Congress Passes Extensive Climate, Tax, and Health Care Bill
Update: President Biden signed this bill into law on August 16, 2022.
The Inflation Reduction Act of 2022[i] (the Act) has narrowly passed the Senate (August 7) and the House (August 12). The President is expected to sign the bill into law this week. This estimated $740 billion Act invests $369 billion in new or expanded climate and energy-related incentives, mostly in the form of complex tax credits. The Act also invests $80 billion in the IRS, primarily for increased enforcement, and nearly $40 billion in agricultural programs, most designed to encourage the reduction of greenhouse gas emissions. Additionally, the Act increases Affordable Care Act subsidies and seeks to lower prescription drug prices for Medicare participants. Several new tax provisions within the Act raise revenue. This summary reviews key provisions.
Tax Revenue Raisers
Corporate Alternative Minimum Tax – Section 10101
This section imposes a new 15 percent alternative minimum tax (AMT) on the annual adjusted financial statement income of C corporations averaging more than $1 billion in revenue over the past three years. This tax applies to U.S. corporations with foreign parents if average 3-year revenue earned in the U.S. is $100 million or more.
This new tax will apply to taxable years beginning January 1, 2023. This provision is projected to raise $222 billion over 10 years.
Excise Tax on Repurchase of Corporate Stock – Section 10201
Beginning in 2023, this section imposes a 1% excise tax on the fair market value of any stock repurchased by a publicly traded company. This provision is projected to raise $73.7 billion over 10 years.
Increased IRS Funding – Section 10301
This section provides $80 billion to increase IRS enforcement and services. This includes the following allocations:
- $45.6 billion to IRS for increased enforcement. Specifically, this funding is for IRS activities to determine and collect owed taxes, to provide legal and litigation support, to conduct criminal investigations, to provide digital asset monitoring and compliance activities, to enforce criminal statutes related to tax and other financial crimes, to purchase and hire passenger motor vehicles, and to provide other services.
- $25.3 billion to support taxpayer services and enforcement programs, including rent payments, facilities services, printing, postage, physical security, headquarters and other administrative activities, research and statistics of income, telecommunications, information technology development, enhancement, and the hiring of passenger motor vehicles.
- $4.75 billion for business systems modernization, including the development of callback technology and other technology to provide a more personalized customer service. The funds may not be used for the operation and maintenance of legacy systems.
- $3.2 billion to increase taxpayer services, including pre-filing assistance and education and filing and account services.
- $15 million to create a task force to examine the creation of an IRS-run free “direct efile” tax return system. The task force is supposed to report back to Congress within nine months regarding the cost to build such a system, taxpayer opinions and level of trust of such a system, and opinions of independent third-parties on the feasibility, schedule, and organizational design of such a system.
This section includes the following statement, “Nothing in this section is intended to increase taxes on any taxpayer or small business with a taxable income below $400,000. Further, nothing in this section is intended to increase taxes on any taxpayer not in the top 1 percent.”
The CBO says that the increased IRS enforcement is projected to raise $180 billion in revenue over 10 years.
Extended Limit on Excess Business Loss Recognition (Energy Security - Part IX, Other Provisions)
The Act extends the limitation on excess business losses of noncorporate taxpayers for an additional two years, through 2028. This is expected to raise $53.8 billion in revenue through additional taxes over 10 years.
“Clean” Energy Provisions
Energy Security - Part I, Clean Energy and Reducing Carbon
I.R.C. § 45 - Energy Produced from Renewable Sources
The Act extends and enhances production tax credits for electricity produced from certain renewable resources, including facilities producing electricity from wind, geothermal, and closed loop biomass. These credits expired at the end of 2021, but will now generally apply to projects where construction begins before January 1, 2025.The Act also reinstates a solar PTC, allowing solar developers an option to take the PTC instead of the Investment Tax Credit.
The production tax credit is now tiered. The basic credit amount is 1.5 cents per kilowatt hour (adjusted for inflation in 2022 to 2.6 cents). Taxpayers that do not pay prevailing wages and ensure that qualified apprentices complete a certain amount of the work, however, will receive only .3 cents per kilowatt hour (adjusted for inflation). Facilities with a maximum net output of less than 1 megawatt (as measured in alternating current) are not subject to the prevailing wage and apprenticeship requirements. Additionally, taxpayers can boost credit amounts by 10 percent by sourcing their steel, iron, or manufactured-product components from United States manufacturers or by locating in an energy community (communities with significant employment in the fossil fuel industry or which have experienced the closure of a coal mine or coal-fired plant).
The production tax credit also applies to open-loop biomass and landfill gas, but the credit is one-half of that available to other projects.
This credit extension is estimated to cost $51 billion over 10 years.
I.R.C. § 48 – Energy Property Investment Tax Credit
The Act extends and enhances the investment tax credit for wind, geothermal, solar, and energy storage projects through 2024. Geothermal is extended through 2034. Taxpayers that meet prevailing wage and apprenticeship requirements are eligible for the full credit of 30 percent. The credit for those with a that do not meet prevailing wage and apprenticeship requirements drops to six percent. Facilities with a maximum net output of less than 1 megawatt (as measured in alternating current) are not subject to the prevailing wage and apprenticeship requirements.
Like the production tax credit, a bonus applies for those taxpayers who buy American components or locate in an energy community.
For 2023 and 2024, qualified solar or wind facilities located in low-income communities or on Indian land will qualify for an additional 10 percent bonus. The bonus jumps to 20 percent if the project is a low-income residential building project or a low-income economic benefit project.
The Act also modifies the definition of "energy property," eligible for the credit, to include stand-alone energy storage technology, qualified biogas property and microgrid controllers.
This credit provision is estimated to cost $14 billion over 10 years.
I.R.C. § 45Q – Carbon Sequestration
The Act extends and enhances the credit for carbon capture and sequestration. Under the new rules, carbon capture, direct air capture, or carbon utilization projects that begin construction before January 1, 2033, qualify for the credit. Eligibility extends to facilities that capture at least 1,000 metric tons per year. Only those companies that pay prevailing wages and meet apprenticeship requirements are eligible for the full credit. Those that do not meet these requirements receive only 20 percent of the full credit. The base credit rate for carbon oxide captured for geological storage is $17 per metric ton, and the bonus credit rate is $85 per metric ton. For direct air capture facilities, the Act provides a base credit rate of $36 per metric ton, with a bonus credit rate of $180 per metric ton.
This credit provision is estimated to cost $3 billion over 10 years.
I.R.C. § 45U - New Credit for Zero-Emission Nuclear Power Production
The Act creates a new credit for “zero-emission nuclear power” electricity sold from existing nuclear reactors. The tax credit extends through December 31, 2032. Those paying prevailing wages and meet apprenticeship requirements receive five times the credit amount as compared to those who don’t.
This credit provision is estimated to cost $30 billion over 10 years.
Energy Security - Part II, Clean Fuels
Part II of the Act implements credits for clean fuels. Several of these credits are extensions of existing credits, such as incentives for biodiesel, renewable diesel, and alternative fuels, as well as second-generation biofuel incentives. It also creates two new fuels credits: one for sustainable aviation fuel (I.R.C. § 40B(h)) and one for the production of clean hydrogen (I.R.C. § 45V).
These provisions are projected to cost $18 billion over 10 years.
Energy Security - Part III, Clean Energy and Efficiency Incentives for Individuals
Nonbusiness Energy Property Credit (I.R.C. § 25C)
The Act retroactively revives and extends the nonbusiness energy property credit through 2032. The credit had expired at the end of 2021. For 2022, the credit retains the same provisions that existed in 2021. Then, for 2023 and beyond, the credit is renamed the "Energy Efficient Home Improvement Credit." For 2023 through 2032, the Act increases the credit from 10 percent to 30 percent for the sum of amounts paid for qualified energy efficiency improvements and residential energy property expenditures. The credit further increases, in an amount up to $150, for amounts paid for a home energy audit.
The Act makes other significant changes to the credit by repealing the lifetime credit limit and implementing a yearly limit of $1,200 per taxpayer per year. A higher $2,000 annual limit applies for amounts paid to implement certain heat pumps, heat pump water heaters, and biomass stoves and boilers. Specific credit limits apply to specific property. For example, a $600 limit applies to credits derived from windows and skylights and a $250 limit applies to each door, with the total credit for all exterior doors limited to $500. The Act expands the definition of eligible "residential energy property expenditures" (eligible water heaters, heat pumps, etc.) to include property that is "used as a residence by the taxpayer" (no longer a "principal residence" requirement within the meaning of IRC § 121).
Beginning in 2025, taxpayers must have a qualified product identification number from a qualified manufacturer to take the credit.
This provision is estimated to cost $12 billion.
Residential Energy Efficient Property Credit (I.R.C. § 25D)
The Act significantly extends and expands the residential energy efficient property (REEP) credit, which is renamed the "Residential Clean Energy Credit." The credit was supposed to be 26 percent for 2022 and 22 percent for 2023. The credit was scheduled to expire at the end of 2023. The credit—available to taxpayers who install solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property in their homes—Is now available through 2034. The Act also expands the credit to include qualified battery storage technology expenditures beginning in 2023. The applicable credit rates are as follows:
- 26% for property placed in service before Jan. 1, 2022
- 30% for property placed in service after Dec. 31, 2021, and before Jan. 1, 2033
- 26% for property placed in service after Dec. 31, 2032, and before Jan. 1, 2034
- 22% for property placed in service after Dec. 31, 2033, and before Jan. 1, 2035
The extension and enhancement of this credit is estimated to cost $22 billion over 10 years.
Energy Efficient Commercial Buildings Deduction (I.R.C. § 179D)
The Act increases the energy efficient commercial buildings deduction, beginning in 2023, but only for those contractors who meet the prevailing wage requirements.The base deduction ranges on a scale from 50 cents to $1 per square foot, with the lower deduction for those with energy savings of 25 percent and more and the higher deduction applying to energy savings of 50 percent or more. The bonus deduction is available to those who meet prevailing wages and apprenticeship requirements. This bonus deduction ranges on a scale from $2.50 for energy savings of 25 percent or more to $5 per square foot where energy savings exceed 50 percent.
This provision is estimated to cost $362 million over 10 years.
New Energy Efficient Home Credit (I.R.C. § 45L)
The Act extends and modifies the new energy efficient home credit for eligible contractors. The credit had expired at the end of 2021, but the Act revives and extends it through 2032. The credit is modified beginning in 2023, with credit amounts ranging from $500 to $5,000, depending on the energy efficient components of the home and whether prevailing wage and apprenticeship requirements are satisfied.
This credit is expected to cost $2 billion over 10 years.
Energy Security – Part IV, Clean Vehicles
The Act implements credits expected to cost $14 billion over 10 years to incentivize the use of “clean” vehicles. This part overhauls the qualified plug-in electric vehicle credit and introduces two new credits. The changes are generally effective for vehicles purchased or placed into service in 2023, although a few provisions are effective before that:
- Clean Vehicle Tax Credit – This credit is an overhaul (including renaming) of the I.R.C. § 30D credit for new qualified plug-in electric drive motor vehicles. Under the new provision, the maximum credit for qualifying vehicles is $7,500, beginning in 2023 through 2032. Now, the credit availability depends upon the sourcing of the battery and critical mineral components (begins when regulations are promulgated) and upon whether the final vehicle was assembled in North America (begins at enactment), although there is a safe harbor for those purchasing between January 1, 2022, and August 16, 2022). The Act eliminates the per-manufacturer cap on these credits. The Act also imposes income limits for eligibility of this credit ($300,000 MAGI for taxpayers filing joint returns or surviving spouses, $225,000 for heads of household, or $150,000 for other taxpayers). There is no phaseout (it's a cliff), but the MAGI rules allow qualification in the current or prior tax year. The Act also imposes per vehicle price limits. If the manufacturer's suggested retail price exceeds these prices, there is no credit: Vans ($80,000), SUVs (80,000), Pickup Trucks ($80,000), Other vehicles ($55,000). Beginning in 2024, credits may be transferred to dealers. Treasury has released an FAQ with initial information.
- New credit for previously-owned clean vehicles (I.R.C. § 25E) - This credit is$4,000 or 30 percent of the cost of the vehicle, whichever is less.Sales price cannot exceed $25,000, and MAGI limits are much lower: $150,000 for MFJ, $ 112,500 for HOH, and $75,000 for single.
- New credit for qualified commercial clean vehicles (I.R.C. § 45W)
- Extension and modification of alternative fuel vehicle refueling property credit through 2032 (I.R.C. § 30C) (only in rural census tracts or low-income census tracts)
Energy Security – Part V, Investment in Clean Energy Manufacturing and Energy Security
Over 10 years, the Act will invest $36.9 billion in clean energy manufacturing incentives. These include the following:
- Modification and expansion of qualifying advanced energy project credit (I.R.C. § 48C)
- New advanced manufacturing production credit (I.R.C. § 45X)
Energy Security – Part VI, Reinstatement of the Superfund
The Act reinstates and increase the hazardous substance superfund tax on crude oil and petroleum products under I.R.C. § 4511. This is expected to raise $11 billion in taxes.
Energy Security - Part VII, Incentives for Clean Electricity and Clean Transportation
The Act will create new future credits (implemented in 2024 and later), expected to cost $65 billion over 10 years. These include:
- New clean electricity production credit (I.R.C. § 45Y)
- New clean electricity investment credit (I.R.C. § 48E)
- New clean fuel production credit (I.R.C. § 45Z)
Energy Security - Part VIII, Credit Monetization and Elective Payments
The Act provides that some of the above energy credits are refundable, but this refundability is generally limited to tax-exempt entities. The Act does, however, allow those entities not eligible for refundable credits, to sell all or a portion of their energy tax credits for cash.
Agricultural Provisions (Title II)
Title II of the Act appropriates nearly $40 billion for new and enhanced programs primarily designed to promote climate smart agricultural practices, increase renewable energy, reduce greenhouse gas emissions, and enhance the financial wellbeing of at-risk farmers, ranchers, and foresters.
The Act appropriates significant funding to expand current USDA conservation programs to promote the sequestration of carbon and the reduction of carbon emissions.
Environmental Quality Incentives Program (EQIP) - $8.45 billion in additional funding, allocated over four years as follows:
- $250 million for fiscal year 2023
- $1.75 billion for fiscal year 2024
- $3 billion for fiscal year 2025
- $3.45 billion for fiscal year 2026
Conservation Stewardship Program (CSP) - $3.25 billion, allocated as follows over four years:
- $250 million for fiscal year 2023
- $500 million for fiscal year 2024
- $1 billion for fiscal year 2025
- $1.5 billion for fiscal year 2026
The funds for the above programs (EQIP and CSP) are to be made available for one or more agricultural conservation practices or enhancements that the USDA determines:
- directly improve soil carbon,
- reduce nitrogen losses, or
- reduce, capture, avoid, or sequester carbon dioxide, methane, or nitrous oxide emissions, associated with agricultural production
Agricultural Conservation Easement Program (ACEP) – $1.4 billion, allocated as follows over four years:
- $100 million for fiscal year 2023
- $200 million for fiscal year 2024
- $500 million for fiscal year 2025
- $600 million for fiscal year 2026
These funds are to be used for easements or interests in land that will most reduce, capture, avoid, or sequester carbon dioxide, methane, or nitrous oxide emissions associated with land eligible for the program.
Regional Conservation Partnership Program - $6.75 billion, allocated as follows over four years:
- $250 million for fiscal year 2023
- $800 million for fiscal year 2024
- $1.5 billion for fiscal year 2025
- $2.4 billion for fiscal year 2026
These funds must be used to support the implementation of conservation projects that assist agricultural producers and nonindustrial private forestland owners in directly improving soil carbon, reducing nitrogen losses, or reducing, capturing, avoiding, or sequestering carbon dioxide, methane, or nitrous oxide emissions, associated with agricultural production.
These funds may not be paid out beyond September of 2031.
The Act also provides funding to USDA for the following programs:
- $1 billion to provide conservation technical assistance through NRCS
- $300 million to establish a program to quantify carbon sequestration and carbon dioxide, methane, and nitrous oxide emissions
Subtitle C--Rural Development and Agricultural Credit
This provision appropriates $14 billion for rural develop and lending projects, including the following:
- $1 billion for forgivable loans under section 317 of the Rural Electrification Act of 1936 (7 U.S.C. § 940g) for electric generation from renewable energy sources for resale to others
- $1.97 billion for eligible projects under the Rural Energy for America Program (REAP)
- $500 million for new biofuels infrastructure to increase the sale and use of agricultural commodity-based fuels
- $9.7 billion for USDA grant assistance to rural electrical cooperatives for renewal energy projects that promote long-term resiliency, reliability, and affordability of rural electric systems
Relief for Borrowers with At-Risk Operations
The Act allocates $3.1 billion to provide payments to distressed borrowers for the cost of loans or loan modifications. The USDA is directed to provide relief to agricultural operations at financial risk “as expeditiously as possible.” Additionally, the Act allocates $125 million to provide technical assistance to underserved farmers, ranchers, and foresters.
The Act allocates $2.2 billion to provide financial assistance to farmers, ranchers, and foresters who have experienced discrimination in USDA lending programs prior to January 1, 2021. No borrower may receive more than $500,000 in assistance. The program is to be administered by one or more non-governmental programs, under the direction of USDA. This provision replaces the embattled ARPA provision providing loan payments to socially disadvantaged farmers.
The Act provides $5 billion in funding to the USDA for the National Forest System, including funding for forest restoration and wildfire prevention, as well as grants to owners of state or private forests for climate mitigation, forest resilience, and related activities.
Increased Affordable Care Act Subsidies – Subtitle C
This provision extends the American Rescue Plan Act expansion of Affordable Care Act premium tax credits through 2025. ARPA had extended these provisions only through 2022. Taxpayers with household income above 400 percent of the federal poverty line will continue to qualify for premium tax credits if the second lowest silver plan would cost them more than 8.5 percent of household income. The Act also lowers the applicable percentages of household income (which determines the amount of the required premium) for all income levels. The following table depicts the final premium percentages through 2025. Taxpayers must only pay premiums in an amount up to the final premium percentage of household income. The premium tax credit pays the difference.
Prescription Drug Pricing Reform – Subtitle B
Beginning in 2026, the bill directs the Secretary of Health and Human Services to negotiate Medicare part D drug prices. This program would expand each year. In 2026, the price of 10 drugs would be negotiated, in 2027 and 2028 that number would increase to 15, and by 2029, the negotiation plan would cover 20 Medicare part B and D drugs.
Additionally, the Act would cap out-of-pocket costs at $2,000 for Medicare Part D participants, beginning in 2025. It also includes a monthly cap on cost-sharing payments for Medicare Advantage and Part D plans in 2025 and a $35 cap on insulin for Medcare patients only, starting in 2023.
[i] H.R. 5376, "An Act to Provide for Reconciliation Pursuant to Title II of S. Con. Res. 14”.
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