Within just two weeks, the Inflation Reduction Act (IRA) passed the Senate, House of Representatives, and received the President’s signature. The IRA is, first and foremost, a climate bill directed at reducing emissions and incentivizing clean energy investments. Also a carry-over from many of the Build Back Better (BBB) attempts, the IRA contains several tax provisions affecting healthcare, manufacturing, and real estate development.
Addressing Climate Change + Clean Energy
The IRA focuses on incentivizing individuals and businesses to invest in clean energy and reduce their dependence on fossil fuels. While the bill is alleged to reduce the nation’s emissions by 40% by 2030, it’s also a way to hopefully ease the pain taxpayers continue to feel at the gas pumps.
Individual Tax Credits and Changes
Limitation on Allowed Losses from S Corporations + Partnerships
Individuals are currently limited to the amount of losses flowing from their pass-through entities to reduce other income on their personal returns. This limitation was set to expire in the next couple of years but is now extended through 2028.
Clean Energy Tax Credit for Homeowners
Residential energy property credits got a makeover with extensions or additions for credits related to efficient heat pumps, solar panels, electric HVAC, and electric water heaters. The credits are desired to help with the initial investment cost.
The Residential Clean Energy Credit (RCEC) is available through 2034 and applied to 26-30% of the property for wind, solar, and fuel cells attached to taxpayers’ homes.
Homeowners who install energy-efficient appliances after December 31, 2022 are eligible for the Residential Energy Property Credit (REPC). The REPC is limited to $1,200 annually and includes a tax credit of up to $150 for home energy audits. The IRA amended some of the original rules to eliminate the lifetime credit and change to the annual credit instead.
Through 2032, eligible homes qualify for a $2,500 or $5,000 credit for meeting the Energy Star Single Family New Homes National Program Requirements or the most recent Energy Star Manufactured Home National Program Requirements. Similarly, multi-family homes are eligible for $500 or $1,000 if certified as zero-energy homes.
Separate from the tax credits, the High-Efficiency Home Rebate Program allows low- and middle-income families to receive a rebate for purchasing energy-efficient appliances and home upgrades. To qualify, the total annual income must be less than 150% of the median income in that region. This rebate program will be administered through state and tribal governments.
Qualifying purchases and maximum rebate amounts:
- Heat pump for clothes dryer, water heater, space heating, or cooling
- Air sealing
- Electric wiring
- Electric load service center
These rebates will be available for qualifying families through September 30, 2031, and up to $14,000 in total rebates per family.
Electric Vehicle (EV) Credits–Clean Cars
Available for both new and used cars, taxpayers may receive a credit for purchasing an EV. Used EVs that are at least two years old and have only had one prior owner can get a $4,000 tax credit, subject to income limitations. New EVs still have a possible $7,500 credit, with some limitations.
The original credit was available to all newly manufactured vehicles but capped at a certain number per manufacturer. The new changes include income limitations, cost, and manufacturing location, to name a few. If eligible, customers can receive the credit in advance versus waiting for it to appear on their tax returns, as well.
Negotiated Drug Prices + Other Medicare Updates
The IRA will force drug companies to negotiate prices with Medicare to target the most common and expensive drugs. While taxpayers won’t see reduced prices until 2026, negotiated drugs will be covered on all Medicare plans. Additionally, out-of-pocket spending for Medicare Part D prescription medications will be capped at $2,000.
Other major healthcare-related updates from the IRA include:
- Insulin costs will be capped at $35/month, even if you haven’t yet met your Medicare Part D deductible
- Catastrophic coverage will no longer require coinsurance
- Medication prices cannot exceed the rate of inflation or must offer a rebate if prices increase rapidly
- Vaccines will be covered with no out-of-pocket costs
With all of these changes, individuals considering home upgrades will want to confirm if a rebate or a credit is available for the item and amount. Many of the items that previously qualified still do in the short term. In the longer term, manufacturers will need to get products certified for the credits/rebates.
The timing is important for EVs or “clean” cars purchased in the near term. Unlike in the past, manufacturers now must have their cars certified to be eligible for the new clean car credit. It is unknown how fast these certifications will take place. If considering buying a used EV/clean car, waiting might be the right answer. There are additional reporting requirements for dealers to confirm eligibility, which will take time to get everything into place.
Inflation Reduction Act Tax Credits for Businesses
Production Tax Credit (PTC) and Investment Tax Credit (ITC)
Buildings and facilities that begin construction before 2034 may be eligible for significant tax savings via the ITC and PTC. The PTC refers to facilities producing sustainable energy like wind, closed- and open-loop biomass, geothermal, landfill gas, trash, hydropower, marine, and hydrokinetic energy. The credit amounts to 2.6 cents per kWh of electricity produced and sold in 2022.
Like the PTC, the ITC targets newly constructed facilities or those constructed before 2025. To be eligible for the 30% ITC, facilities must satisfy one of the following conditions:
- The facility has a maximum net output of less than 1 MW (AC)
- Meet newly enacted prevailing wage and apprenticeship requirements
As with the PTC, businesses can increase the credit amount by 10% by using goods and manufactured products produced in the United States and 10% if located in an energy community. Wind and solar facilities that are less than 5 MW (ACT) and are located in low-income communities may be eligible for an additional 10% credit increase.
Advanced Manufacturing Production Credit (AMPTC)
The AMPTC is available to businesses producing and selling manufactured components in the United States after December 31, 2022. The credit amount varies depending on the product. Eligible components include:
- PV cells
- PV wafers
- Solar grade polysilicon
- Solar modules
- Wind energy components
- Torque tubes
- Structural fasteners
- Electrode active materials
- Battery cells
- Battery nodules
- Critical minerals
The AMPTC will phase out in 2030 and will not be available for products sold after December 31, 2032.
Most of the business tax benefits are related to constructing facilities that generate sustainable energy or manufacture components related to energy production. If you’re part of the construction or manufacturing industries, these credits could signal a growth opportunity.
Managing Your Tax Liability with Aldrich
As legislation and tax changes unfurl, we know it can be tough to stay ahead of the curve. Our advisors are here to help guide you through the nuances of tax liability. If you have questions about your finances or want to explore strategies to increase your tax efficiency, fill out the form below to contact the author and expert, Sara Northcutt, CPA.
Meet the Author
Sara Northcutt, CPA
Aldrich CPAs + Advisors LLP
Sara Northcutt joined the firm in 2005 and has more than a decade of experience working on a wide range of clients, including financial lending, private equity, real estate, and other closely held businesses. Sara specializes in multi-state tax compliance. Sara received her Bachelor of Arts degree from Vanguard University of Southern California and did her... Read more Sara Northcutt, CPA
- Closely-held businesses
- Certified Public Accountant
- Strategic tax planning and compliance