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SuraLinkWritten by Drew Nicol, CPA
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the Act) into law. This $740 billion bill is aimed at fighting climate change, reducing the cost of healthcare, and increasing funding for the IRS. Many of the provisions in this Act are targeted to affect the wealthiest corporations and individuals in the country.
Corporate AMT
Included in the Act is a new 15 percent corporate alternative minimum tax (AMT) on corporations with an average three-year annual adjusted financial statement (book) income in excess of $1 billion ($100 million for members of foreign-parented international financial reporting groups) effective for tax years beginning after December 31, 2022. The corporate AMT calculation incorporates several adjustments including adjustments for accelerated depreciation and financial statement net operating losses. Corporations may also be eligible to claim minimum tax credits for AMT taxes paid in prior years, reducing the amount of AMT tax owed.
Also included in the Act is a one percent excise tax on stock buybacks for any stock repurchases that take place after December 31, 2022. This excise tax is imposed on the fair market value of stock repurchased by a publicly traded corporation. There are exceptions to the excise tax if the repurchase is part of a reorganization or if the total value of the stock repurchased during the year does not exceed $1 million.
The provisions within the Act affecting corporations are anticipated to generate an additional $213 billion in revenue.
Energy Tax Credits
The extension and expansion of green energy initiatives are at the forefront of the Act. Included is the expansion of the clean vehicle credit. Taxpayers may be eligible to claim a credit of up to $7,500 for new, qualified plug-in electric vehicles which generally applies to those vehicles placed in service after December 31, 2022.
The credit will be limited to taxpayers whose modified adjusted gross income (AGI) for the tax year does not exceed $300,000 for joint filers, $225,000 for heads of household, or $150,000 for any other taxpayer. There are also limits on the manufacturer’s suggested retail price (MSRP) of the vehicles. Credit is not allowed on the purchase of any van, SUV, or pickup truck exceeding an MSRP of $80,000 or $55,000 for any other vehicle. For the vehicle to be qualified for this credit, portions of the battery and its components must be manufactured and assembled in North America and final assembly of the vehicle must occur in North America. Taxpayers that purchase eligible vehicles after December 31, 2023, may elect to transfer the clean vehicle credit to an eligible entity (i.e. car dealer) at the time of purchase in return for a reduction in the amount owed to the dealer at the time of purchase. This allows taxpayers to immediately receive the benefits of the credit at the time of purchase as opposed to waiting until their tax returns are filed to claim the credit.
Similar to the clean vehicle credit, the Act also allows up to a $4,000 credit for previously owned, clean vehicles. This credit is limited to the lesser of $4,000 or 30 percent of the vehicle’s purchase price. Only taxpayers with a modified AGI of less than $150,000 for joint filers, $112,500 for heads of household, or $75,000 for married individuals filing separately or single filers are eligible for the previously owned, clean vehicle credit. This credit is generally effective for vehicles purchased after 2022. The credit is set to terminate after 2032.
The residential energy-efficient property credit is extended through 2034. This credit is available upon the purchase and installation of qualified residential energy-efficient property. Qualified residential energy efficient property includes solar electric property, small wind energy property, and geothermal heat pump property. The credit amount is equal to 30 percent of the costs of eligible property placed in service through 2032. Credit amounts decrease in 2033 and 2034 to 26 percent and 22 percent respectively. This credit was also modified to include qualified battery storage technology if made after December 31, 2022.
Additionally, the energy-efficient home improvement credit, previously named the credit for nonbusiness energy property, is extended through 2032. The energy-efficient home improvement credit allows a credit for energy-efficient residential improvements including energy-efficient exterior windows, doors, and metal roofs. This credit was modified to increase the credit to 30 percent of the qualified property cost and replaces the $500 lifetime limit on the credit with a $1,200 annual limit.
Health Care
Medicare recipients are likely to see a decrease in the cost of certain high-cost prescription drugs. Under the Act, the Department of Health and Human Services will now have the power to negotiate prices for high-cost prescription drugs with prescription drug companies. However, Medicare recipients might not immediately see the impact of these negotiations as the first round of negotiated prices is not set to begin until 2026.
The Act allows taxpayers with household income in excess of 400 percent of the federal poverty line to qualify for the premium tax credit through 2025. Under the American Rescue Plan, the affordability percentages used to calculate premium tax credits were modified to increase the amount of credits for taxpayers. The Act extends these affordability percentages through the end of 2025.
IRS Funding
The Act includes nearly $80 billion in funding for the IRS over the next 10 years. The IRS is set to hire 87,000 new employees in an effort to ramp up tax enforcement, enhance taxpayer services, and improve technology with increased funding. While the increase in hiring may sound alarming, this might not be as frightening as the headlines make it seem. The IRS expects that roughly 50,000 workers will retire from the agency in the next five years. Many of these new hires will replace those workers who have already been a part of the agency.
The IRS is also still experiencing a large backlog from pandemic-related relief legislation including 21.3 million unprocessed paper tax returns, delayed refunds, and overwhelmed call centers. Much of the funding will be used to whittle down the backlog of paper returns and improve customer service issues.
Treasury Secretary Janet Yellen and IRS Commissioner Charles Rettig have both pledged not to use the funding to increase audits of small businesses or taxpayers earning less than $400,000. It is unsure at this time how these funds will be specifically used. Yellen has provided a six-month timeframe for the IRS to provide a detailed plan on how the $80 billion will be utilized over the next 10 years. Another item to note is that Commissioner Rettig’s term expires in November for which the Biden administration will seek to appoint a new Commissioner of the IRS. It is expected that a temporary acting chief will hold the realm for a few months until Rettig’s replacement is appointed and confirmed through the Senate confirmation process.
If you have any questions or concerns about how the Inflation Reduction Act may affect your unique tax situation, please contact your BMSS advisor at (833) CPA–BMSS.