The Inflation Reduction Act: Tax, Healthcare, and Climate Reform

August 22, 2022

On August 16, 2022, President Joe Biden signed the much-anticipated Inflation Reduction Act (IRA), essentially a curtailed version of the Build Back Better Act. The bill passed with all 50 Democratic votes in the Senate on August 7, 2022, including Senators Joe Manchin (D-W.Va) and Kyrsten Sinema (D-AZ), who both opposed the previous version of the bill.

This revision brings to fruition efforts to reduce climate change, lower the cost of prescription medication by allowing Medicare to negotiate the prices of some prescription drugs, and impose minimum corporate income taxes and taxes on financial transactions for America's wealthiest companies.

Estimates show that the bill's likelihood of lowering the inflation rate is low or, in some studies, negligible. However, the bill will accomplish initiatives that have been thwarted by congressional debate for many years.

The over 700-page law authorizes more than $700 billion in spending and provides for significant legislative action. So, what can you expect next? We’ve put together a summarized list of the major changes and what they are expected to accomplish.

 

Key Legislation

  • 15% Corporate Minimum Tax - A new corporate minimum tax rate of 15% will apply to corporations with average financial statement income of over $1 billion per year. The tax rate for individuals and households will not increase.
  • 1% Excise Tax on Certain Stock Repurchases - Corporations participating in stock buybacks may pay a 1% excise tax.
  • Excess Business Loss Limitations - This provision is already in place under existing tax law, but the IRA extends it another two years through 2028.
  • Prescription Drug Reform - Allowing Medicare to negotiate pricing on certain prescription medications will reduce costs for the insured. There will be a cap of $2,000 on the annual out-of-pocket minimum for prescription drug costs starting in 2025.
  • Internal Revenue Service Investment - The IRS has been chronically underfunded for years for numerous reasons, including funding shortages, the amount of tax due but uncollected, and the federal budget deficit. The IRA Bill will invest $80 billion in the IRS over the coming 10 years. It is important to note that because some of the funding will be used to add auditors and update systems and technology, it may indirectly lead to more audits and increased taxes for taxpayers.
  • Subsidy Extension of the Affordable Care Act (ACA) - The federal government currently funds Medicare insurance to lower premium costs. The funding was previously set to expire by the end of 2022. Under the IRA, subsidies will extend to 2025. Without the extension, around 3 million Americans might have been at risk of losing their coverage.
  • Climate Change and Energy Investments - The IRA bill includes investments to reduce the effects of climate change and creative tax incentives for households to offset energy costs.

 

Key Tax Credits

The tax credits contained within the IRA include more than $200 billion in energy-related tax subsidies that will go into effect over the next decade. Here are the key tax credits to pay attention to.

  • IRC §48 Energy Investment Tax Credit - This extends and modifies this business solar tax credit by extending it an additional year for property constructed prior to 2025. The new law also reduces the credit from 30% to 6% for taxpayers who fail to meet a new prevailing wages and apprenticeship requirement.
  • Home Energy Tax Credits - The IRA reinstated many previously expired credits, formerly capped at $500, and upped the credits to $2,000.
  • Electric Vehicle Credits - A $7,500 credit is available at the time of purchase if the vehicle adheres to specific mineral and battery sourcing. The MSRP of the vehicle must be less than $55,000 for cars and $80,000 for SUVs or pick-up trucks.
  • Used EV Credit - A $4,000 credit is available if you purchase a used EV.
  • Large EV Purchase Credit - If you purchase a large electric vehicle, such as a grain transporting truck, a taxpayer could qualify for a $40,000 credit. The credit is either $40,000 or 30% of the cost of the vehicle, whichever is less.
  • Credit Transfers - A taxpayer can transfer certain tax credits to a third party for cash for the first time. The transfer proceeds are not taxed, but the party purchasing the credits cannot deduct the purchase.
  • Direct Pay Tax Credit - Some credits allow a "direct-pay" option. A dealer could potentially honor the credit at the time of purchase instead of making you wait for your tax return for the refund.

 

Our Tax team closely monitors all developments resulting from the bill and its moving parts. We are dedicated to informing you of tax news as we continue to absorb this sweeping legislation. Stay in touch with us at contactus@gccpas.net or reach out to your GC advisor directly.

 

 

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