On Tuesday, August 17, President Biden signed the Inflation Reduction Act (IRA) of 2022 into law. This significant piece of legislation—likely to affect most Americans over time—is a climate, energy, healthcare, and tax bill that will increase IRS funding, and change some tax policy and tax credits.
Here is an overview of what is included in the legislation:
Corporate alternative minimum tax.The IRA imposes a corporate alternative minimum tax of 15% of financial statement income (reduced by depreciation and net operating losses) affecting U.S. corporations (not S Corporations, regulated investment companies, or REITs) who have more than $1 billion in annual earnings over the previous three years. A covered corporation is a corporation whose stock is traded on an established securities market. This tax is effective for tax years beginning after December 31, 2022.
Corporate stock buybacks. The IRA imposes a 1% excise tax on the fair market value when corporations buy back their stock.
Funding for the IRS. $80 billion of funding is provided for the IRS over 10 years. Lawmakers anticipate that the IRS would use $45 billion of the funds to improve tax enforcement. This might include boosting staffing levels and modernizing outdated processing systems. Another $25 billion of the additional funding is intended to improve IRS operations.
Climate and energy provisions. The bill includes new, extended and increased tax credits to incentivize both businesses and individuals to boost their use of renewable energy. For example, the bill 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.
Other energy-related tax credits will be extended—some of the extended tax credits could benefit homeowners. For example, the legislation includes a 10-year extension of the homeowner credit for solar projects, like rooftop solar panels. That tax credit could also benefit people who purchase energy-efficient water heaters, heat pumps, and HVAC systems.
Clean vehicle tax credits. Under the IRA, the plug-in vehicle credit is now called the clean vehicle credit. There is no longer a manufacturer limitation on the number of vehicles eligible; it has been eliminated after December 31, 2022. Currently, a taxpayer can claim a credit for each new qualified plug-in electric drive motor vehicle placed in service during the tax year. The maximum credit amount is $7,500. Certain vehicle requirements must be met.
The bill changes how the clean vehicle credit is calculated. A vehicle must meet critical mineral and battery component requirements, and 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, sport utility vehicles and pickups, and above $55,000 for other vehicles.
And, the 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.
Extension of limit to net business losses for individuals. The limitation will now apply through 2028, previously was 2026.
Affordable Care Act premium tax credits. The bill extends the expanded Affordable Care Act (ACA) program through 2025, so that eligible individuals and families who purchase their health insurance through the federal Health Insurance Marketplace can continue to benefit from lower health care premiums. In addition, it extends the expansion of subsidies under the American Rescue Plan Act through 2025— in the form of refundable premium tax credits for those same eligible individuals and families. These subsidies had been scheduled to expire at the end of 2022.
What is not included in the Inflation Reduction Act of 2022:
- No changes to the estate and gift tax rules.
- No increases to the tax rates on high earners.
- No change to the tax rates applicable to individuals on long-term capital gains.
- No increase to the corporate income tax rate, which remains at a flat 21%.
- No change to the qualified small business stock exclusion.
- No change to the like-kind exchange rules.
As you can see, the Inflation Reduction Act features a number of tax and IRS funding provisions as well as encourages conservation and cleaner sources of energy. We will continue to monitor this legislation and keep you updated on issues that could affect your tax liability or financial situation. If you would like to discuss the subject further, please contact our team of tax specialists at EagleStone.
If you would like to discuss the subject further, please contact our team of tax specialists at EagleStone.
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matter addressed herein. Securities offered through DAI Securities, LLC, Member FINRA/SIPC. Financial Planning, Wealth Management and Tax Services offered through EagleStone Tax & Wealth. DAI Securities and EagleStone are not affiliated entities. Financial Planning, Investment & Wealth Management services provided through EagleStone Wealth Advisors, Inc. Tax & Accounting services provided through EagleStone Tax & Accounting Services.