On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA or The Act) into law. In essence, this act is a smaller version of the Build Back Better bill. The following is a brief overview of some of the major tax provisions.
Excise Tax on Stock Buybacks
The Act imposes a 1% excise tax on the fair market value of stock repurchased by a publicly traded U.S. corporation during the taxable year. The taxable amount is reduced by the fair market value of stock issued during the taxable year, and the tax is nondeductible. The excise tax will apply to repurchases of stock after December 31, 2022. Please follow this link to a more in-depth discussion of this topic.
Corporate Minimum Tax
This imposes a 15% corporate minimum tax on corporations with at least $1 billion in financial statement income.
Excess Business Loss Limitation
The Act extends the excess business loss limitation to 2028 (a two-year extension). This can limit the ability of noncorporate taxpayers to deduct business losses exceeding an indexed-for-inflation amount.
This bill provides $80 billion over 10 years in increased funding for the IRS for various levels of enforcement, technology modernization, and e-filing. Additionally, audit rates on families making $400,000 are not expected to rise. Most of the enforcement funding is planned towards examinations of high earners and large corporations. Additionally, the IRS has been underfunded over the years, its technology infrastructure is antiquated, and it has a significant backlog of paper returns to process.
R&D Credit Applied to Payroll Taxes
Under the Inflation Reduction Act, the amount of R&D tax credit applicable against payroll taxes has increased for tax years beginning after December 31, 2022, from $250,000 to $500,000. The credit can now apply to the Medicare portion of taxes and can be carried forward.
Affordable Care Act (ACA) Subsidy
As part of a prior tax act, there was a tax credit to help subsize healthcare insurance for lower- and middle-income taxpayers, known as the ACA subsidy. The Act extends the ACA subsidy through 2025. It was set to expire at the end of 2022.
Prescription Drug Pricing
The bill allows Medicare to negotiate select prescription drugs to bring down the price beneficiaries pay for their medications. Starting in 2025, the annual cost for out-of-pocket drug costs of Medicare recipients will be capped at $2,000.
Climate Change and Energy Investments
The IRA Act includes various provisions for incentives to invest in climate and energy projects to assist in climate change mitigation. The Act provides incentives for many sources of clean energy, if they are carbon neutral. Some of these include tax credits to offset energy costs, incentives for lower carbon sourcing, new rules for electric vehicle tax credits, and solar energy incentives. It also extends the investment tax credit and production tax credits.
The above is a general overview of these topics and is not meant to be an in-depth analysis. Please note that most provisions are effective after December 31, 2022.
If you have any questions, contact Mike Rowe, Principal, at (617) 428-5437, or at [email protected], or reach out to your Wolf tax professional.