What You Should Know About the Inflation Reduction Act and Taxes
President Biden signed the Inflation Reduction Act of 2022 (Act), a sprawling climate, tax and healthcare bill, into law on Tuesday, August 16.
While the Act covers other legislation, below are the details on how the Act will impact taxes. The good news for most taxpayers is that the Act is not designed to increase taxes on small business or families making $400,000 or less.
Corporate Minimum Tax
The Act will enact a new corporate minimum tax of 15% (the new AMT) in tax years after 2022 on large corporations with consistently high income reported on their financial statements. This has also been called the book income tax for corporations. Large corporations are corporations with more than $1 billion in annual income during any three-year period, ending with the current year.
U.S. corporations that are members of a foreign-parented, multinational group for any taxable year will need to have at least $100 million in such income. Foreign corporations that are engaged in a trade or business with the U.S. will be treated as a separate domestic corporation that is owned by a foreign corporation.
Corporations will pay the larger of the minimum tax or the statutory corporate tax, which is currently 21%.
This provision does not apply to S corporations, regulated investment companies and real estate investment trusts (REITs).
The R&D Tax Credit
The Act also expands certain start-up companies’ R&D payroll tax credit opportunities by doubling the amount they may be able to receive. The R&D tax credit has been a good way for companies to increase their bottom lines for years, but now, companies may stand to receive an even greater incentive from their qualifying expenses or activities by using this credit to offset their payroll tax.
Energy Tax Provisions
Green Energy
The Act may provide tax credits for things like energy-efficient water heaters, HVAC systems and heat pumps. The measure would extend the solar investment tax credit (ITC) and renewable electricity production tax credit (PTC) for projects that begin construction before January 1, 2021.
In addition, it will structure various green energy tax credits as tiered incentives, providing either a “base rate” or a “bonus rate” of five times the base amount for projects that meet certain prevailing wage and apprenticeship requirements.
An additional increased credit amount could be claimed in certain cases if projects comply with domestic content requirements, such as ensuring that any steel, iron or manufactured product is produced in the U.S.
Electric Vehicles
The measure will seek to incentivize consumer purchases of electric vehicles (EVs) by offering as much as $7,500 to individuals for purchases of qualifying electric vehicles. While the amount of the credit for EVs is the same as the previous credit, some details have changed including:
- Extending the availability of the credit
- Excluding cars with an MSRP over $55,000 and vans, pickups or SUVs with an MSRP over $80,000
- Eligible vehicles must have final assembly occurring in the U.S.
- Limiting the credit to taxpayers with an adjusted gross income of less than $300,000 (joint) or $150,000 (single)
Affordable Care Act Premium Tax Credits
The new Act will extend the Affordable Care Act (ACA) program through 2025, allowing eligible individuals and families to benefit from lower health care premiums through the federal Health Insurance Marketplace.
Stock Repurchases
The Act will impose a 1% excise tax on corporate buybacks for most publicly listed companies and would take effect in 2023. Companies often purchase their own shares as an alternative way to distribute income to shareholders, with a lower tax rate compared to dividend distributions.
The tax will also apply to stock repurchases of certain foreign corporations by subsidiaries and “expatriated entities.”
IRS Funding
The Act will appropriate $80 billion of additional funding to the IRS over 10 years, which could include:
- $45.6 billion for tax enforcement activities, including legal and litigation support, criminal investigations and digital asset monitoring and compliance activities
- $25.3 billion for operations support, including rent payments, facilities services, other IRS-wide administration activities, research and statistics of income and information technology development
- $4.75 billion for business systems modernization to provide a more personalized customer service
- $3.18 billion for taxpayer services, including pre-filing assistance and education, filing and account services and taxpayer advocacy services
The measure specifies that the IRS funding boost isn’t intended to increase taxes on any middle-class taxpayer or small business.
Carried Interest Loophole
In order to gain the necessary votes in the Senate, the carried interest provision was dropped from the final bill.
Other Provisions
In addition to the provisions above, there are various provisions related to renewable energy, oil and gas projects.
Connect with an Advisor
If you have questions about how these provisions impact your business, please contact your Warren Averett advisor directly, or have a member of our team reach out to you.
This article reflects our views at the time this article was written and should be used as reference only.
This article was originally published on August 10, 2022 and most recently updated on August 17, 2022.
