Inflation Reduction Act includes far-reaching tax provisions – Corporate Tax

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The US Senate and House of Representatives passed the Inflation Reduction Act (IRA) and President Biden signed the bill into law. The IRA includes important provisions related to climate change, healthcare and, of course, taxes. The IRA also addresses the federal budget deficit. According to the Congressional Budget Office (CBO), the IRA is expected to reduce the deficit by about $90 billion over the next 10 years.

The US Senate and House of Representatives passed the Inflation Reduction Act (IRA) and President Biden signed the bill into law. The IRA includes important provisions related to climate change, healthcare and, of course, taxes. The IRA also addresses the federal budget deficit. According to the Congressional Budget Office (CBO), the IRA is expected to reduce the deficit by about $90 billion over the next 10 years.

While the IRA falls far short of the $2 trillion Build Back Better Act originally proposed by Biden, the $430 billion package is nonetheless sprawling legislation that will affect most Americans over time. Here is an overview of what it includes.

Related reading:2021 will end without Senate action on the Build Back Better Act

IMPORTANT TAX PROVISIONS

The IRA is designed not to raise taxes for small businesses or taxpayers earning less than $400,000 per year. But new taxes are part of the equation and the wealthiest targets are in the crosshairs.

The first target is for US corporations (other than S corporations) that have achieved more than $1 billion in annual revenue in the previous three years. Although the current corporate tax rate is 21%, it has been well documented that many of these corporations pay little or no federal income tax, in part due to deductions and credits. The IRA imposes an alternative minimum corporate tax of 15% of financial statement income (also called book income, as opposed to tax income) less, among other things, depreciation and net operating losses. The new minimum tax applies to tax years beginning after December 31, 2022.

As a result of last-minute negotiations, private equity firms and hedge funds are exempt from minimum tax. They could have been covered by a provision which generally includes the subsidiaries in the determination of the annual result. The trade-off is that the IRA will now extend the excess business loss limitation for certain businesses for two years.

Although the original wording of the bill also closed the so-called “deferred interest” loophole that allows such interest to be taxed as long-term capital gains rather than ordinary income, the loophole has eventually survived. Democrats agreed to remove the provision that shut it down to secure Sen. Kyrsten Sinema’s (D-AZ) vote — but added another tax to make up for lost revenue. The IRA will now impose a 1% fair market value excise tax when companies redeem their shares.

In a statement, Sinema said she would work with Sen. Mark Warner (D-VA) on separate legislation to enact deferred interest tax reform. However, to do so outside of the budget reconciliation process would require 60 votes in the Senate in addition to a majority in the House. With midterm elections in the fall and control of both houses of Congress at stake, imminent action on this front seems unlikely.

The IRA also provides about $80 billion over 10 years to fund the IRS and improve its “tax enforcement operations” and technology. Notably, the IRS budget has been significantly reduced in recent years, dropping 20% ​​in 2020 compared to 2010. The CBO estimates that the injection of funds will allow the IRS to raise $203 billion over the course of the next decade with corporations and high net worth individuals.

CLIMATE AND ENERGY PROVISIONS

The IRA is spending around $370 billion on tackling climate change and increasing national energy production. It aims to reduce the country’s carbon emissions by 40% by 2030.

The legislation includes new, expanded and increased tax credits intended to incentivize businesses and individuals to increase their use of renewable energy. For example, it offers tax credits to private companies and utilities to generate renewable energy or manufacture parts used in renewable projects, such as wind turbines and solar panels. Clean energy producers who pay a prevailing wage may also qualify for tax credits.

CLEAN VEHICLE CREDIT

The current qualifying plug-in electric vehicle tax credit has been significantly overhauled in the IRA. Currently, a taxpayer can claim a credit for each new qualifying plug-in electric motor vehicle put into service during the tax year. The maximum credit amount is $7,500. Certain vehicle requirements must be met.

The credit was phased out beginning in the second calendar quarter after a manufacturer sold more than 200,000 plug-in electric motor vehicles for use in the United States after 2009. Under the IRA, the plug-in vehicle credit was renamed Clean Vehicle Credit and the manufacturer limit on the number of vehicles eligible for the credit was removed after December 31, 2022.

The IRA changes the way the clean vehicle credit is calculated. Specifically, a vehicle must meet essential requirements for minerals and battery components. There are also price and revenue limits. Clean Vehicle Credit is not permitted for any vehicle with a Manufacturer’s Suggested Retail Price over $80,000 for Vans, Sport Utility Vehicles and Pickup Trucks, and over $55,000 for other vehicles .

Own vehicle credit is not allowed if a taxpayer’s modified adjusted gross income (MAGI) for the current or previous tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for heads of families.

The IRA also contains a tax credit for a used plug-in electric powered vehicle purchased after 2022. The tax credit is $4,000, or 30% of the sale price of the vehicle, whichever is less. raised. There are also price and revenue limits.

HOME ENERGY UPGRADES

Individual taxpayers can also get tax breaks for home energy efficiency improvements, such as installing solar panels, energy-efficient water heaters, heat pumps and HVAC systems. A “Clean Energy and Sustainability Accelerator” will use public and private funds to invest in clean energy technologies and infrastructure.

PROVISIONS RELATING TO HEALTH CARE

The IRA allows Medicare to negotiate the price of prescription drugs and prohibits future administrations from refusing to negotiate. It also caps Medicare enrollees’ annual drug costs at $2,000 and monthly insulin costs at $35 and provides them with free vaccines. Additional provisions aimed at limiting drug costs include a requirement that drug companies that increase Medicare-purchased drug prices faster than the rate of inflation reimburse the difference to the program.

The IRA is also expected to reduce health care costs for Americans of all ages who obtain health insurance coverage through the federal health insurance market. It extends the expansion of grants — in the form of refundable premium tax credits — under the America Rescue Plan Act through 2025. Those grants were set to expire at the end of 2022.

Related Reading: US Bailout Act Provides Sweeping Relief Measures for Eligible Individuals and Families

MUCH MORE TO COME

The IRA is sweeping legislation that affects many industries in the United States, as well as most citizens. Additional information, guidance and regulations related to its many far-reaching provisions are inevitable. ORBA will keep you informed of developments that may affect your finances and federal tax liability.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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