec. 30C alternative fuel vehicle refueling property credit,

(5) Code Sec. 48C advanced energy project credit,

(6) Code Sec. 45U zero-emission nuclear power production credit,

(7) Code Sec. 45V clean hydrogen production credit,

(8) Code Sec. 45X advanced manufacturing production credit,

(9) Code Sec. 45Y clean electricity production credit,

(10) Code Sec. 48D clean electricity investment credit, and

(11) Code Sec. 45Z clean fuel production credit.

Rather than opting to carry forward credits to years when their credits can offset their tax liability, taxpayers can elect to treat the amount of credit as a payment of tax. This allows entities with little or no tax liability to accelerate utilization of these credits, including tax-exempt and Tribal entities.

Eligible taxpayers include tax-exempt entities, state and local governments (and subdivisions thereof), tribal governments, and the Tennessee Valley Authority. This limitation on eligible taxpayers does not apply for purposes of taxpayers claiming credits under Code Sec. 45Q, 45V, or 45X. For purposes of credits under Code Sec. 45X, this exception is limited to a single period of five consecutive years.

Any election by a partnership or S corporation must be made at the entity level, not the partner or shareholder level.

Taxpayers electing this treatment with respect to facilities placed into service under Code Secs. 45, 45Q, 45V, and 45Y must make a one-time, irrevocable election to have this provision apply during the tax year the facility is placed into service.

This provision provides that, in the case of a real estate investment trust (REIT), the requirements limiting qualified investment to the REIT's ratable share of such qualified investment does not apply.

In the case of a facility placed in service after December 31, 2022, for which a credit is allowed under the Code Sec. 48 ITC, Code Sec. 45 PTC, Code Sec. 45Y clean electricity PTC, or Code Sec. 48D clean electricity ITC, the amount of payment allowed under this provision shall be equal to the amount of credit the taxpayer would otherwise be eligible with respect to such facility multiplied by the applicable percentage, as defined under Code Secs. 45 and 45Y. The applicable percentage for facilities which satisfy domestic content requirements and facilities with a maximum net output of less than 1 megawatt shall be 100 percent.

Under this provision, the Treasury Secretary must provide appropriate exceptions to domestic content requirements if such requirements would increase the overall cost of construction of the project by more than 25 percent or if the relevant domestic products are not produced in the United States in sufficient and reasonably available quantities or of a satisfactory quality. This provision does not apply to mirror-code jurisdictions.

This provision applies to tax years beginning after December 31, 2022.

Transferability. Taxpayers who are ineligible for the direct pay election may instead opt to transfer any applicable credit to another taxpayer. This transfer may be for all or a portion of a credit, but any credit (or portion thereof) may only be transferred once.

Credits eligible to be transferred include:

Code Sec. 30C alternative fuel refueling property credit

Code Sec. 45 renewable electricity production credit

Code Sec. 45Q credit for carbon oxide sequestration

Code Sec. 45U zero-emission nuclear power credit

Code Sec. 45V clean hydrogen production credit

Code Sec. 45X advanced manufacturing production credit

Code Sec. 45Y clean electricity production credit

Code Sec. 48 energy investment tax credit

Code Sec. 48C advanced energy project credit

Code Sec. 48D clean electricity investment credit

Any amount paid in consideration of a transfer must be paid in cash. This payment is not deductible, nor is it included in income. For the credits under Code Secs. 45, 45Q, 45V, and 45Y, the transfer must be made separately for each year of the credit's relevant credit period.

Credits Claimed for Progress Expenditures Are Not Eligible to Be Transferred, Nor Are Credit Carryovers

The 2022 IRA provides that any election to transfer credits by a partnership or S corporation must be made at the entity level, not the partner or shareholder level. The Treasury Secretary has authority to request such information or require such information reporting as is necessary to prevent fraud and improper payments. In the case of an excessive payment, an additional 20 percent penalty applies. The credit carryback period is extended from one to three years for any credit eligible to be transferred.

IV. Affordable Care Act Subsidies

The 2022 IRA extends the expansion of the Affordable Care Act (ACA) health insurance subsidies, enacted as part of the American Rescue Plan Act of 2021, through 2025. Under Code Sec. 36B, a health insurance subsidy is available through a premium assistance credit for eligible individuals and families who purchase health insurance through insurance Exchanges offered under the ACA. The premium assistance credit is refundable and payable in advance directly to the insurer on the Exchange. Individuals with incomes exceeding 400 percent of the poverty level are normally not eligible for these subsidies. However, under the American Rescue Plan Act, that provision was eliminated for tax years beginning in 2021 or 2022 so that anyone can qualify for the subsidy. In addition, the provision limits the percentage of a person's income paid for health insurance under an ACA plan to 8.5 percent of income. This provision is also extended under the 2022 IRA.

V. Other Tax-Related Provisions

Permanent Extension of Tax to Fund Black Lung Disability Trust Fund

The 2022 IRA permanently extends the $1.10 per ton and $0.55 per ton tax rates for underground and surface mined coal, respectively, in addition to the limitation of 4.4 percent of the sales price.

Increase in Research Credit Against Payroll Tax for Small Businesses

Under current law, eligible start-up businesses are allowed to elect to claim up to $250,000 of the research credit against their payroll taxes. The 2022 IRA allows those businesses to claim an additional $250,000 each year against Medicare payroll taxes.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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