Five things to know about the Inflation Reduction Act

President Joe Biden has signed the Inflation Reduction Act, a $740-billion bill that largely focuses on clean energy and climate resiliency, deficit reduction and health care, funded through tax changes. Unlike the initial proposals for a reconciliation spending package, this legislation provides little spending that will directly affect tech-based economic development strategies, although its climate provisions will spur significant growth opportunities for cleantech. There are multiple provisions and opportunities included in the act that are important for regions to understand.

1. Doubling small business R&D credit against payroll tax

For tax years 2023 and beyond, qualified small businesses are now allowed to apply up to $500,000 of their credit for qualifying research expenses to their payroll tax liability. This doubles the current limit of $250,000.

2. Inducing clean and efficient tech demand and production

The majority of the bill’s energy- and climate-related funding, which totals approximately $369 billion, is focused on encouraging adoption of more efficient technologies across residential, transportation, manufacturing and other commercial uses.

Examples of the legislation’s funding for these activities include:

• $31 billion in new product tax credits to support clean tech manufacturing + $6 billion to extend the advanced energy project credit;
• $22 billion in grants and loans to support clean vehicle manufacturing facilities;
• $20 billion in funds to support “climate-smart” agriculture;
• $6 billion funding for emissions-reduction improvements at industrial facilities; and,
• Nearly $350 million in a program and incentive to facilitate sustainable aviation fuels.

Other significant items in the energy and climate portion of the bill are tax credits for clean electricity ($61 billion), residential energy efficiency (about $36 billion across three credits), and clean vehicle purchases (approximately $12 billion for new and used personal and commercial vehicles), as well as funding for a greenhouse gas reduction ($27 billion).

In some cases, these investments dovetail with the clean energy investments made by the infrastructure legislation that passed last year (for example, clean vehicle credits and funds to build charging networks).

3. Research funding included

While research is not a primary focus of the legislation, the bill contains billions of dollars to fund targeted R&D activities. The largest pool is $2 billion for improvements and projects at the U.S. Department of Energy’s National Labs, and the department also has $100 million tagged in the bill to facilitate R&D for high-assay, low-enriched uranium. Other agencies slated to receive R&D funds include: National Oceanic and Atmospheric Administration (NOAA) with $50 million for competitive R&D grants and $150 million for research- and systems-related improvements; and, Environmental Protection Agency with $25 million for air pollution mitigation R&D grants and activities.

4. Private equity scored big wins in the final bill

Due to two changes that were made after the initial announcement, the final version of the legislation will save private equity firms tens of billions in tax dollars.

First, the bill would have closed the carried interest loophole, which was expected to raise $14 billion in tax revenues. This provision was struck before the bill was debated on the floor.

Second, an amendment was passed during the debates to help exempt private equity funds from the new, 15-percent corporate minimum tax instituted by the bill. The final text does not require these firms to include profits from subsidiaries in determining whether the firm has the $1 billion in total profits that make it eligible for the minimum tax.

5. No clear path forward for proposed TBED funding

Readers may be aware that the Inflation Reduction Act is an evolution of the $3.5 trillion reconciliation package that was proposed last fall and included more than $85 billion in innovation-focused spending. As noted above, the vast majority of these items are not included in the final bill. Further, there does not, at this time, seem to be a path forward for these remaining portions of the legislation (this is partly due to insufficient political support in the Senate and partly due to the reconciliation process having some limits on its use).

Specifically, while there has been reporting in other publications implying that the Regional Technology Hubs (authorized through the CHIPS and Science Act) program has been funded, this is not correct, and at this point, the next opportunity for funding the program would most likely come from the regular annual appropriations process.