On Tuesday, August 16, 2022, President Biden signed the ‘landmark’ Inflation Reduction Act (IRA) into law. The Act includes $437 billion of appropriated funds and is expected to generate $737 billion in revenues over the next decade, resulting in a deficit reduction of $300 billion plus. A breakdown of these figures is provided below:
- Revenue Raisers
- 15% Corporate Minimum Tax – $222 billion
- Prescription Drug Pricing Reform – $265 billion
- IRS Tax Enforcement – $124 billion
- 1% Stock Buybacks Fee – $74 billion
- Loss Limitation Extension – $52 billion
- Investments
- Energy Security and Climate Change – $369 billion
- Affordable Care Act Extension – $64 billion
- Western Drought Resiliency – $4 billion
How the Deal Was Done
For Democrats to get a deal done, they had to cull back significant portions of the original Build Back Better bill introduced last year. However, the Inflation Reduction Act is still a big win as Dems seek to influence voters with midterm elections looming this fall.
The Act was fast-tracked through Congress under budget reconciliation rules that allow Democratic leaders to avoid procedural hurdles and essentially negated the need for Republican support. The Senate approved of the measure on August 7th with a 51-50 margin, split by party lines 50/50 with Vice President Harris casting the tie-breaking vote. The House approved on August 12th with a 220-207 margin, similarly strictly along party lines.
As outlined above, the Act includes a number of provisions that will impact the average taxpayer, but families and small businesses making under $400,000 should not see any impact from tax increases. A summary of noteworthy items in the legislation is noted below:
- 15% Corporate Alternative Minimum Tax – corporations that exceed $1 billion in revenues will be subject to a 15% tax on adjusted financial statement (book) income, effective for tax years beginning after December 31, 2022
- 1% Excise Tax on Repurchase of Corporate Stock – corporations with stock traded on an established securities market will be subject to a 1% tax on the fair market value (FMV) of repurchased stock during the tax year, effective for tax years beginning after December 31, 2022
- Prescription Drug Pricing Reform
- Expands Medicare benefits to include free vaccines (2023), $35/month insulin (2023), and caps out-of-pocket costs at $4,000 in 2024 and $2,000 in 2025
- Medicare can also negotiate prices with drugmakers beginning no later than 2026 and initially applicable to 10 designated drugs
- Drug manufacturers who do not comply will be subject to a new excise tax
- Extension of the Affordable Care Act – extended for an additional three years through 2025 (previously extended by the American Rescue Plan Act in March 2021)
- Internal Revenue Service allocated $80 billion – the IRS has been earmarked $80 billion to utilize over the next 10 years with the intent to enhance the agency’s resources and improve compliance efforts. The bulk of the funds will be utilized for enforcement, followed by operations support, business systems modernization, and taxpayer services.
Energy Security and Climate Change
The Act, aside from 1) aiming to close the tax gap, loopholes, and enhance enforcement and 2) reforming Medicare drug pricing and extending the ACA, also includes a number of extended, new, and enhanced tax credits to incentivize consumers and businesses to invest in clean energy technologies. The goal is to reduce carbon emissions by roughly 40% by 2030.
Among these are the following:
- Extension, increase, and substantial modification of nonbusiness energy property tax credit – available towards the cost of residential energy efficiency improvements installed during the year
- set to expire in 2021, now extended to 2032
- previously 10% of qualified costs increased to 30%
- lifetime limitation ($500) repealed and replaced with an annual limit ($1,200)
- Extension and modification of residential energy efficient property (REEP) credit – available to taxpayers who install qualified solar energy property in their homes
- set to gradually decrease sunset in 2024, extended to 2035
- 26% in 2021, 30% through 2032, 26% in 2033-34, and 22% in 2035
- New clean vehicle credit replaces the ‘new qualified plug-in electric drive motor vehicle credit’ – available to offset the cost of new clean energy vehicles from 2023-2032
- eliminated limitation on number of vehicles eligible by manufacturer
- up to a $7,500 credit – $3,750 for a ‘critical minerals requirement’ and $3,750 for a ‘battery component requirement’
- requires the final assembly of the vehicle to occur in North America and batteries sourced from countries with which the US has a free trade agreement
- adds an adjusted gross income (AGI) threshold so taxpayers making more than these amounts are not eligible: $300K married filing joint, $225K head of household, and $150K single & other taxpayers
- additionally, limits the credit to vehicles with MSRP below $55K for cars and $80K for trucks, vans & SUVs
- credit is applied at the time of purchase rather than with the filing of your income tax return
- Creation of a previously-owned clean vehicle credit – available to offset the cost of used clean vehicles purchased after 2022
- up to a $4,000 tax credit (limited to 30% of the vehicle price)
- model year must be at least 2 years earlier than the calendar year of purchase
- original use must have begun with another individual and the purchase must be the first transfer of the vehicle
- vehicle sales price must not exceed $25,000 to qualify
- subject to an AGI threshold so taxpayers making above the following are ineligible: $150K married filing joint, $112.5K head of household, and $75K single/other
- cannot claim the credit more than once within a 3-year period
- New qualified commercial clean vehicle credit – available for businesses who purchase clean vehicles after 2022
- up to a $7,500 credit for vehicles with a gross vehicle weight rating under 14,000 pounds; $40,000 for vehicles in excess
- limited to the lesser of a) 15% of the cost of the vehicle (30% if not powered by a gasoline or diesel internal combustion engine) or b) the incremental cost of the vehicle (excess of the purchase price over such price of a comparable vehicle powered solely by a gas or diesel internal combustion engine)
Also included are new credits for clean energy production, clean energy investment, clean fuel production, advanced manufacturing production; extension of alternative fuel vehicle refueling property credit, and modification and expansion of qualifying advanced energy project credit.
Do you have any questions about The Inflation Reduction Act?
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