The Inflation Reduction Act of 2022
09/14/2022On August 16, 2022, President Joe Biden signed the massive, with more than 300 pages of tax-related changes, Inflation Reduction Act (IRA) of 2022 into law. The Act provides investment in clean energy, promotes reductions in carbon emissions, and extends the popular Affordable Care Act premium reductions. The Inflation Reduction Act of 2022 is significantly smaller than President Biden’s $6 trillion Build Back Better Plan proposed in 2021.
The following is summary of The Inflation Reduction Act of 2022:
Tax Changes for Large Corporations:
There are several tax increases within the Inflation Reduction Act with most increases generally aimed at large corporations.
The IRA places a new minimum tax on companies with revenues over $1 billion. This minimum functions similarly to the alternative minimum tax on individuals; it is based on whether the company would have to pay a higher tax if the traditional tax rate were imposed. Essentially, the government will impose the higher of these two tax options. Some tax adjustments will still be permitted.
There will also be a new 1% excise tax on publicly traded companies for repurchasing corporate stock over any new issues to the public or employees.
Changes to the IRS Enforcement Programs:
The IRS also received additional funding as part of the IRA. This money is slated to be used to increase enforcement activities and operations support and for updating their current systems. This funding amounts to roughly $80 billion, which is a significant increase from their reported budget of $13.16 billion in FY 2022.
Roughly half of the funds provided to the IRS must be used to assist with collection efforts, conduct criminal investigations, monitor digital assets and increase compliance-related activities.
Passthrough Loss Limitations:
A tax increase that will affect sole proprietors or pass-through entities (S-corps & Partnerships) is the excess business loss limitation. It is a complicated rule that affects business owners who take business losses. Essentially, it limits the taxpayer’s ability to offset investment or employment income with a business loss, even if that business owner is actively engaged in the business that created the loss. This provision has been extended through 2028. The provision is simply a revenue raiser and was last extended for the same purpose by the American Rescue Plan Act of 2021.
Affordable Care Act:
The Affordable Care Act provided health insurance premium credits for certain taxpayers who purchased health insurance through the marketplace. The American Rescue Plan (also known as the COVID-19 Stimulus Package, passed in March 2021) extended and increased those credits. The IRA continues those tax credits for an additional three years.
Climate and Clean Energy:
Many energy-related tax incentives were included in the Inflation Reduction Act, totaling $270 billion (including both new and existing provisions). Clean energy and transportation were both target areas for these benefits.
Residential Energy Credits:
Individuals can receive up to $1,200 annually (30% of the cost) for certain energy-efficient remodeling expenses effective after 2022. Previously, this credit was $500 per lifetime. The residential energy-efficient property (REEP) credit for larger items (like solar water heaters and geothermal heat pumps) that was set to expire in 2024 was also extended.
Tax Credits for Clean Vehicles:
Clean vehicles received a $14 billion tax break in the Inflation Reduction Act. The credit for vehicles placed in service after 2022 is up to $4,000 for used electric or hybrid plug-in vehicles or up to $7,500 for new qualifying clean vehicles. While these credits are not necessarily new, they have some new restrictions. They are limited by income, and the final assembly of the vehicle purchased must be within North America.
What’s not included in the IRA:
A list of the many proposed tax increases in the original bill were not signed into law as follows:
- No increase on capital gains tax
- No increase on the current individual income tax rates
- No added surcharges on individuals, estates and trusts over certain threshold amounts
- No changes to gift tax rates or exemption amounts
- No changes to the Medicare surtax for active business owners
For additional information on the Inflation Reduction Act of 2022 contact Michael Ceschini of Ceschini CPAs at: (631) 474-9400.