In August 2022, President Biden signed the Inflation Reduction Act (IRA) into law. The Act contains provisions from climate change to prescription drug prices and is expected to reduce the federal budget deficit by more than $300 billion over the next decade. In this article, we’ll provide a brief overview of the key provisions of the Inflation Reduction Act.
Climate change and energy provisions
The IRA devotes nearly $370 billion to combating climate change and boosting domestic energy production. It aims to reduce the country’s carbon emissions by 40% by 2030. The legislation includes a variety of tax credits intended to incentivize businesses and individuals to increase their use of renewable energy to help reach the 40% goal.
Clean Vehicle Tax Credit Program
The Clean Vehicle Tax Credit Program is a modification of the existing Electric Vehicle Tax Credit program by expanding the tax credits available to consumers but introduced new limitations for qualification.
The Clean Vehicle Tax Credit program is effective for qualified vehicles placed into service after December 31, 2022. For new vehicles, the maximum tax credit is $7,500. For used vehicles, the maximum credit is the lesser of $4,000 or 30% of the vehicle’s sale price.
While the tax credit availability has been expanded, there are several limitations on which cars and individuals qualify for the Clean Vehicle Tax Credit:
- Only cars where the final assembly is in North America are eligible for the Clean Vehicle Tax Credit.
- New trucks, vans, and SUV models must have an MSRP of less than $80,000. Other new cars, like coupes and sedans, must have an MSRP of less than $55,000. For used electric vehicles, the price cap is $25,000, but the cars won’t have to comply with the made-in-North-America requirement.
- At least 40% of the minerals and 50% of the other components of the battery must come from North America or a country that has a free trade agreement with the U.S.
- The credit for new vehicles is only available to taxpayers whose modified adjusted gross income does not exceed $150,000 for single filers, $225,000 for a head of household, or $300,000 for married couples. The adjusted gross income limits for purchasers of used vehicles are $75,000 for single filers, $112,500 for a head of household, or $150,000 for married couples.
Clean energy improvement credits
The IRA includes credits for homeowners and businesses.
The Energy Efficient Home Improvement Credit provides up to $1,200 per taxpayer per year for energy-efficient property placed in service and home energy audits performed between January 1, 2023 and January 1, 2033.
The Residential Clean Energy Credit provides a credit of 30% of the installation cost for clean energy systems that produce electricity, heat water, or regulate temperature. The full credit is available for systems installed before January 1, 2035 and after that is phased out.
The Alternative Fuel Refueling Property Credit, available through 2032, provides a credit of 30% of the cost of qualified alternative vehicle refueling property up to $1,000.
The IRA also contains several tax credit programs for manufacturers and businesses that encourage investment in clean energy systems and the use of clean energy.
The bill extends healthcare subsidies for insurance purchased in the Health Insurance Marketplace. It extends the modified Premium Tax Credit (PTC) and provides PTCs for those with household incomes greater than 400% of the Federal Poverty Line. The bill also caps Medicare beneficiaries’ out-of-pocket medical expenses at $2,000 per year, starting in 2025, and will allow Medicare to negotiate the cost of drugs.
The IRA also includes a requirement that pharmaceutical companies that raise the prices on drugs purchased by Medicare faster than the rate of inflation rebate the difference back to the Medicare program.
The IRA does not raise taxes on small businesses or taxpayers earning less than $400,000 per year. However, it does raise additional tax revenue from other sources.
15% minimum tax for corporations
The Act imposes a 15% corporate alternative minimum tax on Corporations other than S Corporations, with an average annual adjusted financial statement income exceeding $1 billion for the three years prior to the current taxable year. The tax will be levied on financial statement income, reduced by depreciation and net operating losses, and will be effective for tax years starting on or after January 1, 2023. Private equity firms and hedge funds are exempt from the corporate alternative minimum tax.
1% excise tax on repurchased stock
Publicly traded companies will also face an excise tax of 1% of the fair market value of repurchased stock after December 31, 2022 if the total value of repurchases within the tax year is greater than $1 million. There are other exceptions based on how the repurchased stock is allocated.
Business loss limitation rules
The Tax Cuts and Jobs Act limited the annual deduction for business losses for noncorporate taxpayers to $250,000 for single taxpayers ($500,000 for joint filers) through 2025. Excess losses can be carried forward to future years. While the provision was set to expire at the end of 2025, the IRA extends it through 2028.
Research and experimentation tax credits
Small to mid-size businesses have been able to elect to use research and experimentation tax credits (aka research and development tax credits) to offset up to $250,000 in employer Social Security payroll taxes each year for up to five years, provided they meet specific requirements. To qualify, businesses must be under five years old and have less than $5 million in gross receipts.
The IRA expands this by allowing qualifying companies to use an additional $250,000 in credits to offset the 1.45% employer portion of Medicare payroll taxes starting January 1, 2023.
Offsetting payroll taxes can be particularly beneficial for start-up companies and companies that don’t have a tax liability. Start-ups often invest in research and development but rarely generate enough profit to make the tax credits worthwhile. Yet, these businesses still have payroll taxes, so the ability to offset payroll taxes offers an immediate benefit.
IRS budget increase
Perhaps one of the most well-known provisions of the IRA is its increase in funding for the Internal Revenue Service. Specifically, the legislation provides approximately $80 billion of funding over the next ten years to improve the IRS’s enforcement activities. The funding is also supposed to enhance taxpayer services and modernize business systems and operations.
This article is intended to provide a brief overview of the key provisions of the Inflation Reduction Act and is not a substitute for speaking with one of our expert advisors. Please contact our office if you’d like to learn more, including how the IRA might impact you and your business.