What You Need To Know About the Inflation Reduction Act
President Biden signed the Inflation Reduction Act (the Act) into law on August 16, 2022, a wide-ranging $740 billion health care, tax, and climate bill. The Act contains many tax breaks and raises revenue through a new minimum tax on large, profitable corporations and an excise tax on stock buybacks. It’s intended to reduce the U.S. deficit by about $300 billion. Other revenue would come from stricter enforcement of tax compliance by the IRS.
Here are some highlights of the Inflation Reduction Act.
15% Corporate Alternative Minimum Tax
The Act imposes a new 15% corporate alternative minimum tax on the adjusted financial statement income of applicable corporations. The minimum tax will apply if it exceeds the taxpayer’s regular tax including its base erosion and anti-abuse tax for the tax year.
The alternative minimum tax can be thought of as a “book minimum tax” because the starting point of the calculation is a corporation’s average annual adjusted financial statement income that includes financial statements prepared in accordance with generally accepted accounting principles. This is different from the previous calculation of the corporate alternative minimum tax rules, where the starting point was taxable income.
An applicable corporation is any corporation (other than an S corporation, regulated investment company, or a real estate investment trust) that meets an average annual adjusted financial statement income test for one or more earlier tax years that end after December 31, 2021.
A corporation meets the income test if its average annual adjusted financial statement income for the three-tax-year period (determined without regard to loss carryovers) ending with the tax year exceeds $1 billion. Other rules apply.
This provision is effective for tax years beginning after December 31, 2022.
Excise Tax on Corporate Stock Repurchases
The Act generally imposes on each “covered corporation” a tax equal to 1% of the fair market value of any stock of the corporation that’s repurchased by the business during the tax year. A “covered corporation” is any domestic corporation with stock traded on an established securities market.
The 1% excise tax applies to repurchases of stock after December 31, 2022.
Clean Vehicle Tax Credit
The current tax credit for qualified plug-in electric vehicles is significantly revised in the Act. Currently, a taxpayer can claim a maximum credit of $7,500 for each new qualified plug-in electric drive vehicle placed in service during the tax year when certain vehicle requirements are met.
Currently, the credit phases out beginning in the second calendar quarter after a manufacturer sells more than 200,000 plug-in electric drive motor vehicles for use in the U.S. after 2009. Under the Act, the plug-in vehicle credit has been renamed the clean vehicle credit and the manufacturer limitation on the number of vehicles eligible for the credit has been eliminated after December 31, 2022.
The Act changes how the clean vehicle credit is calculated. A vehicle must meet critical mineral component requirements and requirements that the batteries must be made in America. There are also price and income limitations. The clean vehicle credit isn’t allowed for a vehicle with a manufacturer’s suggested retail price above $80,000 for vans, SUVs, and pickups, and above $55,000 for other vehicles.
A clean vehicle credit isn’t allowed if a taxpayer’s modified adjusted gross income for the current or preceding tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly, and $225,000 for heads of household.
Previously Owned and Commercial Vehicles
The Act also contains a tax credit for used plug-in electric vehicles purchased after 2022. The tax credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. There are also price and income limitations. An eligible previously owned clean vehicle is one with a model year that’s at least two years earlier than the calendar year when a taxpayer acquires it.
The Act also adds a new commercial clean vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The credit is a component of the general business credit.
Residential Energy Improvements
Individual taxpayers can also receive tax breaks for home energy efficiency improvements, such as solar panels, energy-efficient water heaters, heat pumps, and HVAC systems. The Act also extends, increases, and modifies a tax credit for new home construction that meets certain requirements.
Provisions Related to Climate, Energy, and Health Care
The Act includes many new, extended, and increased tax credits intended to incentivize both businesses and individuals to boost their use of renewable energy. For example, it provides tax credits to private companies and public utilities to produce renewable energy or manufacture parts used in renewable projects, such as wind turbines and solar panels. Clean energy producers that pay a prevailing wage also may qualify for tax credits.
In addition, the Act allows Medicare to negotiate the price of prescription drugs and prohibits future administrations from refusing to negotiate. It also caps the annual out-of-pocket drug costs of Medicare enrollees at $2,000 and monthly insulin costs at $35 and provides them free vaccines. Additional provisions to rein in drug costs include a requirement that pharmaceutical companies that raise the prices on drugs purchased by Medicare faster than the rate of inflation rebate the difference back to the program.
The Act also should reduce health care costs for Americans who obtain coverage from the federal Health Insurance Marketplace. It extends the expansion of subsidies in the form of refundable premium tax credits through 2025, which were scheduled to expire at the end of 2022.
Increase in Qualified Small Business Payroll Tax Credit for Research
The Act boosts the payroll tax credit for increasing research activities. Currently, a qualified small business (QSB) may elect to take part of the research credit as a payroll tax credit against its employer FICA tax liability. A QSB must have gross receipts of less than $5 million and meet other requirements. An eligible business with qualifying research expenses can then opt to apply up to $250,000 of its research credit against its payroll tax liability.
Under the Act, beginning after December 31, 2022, a QSB can choose to apply another $250,000 in qualifying research expenses (for a total of $500,000) against its payroll tax liability.
The IRS will be issuing guidance about these and other provisions from the Inflation Reduction Act in the coming months. Contact us if you have questions about your situation.
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