There’s no denying the impact that high inflation has on working Americans. High prices decrease the spending power of money and earners at every level are feeling the pinch. One thing that can help is taking advantage of Inflation Reduction Act tax credits that are available as you prepare your federal income taxes.
At CMP, we work with taxpayers every day to help them identify ways to reduce their tax burden with federal tax credits and tax deductions. Any time a new tax law takes effect, we read about the changes with our clients in mind to ensure they claim any credits or deductions that apply to them.
With that in mind, here’s what you need to know about maximizing your tax savings with tax credits from the Inflation Reduction Act.
What is the Inflation Reduction Act?
The Inflation Reduction Act (IRA) represents a compromise on what was originally the Build Back Better Act proposed by President Biden. While not as sweeping as the original legislation, the Inflation Reduction Act includes an array of provisions that include the following:
- Reducing the federal budget deficit.
- Investing in clean energy.
- Allowing Medicare to negotiate lower prescription drug costs.
- Providing tax incentives for investments.
- Increasing funding for the IRS for tax enforcement.
- Extending premium credits for health plans.
As is the case with any legislation, many more provisions are included. In this article, we will focus on the new tax credits available to help taxpayers reduce the amount they pay in addition to other changes that may impact your taxes.
Impact of the Inflation Reduction Act on Individual and Small Business Taxes
There are several Inflation Reduction Act tax credits and provisions that you should know about before you file your taxes.
Rebates for Energy Efficiency
The Inflation Reduction Act has multiple incentives for individual taxpayers and businesses to embrace energy efficiency and make efficient home improvements. These incentives apply to homeowners, home builders, and commercial property owners.
- Homeowners. Homeowners in the US may receive a 30% credit of up to $3,200 in annual rebates to offset the costs of energy-efficient home upgrades. These include up to $2000 annually for electric or natural gas heat pumps and water heaters, biomass stoves or biomass boilers, and up to $1200 annually for other qualifying improvements including electrical panel upgrades, insulation, new doors and windows, home energy audits, and more. There may also be credits available for clean electrical appliances, including electrical stoves.
- Home Builders. The Inflation Reduction Act updated and extended the Tax Credit for Energy Efficient New Homes, which provides a tax credit of $2500 to $5000 to home builders who construct homes that are ENERGY STAR certified. The credit applies to single-family, multifamily, and manufactured homes and has been extended through 2032.
- Commercial Property Owners. Commercial building owners can save thanks to the expansion of an existing tax deduction that was made permanent in 2021. Any commercial building that increases its energy efficiency by 25% or more (reduced from 50% in prior years) can claim a tax deduction based on the square footage of the property. There are additional bonuses for efficiency improvements that exceed the minimum. This credit can be worth many thousands of dollars to commercial property owners.
These clean energy incentives require homeowners, home builders, and commercial property owners to make an up-front investment and save on their taxes later. It’s also worth noting that installing energy-efficient appliances may reduce energy bills, allowing taxpayers to save hundreds of dollars each year.
Clean Vehicle Tax Credit
The Clean Vehicle Tax Credit has been expanded to include previously owned eligible vehicles, with some restrictions. Here are the provisions of the clean vehicle credit for 2022 and 2023.
The 2022 provision allows for a tax deduction of $7,500 for the purchase of a new electric vehicle, provided it was assembled in North America and purchased on or before December 31, 2022. This credit would expire for specific manufacturers who had produced more than 200,000 units, making many popular brands of electric vehicles ineligible for the credit in recent years.
The 2023 provision allows for a tax deduction of up to $7,500 on new electric vehicles assembled in North America that retail for $80,000 or less (for SUVs, vans, and pickup trucks) and $55,000 or less (for other vehicles, including sedans). There is an additional provision for a $4,000 tax credit on the purchase of a previously owned electric vehicle, provided the cost is $25,000 or less for the first-time resale of a used qualifying vehicle For the years 2023 to 2032 the Electric Vehicle Tax Credit is subject to income limitations.
Tax Credit for Electrical Vehicles Charging Infrastructure
The EV charger tax credit isn’t new, but the original version of it expired at the end of 2021. It was reinstated in the Inflation Reduction Act. It includes tax credits for both individual homeowners and businesses who install EV charging stations.
For homeowners, the credit is 30% of the cost of charging hardware and installation up to a maximum credit of $1,000. The same percentage applies to businesses, but the maximum has been increased to $100,000 provided that the business meets the necessary labor and construction requirements.
Energy Credits for Residential Properties
Another provision of the Inflation Reduction Act is a modified and extended Residential Clean Energy credit. The IR allows for a 30% income tax credit for the installation of clean energy equipment, including:
- Geothermal heat pumps
- Battery storage
- Rooftop solar panels
- Wind energy
The 30% credit will last through 2032 and then decrease to a 26% credit for 2033 and a 22% credit for 2034. This credit is nonrefundable, meaning you can’t get a refund for unused credits, but any excess may be carried forward into future tax years.
Solar Energy Tax Credits
There are additional solar energy tax credits available for companies engaged in the manufacture and sale of solar panels. These credits are designed to incentivize companies to step up their production of solar panels, which will reduce costs to consumers and incentivize them to go solar.
Investment Tax Credit
The Investment Tax Credit (ITC) reduces the federal income tax liability for a percentage of the cost of a solar panel system that was installed during the tax year. For construction that started between 2022 and 2033, the credit is 30%. It will decrease to 22.5% in 2034 and 15% in 2035. There are bonus credits for using domestic products and for investments in community solar projects
Clean Electricity Production Tax Credit
The production tax credit, or PTC, is a tax credit for electricity generated by solar and other green technologies in the first 10 years of the system’s operation and is calculated per kilowatt-hour (kWh).
The base credit for systems beginning operations in 2022 through 2033 is 0.3₵ per kWh with an increased credit of up to five times the base amount if the credit recipient meets prevailing wage and apprenticeship requirements. Additional increases to the credit may be available if the project is located in a designated energy community.
We should note that businesses may take the ITC or the PTC, but not both. In most cases, the US Energy Department says that projects in sunny locations are likely to get more value from the PTC, while those with higher up-front costs or in areas that don’t get a lot of sunlight—such as the Pacific Northwest—may benefit more from the ITC.
Healthcare-Related Tax Benefits
There are additional healthcare benefits available through the Inflation Reduction Act, as follows.
- The financial help to purchase health insurance through Healthcare.gov and the Marketplace was originally slated to end in 2022 but has now been extended through 2025.
- Medicare coverage costs will be reduced thanks to a cap on the cost of insulin, a reduced annual cap of $2,000 for out-of-pocket prescription drug expenses, and lower costs across the board since the new law gives Medicare the power to negotiate with drug companies for the best possible prices.
While these benefits are not tax credits, they do represent an opportunity for Americans of all ages to save money on healthcare. Savings may be put toward other expenses or invested for retirement.
Small Business Payroll Tax Credit for Increasing Research Activities
Small businesses are responsible for the employer portion of Social Security tax, which can be expensive. The Inflation Reduction Act has provided an expansion to the payroll tax credit for small businesses that increase their research activities. Before the new law was passed, the maximum credit allowed was $250,000 and could only be applied to the Social Security portion of payroll tax.
As of 2023, companies may apply to double the $250,000 amount, or $500,000, of their R&D tax credit toward both the Social Security and the Medicare tax portions of employer payroll taxes. To claim this credit, businesses must complete the following steps:
- Complete Form 6765 and make the election to apply the credit to payroll taxes.
- Claim your credit by completing Form 8974 and attaching it to your payroll tax return.
To claim this credit, your company must be a Qualified Small Business meeting both of these criteria:
- Be no more than five years past the period for which it had no gross receipts; and
- Have gross receipts of less than $5 million for the election year.
Larger companies that don’t meet these requirements may still claim the standard R&D tax credit if they have qualifying research.
Corporate Tax Adjustments
The final element of the Inflation Reduction Act that relates to taxes applies to corporate taxation. Here are the provisions you should know.
Alternative Minimum Tax (AMT)
The corporate alternative minimum tax has been set at the excess of 15% of a corporation’s adjusted financial statement income (AFSI) over the corporate AMT foreign tax credit.
This means that the companies that meet the specifications for the AMT must pay the AMT, and the estimate from the Joint Committee on Taxation is that only about 150 companies will be required to pay it.
Companies that fall under the AMT are C corporations that have an average AFSI greater than $1 billion, or for foreign parented companies, $1 billion total AFSI with U.S.source AFSI of at least $100 million.
Excise Tax on Stock Buybacks
The Inflation Reduction Act has imposed a new 1% excise tax on any stock repurchased by a publicly traded company. It does not apply to:
- IRC §368 tax-free reorganizations.
- Repurchases that are treated as dividends.
- Repurchased stock totaling $1 million or less for the taxable year.
- Repurchases by real estate investment trusts (REITs) or regulated investment companies (RICs).
- Repurchases of stocks that are then contributed to employee stock ownership plans or employer-sponsored retirement plans.
- Some repurchases by securities dealers are made in the ordinary course of business.
Superfund Excise Taxes
The Inflation Reduction Act has permanently reinstated the Hazardous Substance Superfund excise tax on both domestic crude oil and imported petroleum products. The rate is and 9.0₵ per barrel for the petroleum oil spill tax and16.4₵ per barrel for the petroleum Superfund tax in 2023. The Superfund tax rate will be adjusted for inflation annually going forward.
Revenues from the excise tax will be used to finance the Hazardous Substance Superfund Trust Fund through 2032.
Frequently Asked Questions About the Inflation Reduction Act
Here are some of the most frequently asked questions about Inflation Reduction Act tax credits and changes.
Who is Eligible for Inflation Reduction Act Tax Credits?
Inflation Reduction Act tax credits include tax savings for individual taxpayers and corporations. Homeowners may qualify for tax credits if they replace old appliances with appliances certified with ENERGY STAR, install solar panels, or install an electric vehicle charging station.
Available credits for businesses include credits for energy efficiency, solar panels, EV charging stations, and a generous payroll tax credit that allows companies to offset their R&D expenses by reducing their payroll tax by up to $500,000. There are special credits for home builders who install appliances certified by ENERGY STAR.
How to Claim the Inflation Reduction Act Tax Credits?
The rules for claiming Inflation Reduction Act tax credits depend on which credits you are claiming. For example, if you paid for solar panels on your home, you would need to complete Form 5695 and attach it to your income tax return. An individual can claim the electric vehicle tax credit by completing Form 8936.
Business owners may claim the EV charging portal tax credit by completing Form 8911 and claim the payroll tax deduction for qualified research by completing Form 6765 and Form 8974.
If you aren’t sure how to claim a credit, we suggest completing your tax return with help from an experienced tax professional.
Are There Any Restrictions on Inflation Reduction Act Tax Credits?
All tax credits have some restrictions that dictate who may claim the credit and who may not. For example, homeowners may claim a credit for installing solar panels, but the installation must have been completed during the tax year to qualify. The home credit for installing an EV charging station is capped at 30% of the cost or $1,000 maximum. There are also income limits for some of the deductions.
Another example of a restriction is the Production Tax Credit, which corporations can use to offset the production costs of solar panels and other energy-efficient products. The maximum credit is 2.6₵ per kWh.
Maximize Inflation Reduction Act Credits on Your Tax Return
The Inflation Reduction Act has provided several tax credits that can help individual taxpayers and corporations save when they file their taxes. Since the process for claiming these credits can be complex, we recommend hiring an experienced tax professional to make sure you take advantage of all credits that are available to you.
Make the most of your tax return with CMP's expert income tax services. Let us help you claim Inflation Reduction Act credits. Contact us to schedule a free consultation.