How the Inflation Reduction Act Affects Construction Contractors

On Aug. 16, 2022, President Biden signed the Inflation Reduction Act (IRA) of 2022 into law. The IRA makes changes to the Internal Revenue Code (IRC) intended to boost government revenue and promote clean energy. Within the IRA’s 700+ pages are changes to federal tax law, incentives for clean vehicles (and other “green” measures) and many other provisions. Read on to learn more about what the IRA means for construction contractors.

Tax Changes in the Inflation Reduction Act

Two significant changes made by the IRA are the restoration and creation of energy-related tax credits and the reinstatement of an alternative minimum tax.

Tax Credits

The IRA provides numerous tax credits that promote clean energy. Section 13701, for example, establishes a Clean Electricity Production Credit by adding a new § 45Y to the IRC. Taxpayers that own or operate zero-emission power plants, such as solar plants or wind farms, may claim a tax credit of 1.5 cents per kilowatt hour generated by the facility. The facility must meet additional requirements relating to wages and apprenticeships to get this credit.

The new tax credits make substantial changes to the country’s energy policy by encouraging investment in clean energy. The clean energy business differs from traditional energy sources in important ways. The fuel for many clean energy facilities, meaning wind and sunlight, is essentially free. As the need for non-renewable fuels like coal diminish, numerous industries will have to adapt. This includes construction contractors, who should expect to see changes in contracts and price structures.

Alternative Minimum Tax

One of the main changes the IRA makes to federal tax law is reinstating a corporate alternative minimum tax (AMT). Congress created the first AMT in the 1980s to prevent individuals and corporations from using tax deductions and credits to reduce their tax bills 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 the AMT. However, this only applies to corporations with adjusted financial statement income (AFSI) of over $1 billion over the prior three tax years. The 21% flat income tax remains in place. While it’s unlikely the new AMT will affect any but the largest corporations, it’s still worth understanding how it works.

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 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 will apply to all taxable years starting after December 31, 2022.

Construction Benefits in the Inflation Reduction Act

The IRA includes multiple provisions that promote 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 purchasing “qualified plug-in electric drive motor vehicles.” The new law does not change the tax credit amount. Instead, it modifies the standards for claiming it. Prior to the IRA’s enactment, the Clean Vehicle Credit included:

• A base amount of $2,500; and
• $417 for a battery with at least five kilowatt-hours of capacity, plus another $417 for each additional five kilowatt-hours (up to a maximum of $5,000).

The IRA still provides this maximum credit of $7,500 in two parts but with a different structure. 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 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.

Qualified Commercial Clean Vehicles

Section 13403 of the IRC adds § 45W to the IRC to create a tax credit for “qualified commercial clean vehicles.” The law defines 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), which includes vehicles designed specifically to transport specialized machinery for use in construction and other trades.

The vehicle must 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 is the lesser of:

• 15% of the vehicle’s basis, or 30% if the vehicle is entirely electric; or
• The vehicle’s incremental cost.

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. While this credit is primarily geared toward individuals and families, we all have personal tax returns! So this part of the IRA is certainly worth mentioning.

This credit equals the lesser of $4,000 or 30% of the vehicle’s sale price and is available based on the following maximum modified adjusted gross income amounts for individuals:

• $150,000 for a joint return;
• $112,500 for a head of household; or,
• $75,000 for an individual return.

The onset of tax season is the perfect time to review your dealings and see if these IRA provisions will benefit you. Enlisting the help of a construction CPA is a key step in this process. Their knowledge of your industry and the latest tax laws goes a long way in hammering out your return strategy!

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.