The Inflation Reduction Act of 2022
The President recently signed into law the Inflation Reduction Act of 2022. This legislation will not only deal with Medicare’s drug price negotiations but will also deal with the ever-important climate change issue. Let’s look at what this legislation has to offer:
Additional Funding for IRS Enforcement
Over a ten-year period, funds are given to improve taxpayer services, enforce laws, support operations, and modernize corporate systems. The IRS could hire roughly 80,000 more employees, which would more than double the existing size of the service.
Rebates for Climate Change and Buying Cars
The measure makes changes to existing tax incentives and adds new ones to combat climate change. These include rebates on both new and used electric vehicle purchases.
A new Clean Vehicle Credit will take the place of the current Plug-In Electric Drive Motor Vehicle Credit, and a new Credit for Previously Owned Clean Vehicles will be implemented as well.
The maximum credit for new automobiles is still $7,500, but in order to receive the entire amount, specific components must be manufactured in the United States or in nations that are considered friendly to the United States. The final assembly must take place in the United States as well. The number of manufacturers that will meet these standards is unclear, though.
Purchasers of Tesla, GM, and Toyota vehicles will be able to claim the full credit for vehicles put into service after 2022 thanks to the repeal of the 200,000 per manufacturer cap. However, the credit will only be available if the manufacturer's suggested retail price is under $55,000 (or $80,000 for vans, pick-ups, and pick-up trucks). Additionally, only taxpayers with incomes below a certain threshold in the current and past calendar year will be eligible for the credit. The limits are $150,000 for most taxpayers, $300,000 for married couples filing jointly, and $225,000 for heads of households.
Even if the vehicle isn't put into service until after 2022, the new restrictions won't apply to any taxpayers who signed a formal purchase agreement before the measure was signed.
The credit may be transferred to the dealer beginning in 2024 so that it can be used to lower the taxpayer's cash outlay at the time of purchase instead of the taxpayer receiving the benefit when they file their return.
A taxpayer can claim a $4,000 credit for purchases of qualified used vehicles. They can claim this credit if the car is at least two years old, the sales price is under $25,000, and the taxpayer's current and prior-year AGI is below $150,000 for married couples filing jointly, $112,500 for heads of household, and $75,000 for all other taxpayers.
Extension of the Limitation on Net Business Losses for Individuals
A last-minute amendment to the law extends the IRS section 461(l) provisions, which place a two-year time limit on a person's ability to deduct net operating losses. The Tax Cuts and Jobs Act included this restriction, which was due to expire in 2026. The restriction will now be in effect until 2028.
Carried Interest Loophole
The clause changing the rules concerning carried interest has been removed in order to secure Senator Sinema's support for the bill. Once it was changed, the senator stated she would collaborate with Senator Mark Warner (D-VA) to write a different piece of legislation that addresses the carried interest issues. Even if the Senate is evenly divided after the November election, it is unclear that such legislation could be passed separately because it would likely require 60 votes in the Senate.
What is NOT in the Bill
Among the most notable items previously discussed in the Build Back Better Act that are missing from the Inflation Reduction Act of 2022 are the following:
- The estate and gift tax rules remain unchanged.
- There are no increases in the highest earners' tax rates.
- The individual tax rates on long-term capital gains remain unchanged.
- There will be no rise in the flat 21% corporate income tax rate.
- The qualified small business stock exclusion remains unchanged.
- The guidelines for like-kind exchange rules are unchanged.
Modification to the Payroll Tax R&D Credit
The current law allows small enterprises to put up to $250,000 of their research and development credit toward their social security payroll tax liability in order to use it even if they may not have enough income tax liability to do so. The small business must be under five years old and have gross receipts of less than $5 million in order to be eligible.
For tax years starting after December 31, 2022, the new law would provide an additional credit of up to $250,000 to be claimed against the Medicare payroll tax.
15% Minimum Tax on Large Corporations
This act will focus on corporations that are covered and have over $1 billion in profits for any 3-year period ending prior to the current tax year. If the corporation meets this requirement, it will impose a minimum tax of 15% of “adjusted financial statement income” (AFSI). The effective date of this act will begin on tax years after December 31, 2022.
When a corporation has stock that can be traded on established security markets, that makes it a ‘covered corporation’. Some of the corporations that this new tax does NOT apply to include, regulated investment companies, real estate investment trusts, and S-corporations.
As part of the agreement with Senator Kyrsten Sinema (D-AZ), the calculation of AFSI was changed to permit some businesses to benefit from accelerated tax depreciation. Manufacturers pushed for this change, arguing that the absence of such a clause would reduce investment incentives and undermine American manufacturing as a result.
1% Excise Tax on Stock Repurchases
The final measure contains a 1% excise tax on stock buybacks to make up for the revenue loss brought on by the repeal of the carried interest section of the bill. According to projections, this clause will bring in more money than the carried interest proposals' adjustments. After December 31, 2022, stock repurchases will be subject to this excise tax.
Both stock redemptions and transactions that Treasury finds to be economically similar to redemption will be subject to the excise tax. The law does contain a variety of exceptions though, such as:
- A repurchase which is part of a nontaxable reorganization;
- Repurchased stock (or stock of equal value) which is contributed to an employer-sponsored retirement plan or ESOP;
- Where the total value of the stock repurchased in a tax year does not exceed $1 million;
- A transaction allowed under regulations for repurchases by a dealer in securities in the ordinary course of business;
- Repurchases by regulated investment companies or real estate investment trusts;
- Repurchases treated as a dividend for tax purposes.
Since the Inflation Reduction Act has been signed into law, the IRS and the Treasury will be required to issue instructions for many of these changes, particularly with regard to tax credits
Please don't hesitate to contact us anytime if you have any questions about how these changes might affect you. At CAPATA, our team is always happy to help!