**On Aug. 16, 2022, the Inflation Reduction Act was signed into law.
On Sunday, Aug. 7, 2022, the Senate passed the Inflation Reduction Act (IRA). This act is the successor to the previously House-passed Build Back Better Act (BBBA) of late 2021, with far fewer revenue-raising components. This bill contains many provisions regarding climate, healthcare and energy. Overall, the IRA does not increase the current corporate or individual income or capital gain tax rates nor alter the existing estate tax exemption limits.
What does the Inflation Reduction Act Include?
The tax changes included in this bill are effective for tax years beginning after Dec. 31, 2022, unless otherwise noted, and include:
- Corporate Minimum Tax – The act would reinstate the corporate minimum tax for corporations with profits over $1 billion. Any alternative minimum tax for corporations was eliminated with the passing of the Tax Cuts and Jobs Act of 2017 (TCJA). This provision attempts to raise hundreds of billions of dollars from corporations without raising the corporate tax rate through a 15 percent book minimum tax, a new alternative minimum tax applied to the financial statement income (i.e., book income) that companies report to their investors. The bill does allow for a “tax” depreciation deduction in the computation of financial statement income as allowed under Section 167.
- Corporate Stock Buybacks – “Covered corporations” will pay a one percent excise tax on stock buybacks. “Covered corporation” means any domestic corporation the stock of which is traded on an established securities market. Because this will not take effect until 2023, it is predicted that there will be a rush of buybacks by some companies before year end.
- Excess Business Loss Limitations – The excess business loss (EBL) limitation under Section 461(l) was originally created by the TCJA. This provision applies to noncorporate taxpayers and limits the amount of trade or business deductions that can offset nonbusiness income in any tax year. The limitation was temporarily delayed to tax years beginning after 2020 under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). It was set to sunset after tax year 2025, but the IRA has extended the provision through 2028.
- Research and Development Credits – The IRA increases the research and development tax credit amount that can be claimed against payroll taxes by designated small businesses by $250,000. The payroll tax credit is currently limited to $250,000 each year.
- Premium Tax Credits – The IRA extends the expanded health insurance Premium Tax Credits provided in the American Rescue Plan Act (ARPA), including allowing higher-income households to qualify for the credits and boosting the subsidy for lower-income households through the end of 2025.
- Energy Credits – Modifies, extends, and creates a variety of tax credits for green energy and other efforts primarily through 2031 or 2033. These include a $4,000 tax credit for the purchase of used electric vehicles and $7,500 for new ones. However, vehicles must have an MSRP of under $55,000 for cars and $80,000 for SUVs, vans and trucks to qualify for the credit. In addition, taxpayers may only take advantage of the credit if have modified adjusted gross income under $300,000 for married joint filers or $150,000 for single filers.
- IRS Enforcement – Internal Revenue Service (IRS) enforcement funding would be expanded by approximately $80 billion over the course of 10 years. This will allow for more funds to go toward modernization and employment of additional agents, which may result in an increase in tax audits in the coming years.
There are several provisions included in the original bill as drafted that were cut at the last minute:
- Carried Interest – The original bill would have deleted a provision regarding the treatment of partnership interests held in connection with the performance of services (i.e., “carried interest”). This would have dramatically affected private equity and the way they are taxed.
- Expansion of Child Tax Credit – The original bill aimed to restore the expired expanded child tax credit for an additional four years.
There are several changes that are notably missing from this bill that were anticipated:
- SALT Cap – Unlike the House BBBA, the Senate bill does not include changes to the individual limitation on the state and local tax (SALT) deduction. It remains at $10,000.
- Research and Experimentation Capitalization – Beginning in tax years after Dec. 31, 2021, as part of TCJA, taxpayers will be required to capitalize all research and experimentation expenses for tax purposes. Through 2021, taxpayers have been able to either expense or capitalize any research and experimentation costs for tax purposes regardless of how the costs were treated for book purposes. A bipartisan bill was introduced in May 2022 calling to preserve research and experimentation expensing, rather than the Section 174 five-year amortization that took effect this year. The IRA does not address the treatment of these expenditures under Section 174 as anticipated.
- Net Investment Tax (NIT) on Active Income – The BBBA imposed the 3.8 percent NIT on active business income when adjusted gross income exceeded $500,000 for married couples and $250,000 for single filers. There is no mention of this change in the IRA.
- International Tax Changes – The Senate bill does not include the substantial number of international tax changes that the House BBBA had proposed, such as modifications to the global intangible low-taxed income (GILTI) and base erosion and anti-abuse tax (BEAT) calculations.
Will the Inflation Reduction Act reduce inflation?
This IRA has been touted by President Biden to, among other things, reduce the current inflation. However, many economists predict that it may actually worsen inflation and reduce long-term economic output by about 0.1 percent, as well as eliminate about 30,000 full-time equivalent jobs in the United States as a result of the corporate minimum tax. It may also reduce average after-tax incomes for taxpayers across every income tax bracket in the long term. (Tax Foundation, August 2, 2022).
Windham Brannon continues to monitor the latest regarding the IRA as it goes before the House of Representatives, understanding that many of our clients may be impacted at varying levels by the new legislation. For questions or more information about the IRA in its most recent form, please contact your Windham Brannon advisor or reach out to Nicole Suk, CPA.
