The Inflation Reduction Act 2022: promoting innovation and clean vehicles.

Recently, President Biden signed The Inflation Reduction Act of 2022. The Act contains several new environment-related tax credits. The Act also extends and modifies some preexisting credits.

New credit for qualified commercial clean vehicles

There is a new qualified commercial clean-vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The credit per vehicle is the lesser of: 1) 15% of the vehicle’s basis (30% for vehicles not powered by a gasoline or diesel engine) or 2) the “incremental cost” of the vehicle over the cost of a comparable vehicle powered solely by a gasoline or diesel engine. The maximum credit per vehicle is $7,500 for vehicles with gross vehicle weight ratings of less than 14,000 pounds, or $40,000 for heavier vehicles.

Increase in qualified small business payroll tax credit for Increasing research activities

Previous to this Act, a “qualified small business” (QSB) with qualifying research expenses could elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax. Some small businesses were concerned they may not have a large enough income tax liability to take advantage of the research credit. For tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit can’t exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.

Extension of incentives for biodiesel, renewable diesel and alternative fuels

Under pre-Act law, you could claim a credit for sales and use of biodiesel and renewable diesel that you use in your trade or business or sold at retail and placed in the fuel tank of the buyer for such use and sales on or before December 31, 2022. The Act now allows a business to claim a credit for sales and use of biodiesel and renewable diesel fuel, biodiesel fuel mixtures, alternative fuel, and alternative fuel mixtures on or before December 31, 2024. You’re also now allowed to claim a refund of excise tax for use of 1) biodiesel fuel mixtures for a purpose other than for which they were sold or for resale of such mixtures on or before December 31, 2024, and 2) alternative fuel as that used in a motor vehicle or motorboat or as aviation fuel, for a purpose other than for which they were sold or for resale of such alternative fuel mixtures on or before December 31, 2024.

New corporate alternative minimum tax

To help offset and pay for the clean energy tax credits and incentive provided, Congress has passed new legislation creating a new corporate alternative minimum tax. The corporate alternative minimum tax pre- 2018 was imposed on taxable income as adjusted. The new corporate alternative minimum tax is imposed on adjusted financial statement income. Thus, the new alternative minimum tax applies if 15% of the corporation’s adjusted financial statement income minus any alternative minimum tax foreign tax credits exceed its regular tax plus its base erosion anti-abuse tax for the year. The new alternative minimum tax applies only to applicable corporations with average annual adjusted financial statement income for the three-tax year period ending with the current tax year when it exceeds $1,000,000,000 ($1 billion). Special rules apply to members of a foreignparented multinational group that may cause the new alternative minimum tax to apply if the average adjusted financial statement income for the corporation equals or exceeds $100,000,000 ($100 million). Also, there are a number of aggregation rules, under which related businesses may be aggregated for purposes of the income test, including a rule that includes income of a partnership in which the corporation is a partner.

Stock repurchase plan

The Inflation Reduction Act of 2022 has added a 1% excise tax on the repurchase of stock of any domestic corporation whose stock is traded on an established securities market. Only repurchases that are treated as redemptions for tax purposes are subject to the tax. A $1 million exemption is provided, which is increased to the extent the corporation issues additional stock during the tax year, including stock issued or provided to employees of the corporation or employees of certain affiliates of the corporation.

Automatic penalty abatement (notice 2022-36)

Hot off the press, the IRS announced it will provide automatic relief from certain failure to file penalties and information reporting penalties for 2019 and 2020 taxable years. The IRS will determine whether the taxpayer qualifies and will automatically abate, refund or credit the taxpayer’s account, as appropriate. This is huge as penalties related to some of the international reporting forms can amount to upwards of $25,000 per form per year. You will want to act quickly because the tax years 2019 and 2020 returns must be filed by September 31, 2022. The relief applies to these foreign information forms:

  • Form 5471 – Information Return of US Persons with Respect to Certain Foreign Corporations
  • Form 5472 – Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business

Our firm is equipped to handle the new provisions. Please reach out to us if you think you can benefit from any of the above applied incentives, alternative minimum tax, or penalty abatement.