On August 16, 2022, President Joe Biden signed the Inflation Reduction Act of 2022 into law. The IRA contains numerous changes to the Internal Revenue Code (IRC) intended to boost government revenue and promote clean energy. The new tax provisions are not likely to have a great impact on the construction industry, although it is worth understanding the possible outcomes. Within the IRA’s 700+ pages are many provisions that provide incentives for clean vehicles and other “green” measures. Read on to learn more about what this bill could mean for construction contractors.
Tax Changes in the Inflation Reduction Act
One of the main changes made by the IRA in terms of taxes is a reinstatement of a corporate alternative minimum tax (AMT). Congress created the first AMT in the 1980s to ensure that individuals and corporations could not use tax deductions and credits to reduce their tax bill to zero in years when they show a profit. The Tax Cuts and Jobs Act of 2017 eliminated the corporate AMT and instituted a 21% flat income tax for corporations.
Section 10101 of the IRA reinstates a corporate AMT, but only for corporations with adjusted financial statement income (AFSI) of over $1 billion over the prior three tax years. The 21% flat income tax rate remains in place. It is unlikely that the new AMT will affect any but the largest corporations. It is still worth understanding how it would work.
The AMT is equal to 15% of a corporation’s AFSI. If a corporation pays the AMT in one year, it can claim a tax credit the following year. The is would be equal to the difference between:
- The amount of income tax it would owe at 21%; and
- The likely amount of AMT it would owe.
The corporate AMT applies to all taxable years starting after December 31, 2022.
Construction Benefits in the Inflation Reduction Act
The IRA includes multiple provisions that promote various clean technologies, including incentives for individuals and businesses to invest in electric vehicles.
Clean Vehicle Credit
Section 13401 of the IRA amends § 30D of the IRC, which provides tax credits of up to $7,500 for the purchase of “qualified plug-in electric drive motor vehicles.” The new law does not change the amount of the tax credit, but it modifies the standards for claiming it.
Under existing law, the Clean Vehicle Credit includes:
- A base amount of $2,500; and
- $417 for a battery with at least 5 kilowatt-hours of capacity, plus another $417 for each additional 5 kilowatt-hours, up to a maximum of $5,000
The IRA provides a maximum credit of $7,500 in two parts. First, it provides a credit of $3,750 for vehicles with batteries that meet the following criteria:
- The batteries contain “applicable critical minerals,” defined by § 45X(c)(6) of the IRC, as amended, to include aluminum, beryllium, cobalt, graphite, lithium, nickel, tin and others.
- The minerals were extracted or processed in the U.S. or a country with a free trade agreement with the U.S., or they were recycled in North America.
The second part provides a tax credit of $3,750 if the percentage of the value of the battery components that were manufactured or assembled in North America is greater than or equal to the “applicable percentage.” For the tax year 2023, this percentage will be 50%. It will increase by 10% each year until it reaches 100% in 2029.
Credit For Previously-Owned Clean Vehicles
Section 13402 of the IRC adds § 25E to the IRC to create a tax credit for the purchase of used electric vehicles. This tax credit is primarily geared towards individuals and families since the law limits its availability based on maximum modified adjusted gross income amounts:
- $150,000 for a joint return;
- $112,500 for a head of household; or
- $75,000 for an individual return.
The amount of the tax credit is the lesser of $4,000 or 30% of the vehicle’s sale price.
Qualified Commercial Clean Vehicles
Section 13403 of the IRA adds § 45W to the IRC to create a tax credit for “qualified commercial clean vehicles.” The statute would define this term to include:
- Vehicles that are “manufactured primarily for use on public streets, roads, and highways”; or
- Mobile machinery, as defined by IRC § 4053(8).
The vehicle would need to use a rechargeable battery with a capacity of at least 15 kilowatt-hours for at least part of its power. The amount of the tax credit would be the lesser of:
- 15% of the vehicle’s basis, or 30% if the vehicle is entirely electric; or
- The vehicle’s incremental cost.
If you have any questions or would like additional information, please contact DMJPS.
Joseph Nash, CPA
Joseph (Joe) Nash works in taxation services at DMJPS. He has experience with family-owned businesses, including partnerships and corporations, and associated trusts and individuals. His work spans across multiple industries. He strives to provide thorough client service and foster long-term relationships.