IRS Focus: Green Energy Incentives and High-Income Individuals

At a recent Tax Executives Institute event, Holly Paz, the deputy commissioner of the IRS’s Large Business & International division, told listeners that increasing staff who focus on high-income individual filers “is a really high priority area for the service.” She added that the green energy credits for businesses included in the Inflation Reduction Act are “a really large undertaking” that will require special systems and processes.

In previous posts, we’ve discussed the broad impacts of the Inflation Reduction Act and the $80 billion in new funding that the Act provides for the IRS. In this post, we’ll go a little deeper into the implications of Paz’s remarks to look at what high-income filers might be able to expect and what the green energy credits might mean for businesses.

Enforcement for High-Income Individuals

Over the past decade, the IRS’s budget has been cut by 20% (adjusting for inflation) and its staff by 38%. Without the budget and staff to keep up, the number of audits has decreased sharply during that time as well.

The IRS’s new $80 billion budget includes $45.6B for “enforcement,” which has been the subject of much speculation. Rumors have circulated on social media that “87,000 armed IRS agents” will be hired to target lower and middle-income Americans.

The number is most likely based on a May 2021 report by the Department of the treasury that gave the number of new employees that the IRS would need to maintain efficiency as 86,852, but a precise number of hires is not included in the Act. While the IRS will no doubt use its new funding to significantly increase its workforce, the new hires will be spread out across the agency, supporting technology and taxpayer services in addition to enforcement. According to a Congressional Research Service report, “enforcement” funds probably also be used for increased legal support, better technology, and to monitor and enforce taxes on cryptocurrencies and other digital assets.

That said, Paz’s remarks echo Janet Yellen, Secretary of the Treasury, who has stated that a priority of the IRS will be closing the “tax gap,” the difference between what is owed and what is actually paid. As Yellen and others have pointed out, there is evidence that the top 1% of income earners are responsible for more than $160 billion in lost taxes every year.

Yellen has said that she has directed the IRS to focus on high-income taxpayers, and that individuals making less than $400,000 a year should not expect to see a rise in the number of audits. Given the increased funding for enforcement, it seems likely that high-income earners may come under increased scrutiny in the coming years.

Green Energy Credits for Businesses

Arguably the most ambitious climate-change legislation ever passed by Congress, the Inflation Reduction Act provides over $369 billion to fight climate change with the aim of reducing carbon emissions by around 40% by 2030. To that end, the Act has significantly altered the tax code to incentivize businesses to reduce emissions, use clean energy, and invest in energy innovation and security.

In addition to base tax credits, some of the new provisions also offer a bonus to companies that meet certain labor and manufacturing regulations. Taxpayers should also note that under some circumstances, they may be able to choose a direct pay option in lieu of a tax credit or monetize credits by transferring them to another entity.

There isn’t space in a single blog post to go over all the new and extended credits, deductions, grants, and programs that potentially affect every industry and sector. Here, we cover a few of the highlights:

Clean Energy Incentives for Small Businesses
The Act has several provisions aimed at helping Qualified Small Businesses (QSBs) save money on energy costs while lowering their carbon footprint. These include:

• A tax credit that covers 30% of the cost of switching over to low-cost solar power;
• A tax credit of up to $5 per square foot to support energy efficiency improvements
• Tax credits that cover up to 30% of purchase costs for electric, fuel-cell, and other clean commercial vehicles for businesses with large-vehicle fleets such as trucks and vans.
• A tax credit of up to $7,500 for new commercial clean vehicles placed in service after December 31, 2022

Industrial Manufacturing Credits
The Act includes grants and tax credits, including $6 billion for a new Advanced Industrial Facilities Deployment Program, to reduce emissions from industrial manufacturing processes, including chemical, steel, and cement plants.

Advanced Manufacturing Production Credit
Companies that produce and sell solar and wind energy components, qualifying battery components, inverters, and some critical minerals after December 31, 2022, may qualify for this new tax credit.

Clean Fuels, Electricity Sources, and Energy Storage
Over $30 billion in tax credits has been to states and electric utilities to help them transition to clean energy. Similarly, credits and grants are available to all parts of the transportation sector to help it reduce emissions and move to clean fuels and energy.

Federal Procurement of Clean Technologies
To create a stable market for clean energy products, the Act includes over $9 billion for Federal procurement of American-made clean technologies. Three billion dollars of this is earmarked for the U.S. Postal Service to purchase zero-emission vehicles.

Clean Energy and Sustainability Accelerator
Twenty-seven billion dollars has been allocated for investment in projects, activities, and technologies that reduce greenhouse gas emissions and support the deployment of clean technologies. Fifteen billion dollars of that has been earmarked specifically for disadvantaged and low-income communities.

What Do The IRS’s New Priorities Mean for You?
Whether you’re a business owner or a high-income individual, it seems likely that the IRS’s new-found fortunes could have implications for you. Given the government’s investment in clean technology and reduced emissions, there is tremendous potential for businesses to save money, but with the new focus on enforcement, it is also possible that individuals may see more audits.

Tonneson + Co suggests working with a qualified accounting, tax compliance and consulting team that can help you take advantage of new opportunities and ensure that your taxes are filed timely and correctly.