President Biden signed the Inflation Reduction Act—a climate, energy, healthcare, and tax law that increases IRS funding, includes several tax credits, and changes some tax policy to raise tax revenue. Basically, it is a re-brand of the Build Back Better Plan missing some controversial line items.
The Inflation Reduction Act of 2022, is a sweeping piece of legislation that is designed to address some of the significant issues that America is facing like the high cost of prescription drugs and inflation. The “Act” will create a $1 Billion incentive program for energy-efficient affordable housing. It also has provisions for fighting climate change, supports clean energy production, and will reduce the deficit which should decrease inflation, albeit slightly according to several studies.
The “Act” could certainly have a broad economic impact, as it touches on everything from the climate crisis to taxes on corporations. The financial markets started reacting to the legislation long before it went to Biden’s desk for signature. There are winners and losers.
Here is a quick summary of the most important items:
There is good news for small biz and regular folks. The Inflation Reduction Act is not designed to increase taxes on small businesses or on families that make $400,000 or less. However, some corporations pay more tax than they currently pay. It is likely that very large businesses with more than $1 Billion in reported income, like Nike or Amazon, would pay a minimum corporate tax rate of 15%.
The “Act” also includes a new non-deductible 1% excise tax on corporate stock buybacks of publicly traded corporations. Generally, a stock repurchase means any redemption of stock or any economically similar transaction, but any taxable repurchases will be adjusted by the amount of stock provided to employees. There are exceptions and exclusions, such as transactions in the nature of a reorganization; repurchase amounts under $1 million; or transactions that are treated as a dividend.
More benefits for small businesses regarding research tax credits includes a provision that could benefit startups especially, allowing them to potentially double the amount they can claim on the research and development tax credit from $250,000 to $500,000 per year against payroll taxes. To qualify for the expanded credit, the small business would need to have less than $5 million of gross receipts and be less than five years old. The Inflation Reduction Act would permit an additional credit of up to $250,000 to be applied against the Medicare payroll tax for tax years starting after Dec. 31, 2022. The expanded R&D tax credit probably won’t show up on tax returns until 2024 since it can first be claimed for tax year 2023.
The new law 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. Eligibility for the ACA premium tax credit program was temporarily expanded during the pandemic to allow more individuals and families to claim the refundable tax credit for 2021 and 2022. One win for seniors is a $2,000 annual cap on their contribution to prescription spending. Additionally, the new law contains provisions that could allow Medicare to negotiate lower prices for some prescription drugs, and includes inflation controls, where pharmaceutical companies will be penalized for imposing price increases beyond inflation.
To support clean energy, the Inflation Reduction Act will provide new tax credits which could benefit homeowners, and other energy-related tax credits will be extended. There is a 10-year extension of the homeowner credit for solar projects, like rooftop solar panels. Also, think credits for energy-efficient water heaters, heat pumps, and HVAC systems!
Existing tax credits of up to $7500 for buying a new or used electric vehicle are extended for 10 years—until December 2032. Those credits will apply to any “clean vehicle,” all-electric cars and hybrid plug-ins, including hydrogen fuel cell cars. The act also provides a separate tax credit worth a maximum of $4,000 for used versions of these vehicles. The law sets income limits on who can claim the electric vehicle credits, and limits based on the manufacturers retail sales price (MSRP) of the cars that would qualify for the credit. Those limits effectively exclude higher-priced luxury electric vehicles. The new law also removes the 200,000-car cap for claiming the credit, which will allow manufacturers like Tesla, General Motors, and Toyota to qualify for the credit.
Also, there will be an option, beginning in 2024, for car buyers to take the clean vehicle tax credit as a discount at the time of the car purchase. You would effectively be transferring the credit to the dealer who could reduce the price of the vehicle by the amount of the EV tax credit. That means that you wouldn’t have to wait until tax time to benefit from the clean vehicle tax break. Vehicles must be manufactured in North America and the price must be below $55,000 for a sedan and $80,000 for a van, truck or SUV.
The bad news is $80 Billion of additional funding over ten years will go to the IRS to improve operations, which means greater IRS Tax Enforcement. $5 Billion is allotted in the bill for improved technology. $45 Billion of the funds will be used to improve enforcement of tax laws and uncovering fraud and tax evasion.
THE WINNERS:
- Clean energy companies
- Electric vehicle makers
- Materials, industrials and utilities companies
- Startups in tech
- Seniors and families in need of healthcare and prescription drugs
THE LOSERS:
- Giant tax-avoiding companies
- Shareholders of companies doing buybacks
- Drug companies
- High earning executives
- Cryptocurrency
Reach out to us: As you can see, the Inflation Reduction Act makes some interesting changes to current tax credits and shifts some longtime tax policy—particularly for some large corporations. Even if the tax changes in the legislation don’t impact your personal tax bill, a few extended tax credits might save you some money. Call us toll free at 855-542-7537, or email CPA@fuoco.com, to see if some of the expanded tax credits in the legislation could benefit you. On the other hand, if you are a high earner, talk to us about tax planning to mitigate your tax liability for the future.