On Aug. 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA). The IRA is much smaller in size than what was proposed under the Build Back Better plan, but still includes some significant tax law changes. The IRA includes tax law changes to raise revenue for the government, along with some tax deductions and credit changes. It also includes a provision for $80 billion in additional funding for the IRS.
Read on to learn about how these changes could affect your taxes.
Tax revenue raisers in the bill include the following:
- A 15 percent alternative minimum tax (AMT) for corporations with average annual adjusted financial statement income exceeding $1 billion for three consecutive tax years. This new corporate tax applies to tax years beginning after December 31, 2022.
- A 1 percent excise tax on the repurchase of corporate stock traded on an established securities market. The excise tax applies to repurchases of stock after December 31, 2022.
- Reinstatement of Superfund taxes on crude oil and petroleum products effective January 1, 2023.
- A two-year extension of the section 461(l) loss limitation rules for non-corporate taxpayers. This extends the current law limitation to tax years beginning before January 1, 2029.
- Establishment of an excise tax on drug manufacturers, producers and importers who fail to enter into drug pricing agreements. The excise tax rate range would be from 185.71 percent to 1,900 percent of the selected drugs price depending on the duration of non-compliance.
Tax deduction and credit changes in the bill include:
- 179D deduction increase. The bill includes a significant increase of up to $5 per qualified square foot, up from the current rate of $1.88 per square foot.
- Increase in Research Credit against payroll tax for small businesses. Current law allows a small business, defined as a business with less than $5 million in gross receipts and that is under five years old, to apply up to $250,000 of the Research Credit toward its Social Security payroll tax liability. The new provision in the bill would allow an additional credit of up to $250,000 against Medicare Hospital Insurance tax for taxable years beginning after December 31, 2022. The credit could not exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
- Credits for purchasing both new and used electric vehicles. Buyers of new electric vehicles (EVs) will be eligible for a $7,500 credit for EVs placed in service before 2033, while the manufacturer’s limit is eliminated for EVs sold after 2022. Also, a credit of up to $4,000 will be available on purchases of previously-owned EVs.
- Extension of the residential energy property credit for homeowners. The credit is extended until it begins to phase out in 2033.
- Extension of the health insurance premium tax credit modifications made in the American Rescue Plan Act through 2025.
- Various credits for producing energy from renewable sources, clean hydrogen, and zero-emission nuclear power.
The additional $80 billion in funding for the IRS is appropriated over 10 years as follows:
- $3,181,500,000 for taxpayer services,
- $45,637,400,000 for enforcement,
- $25,326,400,000 for operations support, and
- $4,750,700,000 for business systems modernization
The additional revenue that will be generated from IRS enforcement efforts was estimated to be $124 billion. Small businesses are likely to bear the brunt of the enforcement efforts.
Please contact your Rea tax advisor with any questions or concerns about how this bill impacts your business.
By Lesley Mast, CPA, MAcc – Taxation (Wooster office)