On Tuesday, August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law. This sweeping legislation includes provisions aimed at combatting climate change, reducing healthcare costs, and raising tax revenue, among other initiatives. Its goals include reducing the deficit by around $300 billion, lowering carbon emissions by about 40% by 2030, and, of course, fighting inflation.
The Inflation Reduction Act has implications for individual taxpayers, small businesses, and large corporations alike. In this post, we’ve pulled out some of the key provisions to explain how you and your business may be affected.
Highlights of the Inflation Reduction Act
1. 15% corporate minimum tax
2. 1% Excise tax on the repurchase of corporate stock
3. Clean Energy and Domestic Manufacturing Incentives for Businesses
4. Consumer energy credits and incentives
We go into more depth on each of these topics below.
15% Corporate Annual Minimum Tax
The Act does not create new taxes for small businesses, but businesses with $1B or more in reported income will now be subject to a minimum corporate tax rate of 15%.
Specifically, this provision applies to C corporations that have an average annual adjusted financial statement income greater than $1 billion over three taxable years. It does not apply to regulated investment companies, S corporations, or real estate investment trusts (REITs). The Joint Committee on Taxation estimates that only 150 companies annually will be subject to the minimum tax.
The tax, which goes into effect on January 1, 2023, will be based on corporate financial statement income and will make it harder for these businesses to lower their effective tax rate through deductions and credits.
Excise Tax on the Repurchase of Corporate Stock
The Inflation Reduction Act also includes a nondeductible 1% excise tax on corporate stock buybacks. The tax is based on the stock’s fair market value and applies to any domestic corporation with publicly traded stock. There are special rules for the acquisition of stock in certain foreign corporations.
Repurchases below $1 million or contributed to employee pension or similar plans will not be subject to tax, new issues to the public or stock issued to employees can be deducted from the taxable amount, and there are exceptions for certain tax-free reorganizations.
Clean Energy and Domestic Manufacturing Incentives for Businesses
The Act includes a number of incentives designed to stimulate clean energy usage, reduce clean energy costs, alleviate supply chain bottlenecks, and protect American jobs. There are production tax credits designed to accelerate the production of wind turbines, solar panels, batteries, and critical minerals, as well as investment tax credits that encourage the creation of clean technology manufacturing facilities, such as those that make solar panels and electric vehicles.
The act also makes $2 billion in grants available to auto manufacturers to refurbish existing manufacturing facilities to produce clean vehicles and keep auto manufacturing jobs in the US. Automobile makers should also be aware of the eligibility requirements imposed on new clean-energy vehicles bought with consumer tax credits (see below).
Consumer Clean Energy Incentives
The Act also includes clean energy incentives aimed at consumers with the goal of lowering energy costs and boosting the use of clean energy technologies. Provisions include a tax credit of up to $7,500 to buy new clean-energy vehicles and a $4,000 tax credit for lower/middle income individuals to buy used clean-energy vehicles.
Consumers should note that the Act imposes eligibility requirements on the materials and production of new vehicles bought with the tax credit. Specifically, at least 40% of the critical minerals used to manufacture these cars before 2024 and 80% after 2026 must be extracted or processed in the United States or in a country with which the United States has a free trade agreement or recycled in North America. Similarly, at least 50% of electric vehicle battery components before 2024 and 100% after 2028 must be manufactured or assembled in North America.
Homeowners may also benefit from the Act, which extends an energy property credit through 2032 and raises it from 10% to 30% of the amount paid or incurred by the taxpayer for home energy audits and energy-efficient improvements. These improvements include clean, energy-efficient technology such as heat pumps, rooftop solar, and electric HVAC and water heaters.
The Act also includes a $1 billion grant program to make affordable housing more energy-efficient.
Research & Development (R&D) Tax Credits
Beginning in 2023, the amount in R&D tax credits that can be used to offset the employer-paid Medicare portion of a company’s payroll taxes is doubled to $500,000. These credits are available to small businesses that have less than $5 million dollars in annual gross receipts for the taxable year and do not have gross receipts for more than 5 prior years.
Other Provisions Worth Noting
Extension of the Limitation on Excess Business Losses
The Act extends the limitation on excess business losses of noncorporate taxpayers by two years to 2028. This limits the ability of noncorporate taxpayers to use more than $250,000 ($500,000 for married taxpayers filing jointly) of business losses to offset nonbusiness income.
Affordable Healthcare Act Subsidies Extension
The expanded Affordable Care Act (ACA) program was extended through 2025. This gives eligible individuals and families the ability to continue purchasing their health insurance through the federal Health Insurance Marketplace.
Increased Funding for the IRS
The Act allocates $80 billion in new funding for the IRS for tax enforcement and compliance, business systems modernization, and the hiring and training of new auditors.
Drug Pricing Reform
The Act includes a number of provisions aimed at driving down the cost of prescription drugs. These include giving Medicare the ability to negotiate directly with drug manufacturers, capping Medicare patients’ out-of-pocket costs at $2,000 a year, and requiring drug companies to rebate the difference to Medicare if they raise prices higher than inflation.
This post has touched on the highlights of the Inflation Reduction Act, but with over 700 pages of new extensions, incentives, and requirements, there simply isn’t the space to get into all the nuances here. We strongly suggest talking to a trusted tax advisor about the implications of the Act and how they might apply to your family or business.
If you’re interested in working with Tonneson + Co, please reach out to us. We look forward to hearing from you!