Filed under: Tax Compliance & Planning
On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. The legislation aims to create clean energy jobs through significant new and extended clean energy investment incentives for both businesses and individuals. The IRA also includes new authority for Medicare to negotiate the price of prescription drugs and sets an annual cap of $2,000 per patient out-of-pocket costs under Medicare for patients enrolled in drug plans. The following article will provide a high-level overview of these and other provisions.
About the IRA
IRA funding comes from two aspects of the legislation: first, a new 15% corporate minimum tax for large corporations (over $1 billion in revenue) and, second, by awarding the IRS with $80 billion in additional funding for tax enforcement activity. The IRA also includes a new 1% excise tax on stock repurchases. In total, the IRA is estimated to raise $740 billion in new revenue, with $440 billion in new spending and $300 billion going towards deficit reduction.
The good tax news about the IRA is what it didn’t include: no rate increases on individuals, no expansion of the net investment income tax, and no changes to the “carried interest” provisions.
The bad tax news is that the IRA excluded any relief on the state and local tax deduction cap of $10,000. The IRA also extends the $500,000 (joint filing) excess business loss rule through 2028. The IRA also increases IRS funding by $80 billion over the next 10 years.
Highlights of the IRA
IRS Budget and Enforcement
The IRA awards the IRS with $80 billion in new funding. IRS has set a goal of hiring 87,000 new employees over the next 10 years, with about half of those being enforcement (i.e., audit) personnel. Increased audit activity will be targeted toward businesses and individuals who earn over $400,000.
Stock Buybacks Subject to 1% Excise Tax
The IRA will implement a new excise tax on corporate stock repurchases of 1% of the fair value of the stock. The tax will not apply to otherwise tax-free reorganization transactions, stock contributed to an employer sponsored retirement plan, stock valued at under $1 million, or to the extent the repurchase is treated as a dividend.
Prescription Drug Price Reform Will Empower Medicare
The IRA grants the Health and Human Services Secretary the power to negotiate the price of eligible drugs. This will be phased in from 2026-2029. The legislation also includes new caps on insulin co-pays at $35 per month. The IRA will also eliminate the 5% co-insurance payment for Part D Medicare and add a $2,000 cap on Part D out-of-pocket costs per year.
New 15% Corporate Minimum Tax Rate for Large Corporations
The IRA creates a new 15% corporate minimum tax on large corporations (over $1 billion in pre-tax earnings) based on adjusted financial statement income. This new minimum tax will provide most of the new tax revenue under IRA. Treasury officials are working on new implementation rules and hope to have them ready for review by the end of 2022.
ACA Subsidy Extension
The IRA extends for three years the enhanced ACA marketplace subsidies implemented originally under the American Rescue Plan, thereby avoiding a subsidy “cliff” that was due to hit at the end of 2022. This is a big win for taxpayers utilizing ACA exchange health insurance.
Clean Energy Investments
The primary focus of the IRA is on climate change mitigation. The IRA includes a number of tax credits and incentives to encourage the adoption of clean energy sources, the reduction of carbon emissions, and the purchase of electric vehicles, while also promoting domestic production and energy security.
The IRA creates new credits for biodiesel, sustainable aviation fuel, and alternative fuels. The IRA has also added credits for clean fuel production and an enhanced investment tax credit.
The IRA’s maximum clean vehicle credit is $7,500. To receive the maximum credit, the vehicle and its batteries must meet specific domestic production requirements. There are also income limits for taxpayers wanting to claim the credit ($300,000 AGI for joint filers). The IRA expands credit eligibility for used clean vehicles as well.
The IRA increases and extends the energy and efficiency incentives for individuals. The new limit is $1,200 per taxpayer, per year, with the lifetime cap removed. The credits are available now through December 31, 2032.
The IRA also adds a new five-year depreciation category for certain green energy property. For property placed in service starting in 2024 this includes qualified facilities eligible for clean energy production credit and qualified property and energy storage technology that is eligible for the clean energy investment credit.
Takeaways
The IRA represents the most significant climate change legislation ever enacted in the United States. Despite criticism that the IRA’s deficit reduction will be offset by President Biden’s student loan forgiveness, and that the IRA’s inflation reducing impact will be negligible, the climate provisions are a major win for the Congress and the White House.
If you have questions on how the IRA may affect your organization, please send us an email.
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