The new Clean Vehicle Credit eliminates the limitation on the number of vehicles eligible for the credit and requires assembly of the vehicle now take place in North America. Further beginning in 2023, purchase price and taxpayer income limitations may apply. In addition, the act provides credit provisions for used and qualified commercial clean vehicles.
Overall, the Inflation Reduction Act significantly changes the eligibility rules for tax credits available for clean vehicles, and additional guidance is still to be issued by the IRS.
The residential clean-energy credit has been extended and modified. The personal tax credit for solar electric, solar hot water, fuel cell, small wind energy, geothermal heat pump, and biomass fuel property was set to expire in 2023 and is now extended through 2034.
Another perhaps not so taxpayer friendly provision is the extension of the limit on excess business losses of non-corporate taxpayers.
Under prior law, there was a cap set on business loss deductions by non corporate taxpayers. For 2018 through 2025, the Tax Cuts and Jobs Act limited deductions for net business losses from sole proprietorships, partnerships and S corporations to $250,000 ($500,000 for joint filers).
Losses in excess of those amounts (which are adjusted annually for inflation) may be carried forward to future tax years under the net operating loss rules.
Although another law (the CARES Act) suspended the limit for the 2018, 2019 and 2020 tax years, it’s now back in force and has been extended through 2028 by the Inflation Reduction Act.
James Elliott: There are some important, smaller provisions in the Act, like the extension of the renewable energy tax incentives through 2034 (now called residential clean energy credit). The doubling of the R&D credit for small taxpayers will also be a great opportunity for our clients.
The biggest thing, however, is what’s not included in the Act, which is no direct changes to the corporate or individual income tax rates.
Daniel Novak: Most of the questions I’ve received around the IRA have been related to the energy incentives.
But the way the law was written, with many requirements for U.S. made products, it’s left significant uncertainty as to what may qualify.
This uncertainty has led to a “wait and see” stance until we have more guidance from the IRS.
But also want to ask, that $80 billion in additional funding for the Internal Revenue Services: How much and how soon will it have an impact on the issues you have had in getting service from this key government agency, if at all?
Jon Dal Poggetto: We have not seen any improvement in service from the IRS yet. We hope that the funding allows them to restore their services such as receiving telephone calls on notices and working with us to resolve disputes.
Judy Deniz: I think it’s going to be a couple of years before we see improvement, but I think the improvement will relate more so to the IRS catching up from the bag log created during the pandemic.
Over the last couple of years, we could be on hold for hours, and that’s if you were lucky enough to even get through to a hold status. In the 17 years I have been in public accounting, I can’t ever say it has been “easy” dealing with the IRS as there’s always a hold, lag, or tedious process to get to the right department.
James Elliott: Of the $80 billion, only $3 billion will be directed to taxpayer services, while the rest will be allocated to enforcement ($46 billion), operations ($25 billion) and business systems modernization ($5 billion).
Daniel Novak: It’s definitely going to take some time to see how the funds are allocated and what the impact will be. Hopefully the first improvements we notice will be in customer support and the ability to get an issue resolved efficiently.
We are also hoping that this will enable them to stop using fax machines and move into the 21st century from a technological standpoint.
Are you concerned related to that it will increase audits on clients, though Treasury Secretary Yellen has told the agency not to go after small businesses more aggressively?
Jon Dal Poggetto: No, increased audit activity is not a concern.
James Elliott: Our professional associations have been advocating heavily on behalf of CPAs and our clients, and we have heard very promising feedback on how funds are intended to be spent.
Overall, we feel the increased funding to IRS will benefit our clients.
Daniel Novak: I am not concerned, and the reason is that the IRS needs to get up to a minimum level of service before increasing focus on enforcement. In a 2022 report from the taxpayer advocate service in 2021 the IRS only was able to answer 9% of phone calls and as a tax practitioner I still regularly have to fax documents to the IRS.
Adding additional agents and spending on updated technology will not increase audits on clients and should instead improve the overall experience of dealing with the IRS.