Senate Democrats have agreed to bring H.R. 5376, the Inflation Reduction Act of 2022 (IRA), to a full floor vote as part of President Biden’s budget proposal. The Bill proposes sweeping changes across the tax landscape: a minimum “book tax” for corporations, closed tax loopholes, increased Internal Revenue Service (IRS) enforcement, and modified (but extended) energy tax credits. Taxpayers should pay attention to the highlights of the Bill’s content, as investment in green energy projects could help offset any disadvantageous policy changes.
New Alternative Minimum Tax
The bill amends Internal Revenue Code (IRC) § 55(b) to impose a 15% Alternative Minimum Tax (AMT) for C-corporations. If signed into law, the AMT would be 15% of the corporation’s adjusted financial statement income if the corporation’s average adjusted financial statement income for the prior three taxable years exceeds $1,000,000,000. In the case of a foreign-parented corporation, the three-year average threshold would be reduced to $100,000,000. The bill would allow for an AMT foreign tax credit to reduce its total AMT. The AMT would go into effect for tax years beginning after December 31, 2022.
Carried Interest Revisions
IRC § 1061 would be amended to end the “carried interest loophole” enjoyed by equity and hedge fund partner-managers. Historically, a part of the partner-managers’ compensation could be treated as long-term capital gains, yielding a preferential 23.8% tax rate. The amendment would classify all capital gains from equity and hedge fund partnerships as short-term capital gains, yielding up to a 37% tax rate. The capital gain reclassification does end after a five-year holding period for high-income individuals and a three-year holding period for lower-income individuals. The carried interest modifications would go into effect for tax years beginning after December 31, 2022.
Increased IRS Funding and Enforcement
The bill authorizes almost $80 billion in funding for the IRS to improve services and enhance enforcement. The initiatives for the funding range from general operational support, improved customer service, amplified audit and compliance programs, technology modernization, and guidance expansion. Congress aims to get a return on its investment by estimating that increased enforcement and compliance will generate an additional $122 billion in government revenue.
Production Tax Credit Extended and Modified
If passed, the IRS would revive and extend the Production Tax Credit (PTC) by three years, giving taxpayers until December 31, 2024, to begin construction on any qualifying facilities under § 45. Additionally, the base PTC for new and large projects would be reduced to 30¢; however, meeting a wage and apprenticeship requirement during construction would increase the PTC to $1.5 (which equates to the historical PTC amount). A 10% domestic content bonus credit would be created for facilities that use steel, iron, and manufactured byproducts produced in the U.S. during construction of the facility. These modifications would be effective for the 2022 tax year and onward. Safe harbors for the wage and apprenticeship requirements would exist for projects currently under construction.
Energy Credit Extended and Modified
The Energy Credit under § 48 would be extended by one year, giving taxpayers until December 31, 2024, to begin construction on any qualifying properties. The base § 48 credit would be reduced to 6% (and certain phase-out percentages reduced to lower amounts) for named qualified facilities and to 2% for all other facilities. However, an increased credit amount (of five times the statutory amount) would be available for projects that meet the wage and apprenticeship requirements during construction. The Energy Credit would also be expanded to cover energy storage technology, biogas facilities, and microgrid controllers. A 10% domestic content bonus credit would be created for facilities that use steel, iron, and manufactured byproducts produced in the U.S. during construction of the facility. These modifications would be effective for the 2022 tax year and onward. Safe harbors for the wage and apprenticeship requirements would exist for projects currently under construction.
New Credits to Supplement the Energy Credit’s Sunset
As the amended § 48 Energy Credit is set to expire for facilities beginning construction in 2025 and onward, the Bill creates two new alternative credits to supplement the investment initiative. The two new credits would be 1) a Clean Electricity Production Credit under § 45Y and 2) a Clean Electricity Investment Credit under § 48D. Under both new credits, qualifying properties would be those that are placed in service after December 31, 2024 and produce electricity without emitting greenhouse gases. Additionally, both credits would be subject to the wage and apprenticeship requirements, would have a 10% domestic content bonus credit available, and could have the base credit increased for being located in an energy community.
The § 48D Clean Electricity Investment Credit would be available for qualifying facilities beginning on January 1, 2025. If meeting the wage and apprenticeship requirements, the new provision could yield a credit of 30% of overall investment (but only 6% if the requirements are not met). With the availability of bonus credits, § 45D could provide up to a 50% credit.
The § 45Y Clean Electricity Production Credit would apply to the same property as § 48D, but the credit would instead be based on electric production opposed to overall investment. If meeting the wage and apprenticeship requirements, the new provision could yield a credit of $1.5 per kilowatt hours produced and sold (but only 30¢ if the requirements are not met). Additionally, the credit would be available for the 10-year period following the placed-in-service date of the facility. The base credit would also be subject to a 20% increase if taxpayers can achieve the domestic content and energy community bonus credit requirements.
Carbon Oxide Sequestration Credit Extended and Modified
The Carbon Oxide Sequestration Credit under § 45Q would be extended over the next decade, giving taxpayers until December 31, 2032, to begin construction on any qualifying facilities. Along with modifications made to credit qualification, the base § 45Q credit amounts would be reduced to $17 and $12. However, an increased credit amount (of five times the statutory amount) would be available for projects that meet the wage and apprenticeship requirements during construction; meeting such requirements would yield credit amounts of $85 and $60, respectively. These increased credit amounts are higher than what is available under current law. These modifications would be effective for the 2022 tax year and onward. Safe harbors for the wage and apprenticeship requirements would exist for projects currently under construction.
Energy Community Bonus Credit
For certain credits, including the PTC and Energy Credit, a 10% bonus credit (applied to the base credit amount) would be available for qualified facilities located in energy communities. Generally, the Bill defines these communities as areas, or are around areas, that have had significant employment related to the extraction, processing, transportation, or storage of coal, oil, or natural gas. These bonus credits would be available starting in the 2022 tax year.
Other Proposed Energy Credit Modifications and Extensions
- Amendment to § 48 to allow up to a 20% bonus credit for wind facilities placed in service in low-income communities or on Indian land, effective starting January 1, 2023.
- Revival of the Biodiesel and Renewable Diesel, Alternative Fuel, and Alternative Fuel Mixture Credits for the 2022 tax year and extends them through December 31, 2024.
- The Alternative Fuel Refueling Property Credit under § 30C would be extended through December 31, 2032.
- Extension of credits for second-generation biofuel production through December 31, 2025.
- Creation of new renewable energy credits:
- Effective starting January 1, 2023:
- § 40B – Sustainable Aviation Fuel Credit
- § 45W – Credit for Qualified Commercial Clean Vehicles
- § 45V – Clean Hydrogen Production Credit
- § 45X – Advanced Manufacturing Production Credit
- Effective starting January 1, 2024:
- § 45U – Zero-Emission Nuclear Power Production Credit
- Effective starting January 1, 2025:
- § 45Z – Clean Fuel Cell Production Credit
- Effective starting January 1, 2023:
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