Inflation Reduction Act of 2022: An Overview
On August 16, President Biden signed the Inflation Reduction Act (IRA 2022) into law, finalizing a scaled down version of legislation that has been months in the making. Here is an overview of the items in the Act that could have an effect on taxpayers and their businesses:
The IRA provides some short-term benefits to certain taxpayers, including a new credit and the extension of two existing credits.
- New for the 2023 tax season (to be applied on 2022 returns) is an updated energy credit for both new and used electric vehicles. Taxpayers can receive up to a $7,500 credit for new vehicles through 2032. Additionally, a $4,000 credit is available for the purchase of used electric vehicles. Price caps will apply to the new vehicle credit and both credits are subject to income and other limitations.
- Extension of American Rescue Plan Act (ARPA) provisions for health insurance purchased through the Health Insurance Marketplace. For tax years 2021 and 2022, the ARPA removed the 400% federal poverty line limitation for premium assistance and replaced it with a standard that Marketplace-purchased insurance costs should not exceed 8.5% of household income. The IRA also extends the 8.5% limitation through 2025.
- Extension of credits for homeowners who install solar-powered projects and other energy-saving products. There are also several other provisions in the legislation that benefit the clean-energy industry. The prior $500 lifetime credit has been replaced by an annual credit of up to $1,200 with certain restrictions on eligibility.
- Excess business loss (EBL) provisions which were extended through 2026 are now extended for an additional two years to 2028 by the IRA.
- A corporate 15% minimum tax on “book income” publicly reported on financial statements to shareholders for businesses with greater than $1 billion in revenue.
The IRA provides for a large allocation of money to increase the IRS’s funding over the next 10 years.
- The act designates $80 billion to update technology and outdated systems and hire additional agents to decrease the backlog. $15 million of the $80 billion will also provide funding for the IRS to conduct a study on the feasibility of expanding access to the IRS Free File system, with taxpayer’s being given access to data already on file with the IRS, such as W-2s, 1099s, etc.
This increase in funding could mean increased IRS scrutiny for businesses and individual filers including IRS audits and information requests.
Taxes on Large Corporations
The IRA imposes a tentative minimum tax of 15% of adjusted financial statement income (AFSI) for corporations with over $1 billion in profits for any 3-year period ending prior to the current year. The provision is effective for tax years beginning after December 31, 2022.
The tax applies to C corporations which have an average AFSI greater than $1 billion over three years. While this threshold seems to exclude most of the middle market, corporations with a foreign parent that have at least $100 million in AFSI could be subject to the TMT. In addition, controlled group rules apply which would aggregate the income of commonly controlled companies to determine applicability of this tax.
In addition, the IRA includes a new 1% excise tax on stock repurchases by publicly traded companies beginning in 2023.
The IRA did not address the 10K limitation on the deduction of state income and other state and local taxes.
The IRA did not address the required amortization of research expenses as many had hoped. However, it does increase from $250,000 to $500,000 the limit on the amount of credit a qualified small business may elect to treat as a credit against their payroll tax liability. This is applicable to taxable years beginning after 2022.
We expect to see further guidance on these issues in the coming months. We will continue to provide updates as they become available. If you have any questions on this news and how it could impact you or your business, please do not hesitate to contact our tax team.
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