Taxes in 2023 are going to look a bit different than they have in the past. In addition to newly passed tax law updates, a number of pandemic-era provisions will gradually sunset in the years to come. With this in mind, here’s everything you need to know about tax law changes coming in 2023.
Inflation Reduction Act (IRA) Updates
Signed into law in 2022, the Inflation Reduction Act (IRA) outlines several major tax law changes that will begin taking effect in 2023. Many of these involve specialty tax incentives for energy-efficient property, including 179D deductions and 45L tax credits.
179D EPAct Tax Deduction
Some of the most significant tax changes coming in 2023 are the adjustments to the 179D energy tax deduction outlined in the IRA. Among other revisions, the IRA introduces prevailing wage and apprenticeship standards. These optional labor requirements allow those who meet them to obtain increased tax deductions for energy-efficient commercial properties.
Additionally, energy savings requirements and retrofit rules have been updated to reflect contemporary construction practices. Overall, EPAct tax deductions will be more complex than ever beginning in 2023, but they’ll also have the potential to be more valuable than they ever were before.
45L Energy-Efficient Home Tax Credit
Similarly to the 179D deduction, the 45L Energy-Efficient Home Tax Credit has revisions set to take effect in 2023. Perhaps the most dramatic change is the increase of the maximum available credit from $2,000 to $5,000 per unit. However, achieving this “bonus rate” will only be possible for those meeting the Zero Energy Ready Home program. Prevailing wage requirements were also introduced for multifamily properties as a means to increase credit savings.
Because the certification model has shifted from IECC to ENERGY STAR, there is now no longer a height limitation on multifamily properties. Additionally, 45L credits claimed for 2023 and after will not reduce the adjusted basis of buildings supported by LIHTCs, opening up further tax incentive possibilities for investors in low-income housing.
Tax Cuts and Jobs Act (TCJA) Sunset Provisions
The Tax Cuts and Jobs Act of 2017 (TCJA) contains sunset provisions set to begin phasing out in 2022 and 2023. Tax incentives introduced or increased in 2017 will gradually decrease until 2026, when tax rates return to their 2017 baseline. Many tax experts expected these incentives to be extended through 2023 and beyond, but Congress has yet to pass anticipated extender bills.
Decreased Bonus Depreciation
The TCJA introduced a provision allowing for 100% bonus depreciation on certain types of “qualified property.” Unfortunately, this increased bonus depreciation rate will not last forever. Taxpayers will only be able to claim 80% bonus depreciation for qualified property placed in service in 2023. This means that cost segregation studies may not accelerate depreciation as dramatically in 2023 as they did in 2022.
Regardless, cost segregation remains a powerful tax tool that can help investors save significant amounts of money. Although reduced bonus depreciation rates will make cost segregation slightly less valuable than it was in the past, taxpayers will still benefit from cost segregation studies in 2023 and beyond.
174 Expense Amortization Requirement
While the overall value of R&D tax credits is unaffected by the TCJA, the added amortization requirement for 174 expenses increases the length of time taxpayers must wait to receive the full value of their research and experimental expenditure write-offs. This change brings increased complexity to an already complicated tax benefit structure. As such, certain taxpayers may decide to alter their tax strategy for research and development expenses.
For further details on the new 174 expense amortization requirement, see our previous blog post on the subject.
Increased IRS Funding
One provision included in the IRA was an increase in IRS funding of nearly $80 billion. Beginning in 2023, the IRS will receive additional funding for tax law enforcement, taxpayer services, IT improvements and miscellaneous other operations. Taxpayers should expect to see heightened efforts to enforce tax law, which may lead to increased auditing.
Understanding and abiding by recent tax updates is essential for those who want to avoid the headache of an audit. Additionally, taxpayers should take extra care to maintain proper documentation in case the IRS asks questions.
The Bottom Line
With tax law updates making things increasingly complex and the IRS more likely to audit than ever before, taxpayers should be particularly careful about how they file their 2023 taxes. As always, the best way to ensure IRS compliance is by working with an experienced tax professional.
Engineered Tax Services is the nation’s leading specialty tax firm with a proven reputation and strong track record of success. We have the proper expertise to help our clients reduce their tax burden and remain compliant with the law. Contact us today to learn more about how you can benefit from specialty tax incentives.
Summary
| Tax Law Changes | Details |
|---|---|
| Inflation Reduction Act (IRA) Updates | Signed into law in 2022, the IRA outlines several major tax law changes that will begin taking effect in 2023, including specialty tax incentives for energy-efficient property such as 179D deductions and 45L tax credits. |
| 179D EPAct Tax Deduction | Adjustments to the 179D energy tax deduction outlined in the IRA include new prevailing wage and apprenticeship standards, updated energy savings requirements and retrofit rules, and increased potential tax deductions for energy-efficient commercial properties. |
| 45L Energy-Efficient Home Tax Credit | Revisions include an increase of the maximum available credit from $2,000 to $5,000 per unit, but only for those meeting the Zero Energy Ready Home program, and new prevailing wage requirements for multifamily properties. The certification model has also shifted from IECC to ENERGY STAR and there is no longer a height limitation on multifamily properties. |
| Tax Cuts and Jobs Act (TCJA) Sunset Provisions | Incentives introduced or increased in 2017 will gradually decrease until 2026, when tax rates return to their 2017 baseline. This includes decreased bonus depreciation for qualified property placed in service in 2023 and increased amortization requirement for 174 expenses for R&D tax credits. |
| Increased IRS Funding | The IRA includes an increase in IRS funding of nearly $80 billion. |
