Inflation Reduction Act Summary
/Inflation Reduction Act Summary
If you have been following the political news lately, I am sure you have heard of the Inflation Reduction Act. Often it is difficult to get away from the sound bites meant to stir controversy and determine what is in new legislation, and how to respond accordingly. In this thought leadership piece, we have sought to distil down the main points of the new act into a concise summary and call out where action may be appropriate.
15% Minimum Tax on Large Corporations
Early estimates show that only around 150 corporations will be subject to this tax. From a personal financial planning perspective, there will be no impact. Our CCP portfolio management team is actively monitoring how this change will affect our investment thesis.
1% Excise Tax on Corporate Stock Buybacks
Similar to the large corporation minimum tax change, this will have no impact on an individual’s planning, but is being assessed from an investment perspective by our portfolio management team.
Extension of Section 461 (l) Business Loss Limitations
Non-corporate business losses used to offset non-business income will be limited to 250k per year ($500k if married). Excess losses can be carried forward to future years. This limitation was already in effect but was set to expire, this new provision extends it through 2028.
While this is not a new policy, it is something that may continue to impact a small business owner who also has multiple income streams. If you anticipate having a large business loss flowing through your 1040, consider consulting with your CPA and advisor on how you may be affected by this provision.
Healthcare Changes
Medicare
There are two major changes for Medicare within the legislation. Insulin out of pocket costs will now be capped at $35 per month, and Medicare will now be able to negotiate prices with drug manufacturers. Previously, no negotiation took place. This will hopefully result in both lower premiums and out of pocket costs for Medicare recipients.
Affordable Care Act
Affordable Care Act subsidies have been extended for three additional years, expanding on the initial extension as part of the American Rescue Plan Act.
Clean Energy measures
$370 billion has been allocated for new energy focused tax credits over the next 10 years. The three main credits are summarized below:
Electric Vehicle (EV) Tax Credit Expansion
You may be familiar with the $7,500 tax credit on EVs that had previously been in existence. The new legislation extends the $7,500 credit on new EVs through 2032, as well as expanding the credit to include used EVs over two years old (limited to lesser of $4,000 or 30% of price on used).
New limitations have also been introduced into the EV credit. Individual filers will not qualify if their AGI exceeds $150,000 ($300,000 if married). There are also new limits on the maximum price of the vehicle purchased. For full details on important dates and dollar-based thresholds, refer to the US Treasury press release here.
Solar Energy Tax Credit
Residential solar installation will now qualify for a 30% tax credit through 2032, which is an increase from 26%. Commercial solar installations will also be eligible for the 30% credit through 2032.
Nuclear Energy Tax Credit
The new law provides a production-based tax credit for existing nuclear energy units, which will likely extend the longevity of several nuclear plants that had been scheduled for early retirement.
IRS Funding Expansion
The new legislation includes $80 billion in new funding for the IRS over 10 years. $45.6 billion of this amount is designated for enforcement, which initial estimates claim could bring in an additional $203 billion in revenue over the same time period.
While it is still unclear if and how this may affect individuals, it does seem likely that households earning over $400,000 per year will face an increased risk of IRS audit. Historically, the IRS has taken a targeted audit approach, seeking to inspect filers that will most likely result in a finding that could significantly increase tax revenue. For example, a filer with only W-2 ordinary income taking the standard deduction faces a significantly lower audit risk than an independent contractor or business owner taking more complex deductions such as claiming a home office or business vehicle.
Continuous communication with your CPA and advisor should put you in the best position possible to be prepared for an IRS audit. While this does not result in any law or policy changes, an increased emphasis on maintaining accurate books and records for tax filers may be appropriate.
Payroll Research Tax Credit for Qualifying Small Businesses
The 2015 Protecting Americans from Tax Hikes Act (PATH) codified the research and development (R&D) tax credits for qualifying small employers. A qualifying small business is deemed to be any business with both less than $5 million in gross receipts for the calendar year, as well as no gross receipts for any tax year before the five preceding years. The Inflation Reduction Act allows an additional tax credit for up to $250,000 against Medicare Hospital Insurance tax. Previously the $250,000 offset could only be used against payroll taxes.
If you believe your business qualifies as a small business, coordinate with your CPA and advisor in order to plan accordingly and take full advantage of this expanded credit.
What isn’t in it?
There are several items many people expected or hoped to be included in the inflation reduction act, here are a few of the most popular items that were not adopted:
· State and local tax deductions are still limited to $10,000 as part of the Tax Cuts and Jobs Act (TCJA). Residents of high tax states were hoping to see this portion of the TCJA reversed, which would have provided some federal tax relief.
· The expanded Child Tax Credit, which was expanded for 2021 as part of the American Rescue Plan had been paying parents $300 per month per child. This provision ended in 2022, but many had expected the current administration to revisit it and potentially codify it permanently.
· Individual and Corporate tax rate changes remain unchanged, aside from the two corporate changes mentioned in previous sections.
· The carried interest tax loophole closure was also forgone. Private equity fund managers will continue to receive carried interest income at long term capital gains rates. An early version of the bill attempted to close this loophole.
If you have made it this far into the article, I’d like to congratulate you on reading through an overwhelming number of policy changes. While this piece is intended to be a jumping off point, by nature, it paints with broad strokes, so consultation with your CPA and Advisor will be necessary. If you would like to discuss any of these new provisions further, feel free to reach out to myself or your CCP Advisor.
