IRA 2022 – What It Means For Farmers

• August 16, 2022
• Paul Neiffer

Now that President Biden has signed the Inflation Reduction Act of 2022, we can now dig into the details of the bill and how it might affect farmers.

The Tax Provisions

The bottom line for farmers is that there are very few tax provisions that will affect them. The Excess Business Loss (EBL) rules have been extended for another two years through the end of 2028. The EBL prevents farmers from deducting more than $270,000 /$540,000 against other income including wage income.

The IRS is getting an additional $80 billion of funding that will be used to hire more auditors and hopefully update their ancient processing systems. This may indirectly lead to more taxes for farmers since there will be more audits. Secretary Yellen indicated the share of audits for people with income under $400,000 will remain the same. This means if overall audits double, then audits of these taxpayers will also double.

Healthcare Provisions

Farmers who obtain health insurance from the ACA marketplace enjoyed relaxed rules in 2022. There is no 400% of AGI cliff where a farmer would have to pay back all of the credit once they go over this level. There is also a provision that the maximum premium cost would be 8.5% of AGI. These provisions have been extended for another three years through 2025.

Energy Tax Credits

Prior to the bill passage, home energy tax credits had either expired or had a lifetime cap of $500. IRA has reinstated most of these credits and increaed the credit to $1,200 per year and in some cases $2,000. This means that a farmer who does upgrades to their home will now qualify for some rebates from the IRS on these costs and if they spread out the upgrades over several years can qualify for much greater credits.

If a farmer wants to purchase an electric vehicle (EV) such as the new Ford F 150 Lightening, a $7,500 credit will be available and can be obtained at the time of purchase. However, the vehicle needs to meet certain mineral and battery sourcing and most of the current vehicles will not qualify. Also, the MSRP of the vehicle has to be less than $55,000 for autos and $80,000 for SUVs and Pick-ups. Plus your adjusted gross income will need to be under $300,000 for a married couple both before the year of purchase and the current year.

You may receive up to a $4,000 credit for purchasing a used EV, however, the maximum purchase price appears to be $25,000 and the AGI limits are cut in half in most cases.

A larger EV purchase may qualify the farmer for up to a $40,000 credit. This could apply to a purchase of an EV truck for transporting grain. The credit is the lessor of $40,000 or 30% of the cost of the vehicle.

A farmer who puts in a methane digester, solar panels, wind turbines, etc. can qualify for a production tax credit for up to 10 years or an investment tax credit. The amount of the investment tax credit is only 6% of the cost unless the project uses prevailing wages for the area and offers an apprenticeship program. In that case, the credits is multiplied by 5 resulting in a 30% tax credit.

A 6% credits is not much of an incentive. If you use prevailing wages, your credit is much higher but will it offset the higher cost of the project. In our area, prevailing wages can easily be twice the normal rate plus extra benefits. This can easily eat up any savings. Let’s look at an example:

Roger has priced out a new 100KW solar project that will cost $500,000 using normal wages for the area. When he costed the project using prevailing wages, the cost increased to $700,000. The normal credit is $30,000 ($500,000 times 6%) while the increased credit is $210,000 ($700,000 times 30%). The higher credit is $180,000 higher than the normal credit, however, a project using prevailing wages is actually $20,000 worse than not paying those wages since the total cost of the project is $200,000 higher.

Transfer of Credits

For the first time, a taxpayer can transfer some of these new tax credits to an unrelated third party for cash. The proceeds received for the transfer is tax-free, however, the party purchasing the credits cannot deduct the purchase. This means that any purchase will likely be for less than face value and the discount could be 15% or more. Let’s look at an example:

Mary puts in a new methane digester and receives a tax credit of $500,000. Since her annual income tax bill is less than $50,000, it would take at least 10 years to soak up the credit. Instead, she sells the credit to a local bank that can use it immediately for $400,000. This allows the bank to offset federal income taxes in the amount of $500,000. A win-win for both parties.

There are also some credits that qualify for a “direct-pay” option. For example when you purchase a new EV, the dealer can directly grant the credit against the sale price saving you having to wait to file an income tax return.

We will continue to post any other items of interest as we wade through the 730 pages of the Bill.

The bottom line is that the new expanded energy tax credits are likely not as good as the old credits and the cost of doing any new energy project will be much higher if you want to maximize the credit and the net cost may be still higher.

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