Tax Strategy: Inside the Inflation Reduction Act legislation

The legislation includes a wide variety of provisions in support of green energy, estimated to cost $370 billion over 10 years, and a few in support of fossil fuels as well. Some of these provisions extend or expand existing tax provisions while others create new incentives. Extended provisions include the Code Sec. 45 Production Tax Credit, to the beginning of 2025, and the Code Sec. 48 Investment Tax Credit, to the start of 2025, with geothermal projects given an extension to the beginning of 2035 and electricity produced by zero-emissions projects to the beginning of 2033, and with expanded eligible equipment. The Code Sec 45Q Carbon Capture Credit is extended to the beginning of 2033. The Code Sec. 48C Advance Energy Project Credit would be expanded to include certain clean energy manufacturing facilities.

New provisions include a production tax credit for clean hydrogen starting in 2023 and ending after 2032, a credit for sustainable aviation fuel, and a new Advance Manufacturing Production Credit to promote domestic production of green energy components and critical materials. New tax credits have also been created for zero-emission nuclear power production and fuels with lower emissions.

Other changes provide for enhanced rates when prevailing wage and apprenticeship requirements are met and enhanced credits when domestic content or favored location requirements are met. Other enhancements include the ability to transfer energy tax credits, a three-year carryback period, and an option to obtain the credits through a direct pay option.

The plug-in electric vehicle credit, which is now called the Clean Vehicle Credit and includes fuel-cell and hydrogen vehicles, is extended through 2032, and the 200,000 vehicle cap per manufacturer is lifted. In addition to the $7,500 credit for new vehicles, there is a new $4,000 credit for used vehicles. Purchasers also have the option to get the credit as a price reduction at the time of purchase. However, the legislation also imposes restrictions requiring increased sourcing over time of components from the U.S. or other countries with which the U.S. has free trade agreements, puts limits on the price of eligible vehicles, and puts limits on the incomes of eligible taxpayers. These restrictions may limit the vehicles eligible for the credit for some period of time.

The $500 lifetime Nonbusiness Energy Property Credit transforms into a $1,200 annual credit. Rebates of up to $14,000 would be available to assist in installation of certain energy-efficient home installations and rebates of up to $4,000, or $8,000 for low- and moderate-income households, for retrofitting homes based on projected energy savings. Rebates may in some cases be available at the time of sale. HUD housing is also authorized grants to upgrade public housing. Tax credits for developers of energy-efficient homes are also enhanced.

The Residential Energy Efficient Property Credit, which includes solar and small wind installations, which was already starting to phase out, was extended as a 30% credit through 2032. Tax credits were also made available for low-income community solar projects and apartment complexes. Small businesses can qualify for tax deductions of up to $1 per square foot for energy-efficient expenditures and a 30% credit for conversion to clean vehicles. 

There are also some non-tax provisions to assist drought-stricken parts of the country.

In order to obtain passage, the legislation also expands oil and gas leasing in the Gulf of Mexico and Alaska and promotes some pipeline construction.

The legislation permits Medicare to negotiate lower drug prices (up to 10 drugs in 2026, another 15 in each of 2027 and 2028, and another 20 annually starting in 2029) and puts a cap on annual out-of-pocket costs at $2,000.

The provision in the American Rescue Plan to expand premium assistance for Affordable Care Act coverage would be extended through 2025.

A new corporate minimum tax of 15% would be imposed on corporations with an average book income of over $1 billion. Last-minute changes would help to preserve manufacturers' ability to write off capital assets and exclude companies owned by private-equity firms. The exclusion of subsidiaries of private-equity firms was paid for with a two-year extension of the limitation on business losses. This provision is projected to raise $258 billion over 10 years.

The removal of an enhanced tax on carried interests from the legislation at the insistence of Senator Sinema resulted in the replacement of the revenue with a 1% tax on stock buybacks. This provision is projected to raise $74 billion over 10 years.

The allocation of nearly $80 billion to the IRS with the hope of expanding enforcement activities was projected to raise revenue from those enforcement activities.