On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 into law. The Act has various provisions affecting a broad spectrum of Americans, making it important to understand the legislation that will directly impact your clients.
Provisions in the Inflation Reduction Act most notably impact mid- to large-sized companies. The provisions passed include:
- Corporate Alternative Minimum Tax – This Act creates a 15% AMT on U.S.-based corporations with over $1 billion in book income. This additional tax also applies to foreign corporations with over $100 million in revenue on a 3-year average. The $1 billion book income metric looks to target corporations that frequently report significantly less taxable income. This high threshold means that most of your clients won’t have to worry about this additional tax.
- Stock Buyback Excise Tax – This provision imposes a 1% excise tax when a publicly-traded company repurchases more than $1 million of its shares. The tax is assessed on the fair market value of the stock and not the purchase price.
- IRS Enforcement Funding – Although this section isn’t directly related to corporations, they will feel the impact of up to 87,000 new IRS employees. This provision comes with $79 billion in funds to carry out various IRS initiatives, and an audit may be a little more likely for your clients. However, only about $45.6 billion is for enforcement activities over the next 10 years. With turnover and the struggle to hire new agents, it remains to be seen what kind of increase in audit activity we can expect. Additionally, the Treasury and the White House have stated that they expect audits to increase on taxpayers (both businesses and individuals) making more than $400,000/year.
These are the main corporate provisions that you can expect your clients to inquire about. As with anything, the rules surrounding these provisions of the law are subject to change throughout the implementation process, so regularly follow up with IRS announcements.
Various healthcare provisions are also included in the Inflation Reduction Act to reduce the rising costs of prescription drugs. The provisions include:
- Trump-Era Rebate Rule Delay – This rule was set to be implemented from November 2020 under the Trump administration but was delayed; however, provisions in the Act removed the enforcement of discounts for prescription drugs at the point of sale and reinstated the safe harbor for Part D drugs. The Act provides that it will not be implemented before 2032.
- Drug Inflation Rebates – Drug companies that disproportionately increase the cost of drugs relative to inflation are subject to compulsory rebate requirements. The rebate is based on the average sales price on a quarter-by-quarter basis starting in 2023 compared to the third quarter of 2021. However, only Medicare Part B drugs with no competition and Part D drugs that cost over $100 per year apply. Rebates will be paid to the federal government, not the consumer.
- Drug Negotiations – The Act allows the Secretary of Health and Human Services to negotiate prices on certain drugs in Medicare Parts B and D. This provision aims to lower the cost of drugs that are at least nine years past FDA approval. The Act imposes a significant penalty on drug companies unwilling to negotiate.
- Medicare Part D – A few additional changes to Medicare Part D are separate from the provisions worked into the drug negotiations and drug inflation rebates. In 2024, the 5% cost sharing in Part D is set to be eliminated, while out-of-pocket expenses are capped at $2,000 beginning in 2025. Additionally, the premium growth is limited to 6% for the next five years, and the cost of insulin is capped at $35 a month.
- Add-On Payments – Medicare Part B will see add-on payments for biosimilars from 6% to 8% above the average sales price.
Most of the healthcare reform provisions aim to ease the mounting financial burden on older generations. Your younger clients will not need to worry about many of these provisions, while clients nearing Medicare age will need to be aware of the changes.
Renewable energy has been gaining popularity in the past few years as lawmakers look to ease the environmental impact of energy production. The Inflation Reduction Act directly tackles this issue by offering various incentives for energy-efficient improvements and upgrades, including:
- Investment and Production Tax Credits – The Investment Tax Credit was extended by the Act, which provides a 30% tax credit for certain energy projects involving wind, biomass, geothermal, and other technologies through 2024. Additionally, the Production Tax Credit was altered to include energy storage.
- Carbon Capture Tax Credit – This tax credit was also extended with the Act’s passing to include sites for which construction starts by 2032. The credit rates were also increased, reaching up to $85 per metric ton. The Act reduces the annual threshold, enabling more facilities to qualify.
- Advanced Manufacturing Production Tax Credit – Manufacture of certain energy production equipment is now being rewarded through a credit of up to 75%. Additionally, $5.81 billion in programs were created to support industrial facilities with processes that reduce greenhouse gas emissions. This budget covers the initial purchase, installation process, and implementation of energy-intensive technology.
- Electric Vehicle Tax Credit – This is one of the provisions that your clients may directly use as the popularity of electric vehicles grows. The Act provides an income tax credit of up to $7,500 for new electric vehicles and up to $4,000 credit for qualifying pre-owned electric vehicles. However, the electric vehicle tax credit is subject to modified adjusted gross income (MAGI) restrictions on the taxpayer. The Act made a 30% credit available for purchases of clean heavy-duty electric vehicles.
- Energy Efficient Commercial Building Deduction – Another energy incentive in the Act concerns the reduction of energy costs a building is certified as experiencing due to energy efficiency improvements. The Act reduces the threshold from 50% to 25%. The improvements generate potential deductions of between $0.50 and $5 per square foot.
- Manufacturing Grants – The Act also established a fund of $2 billion dedicated to businesses that produce electric vehicles.
- The nonbusiness energy property credit was enhanced to provide credits for residential improvements for new windows, new doors, heat pumps, and other energy-savings items.
The different array of incentives promotes the adoption of energy-efficient initiatives by businesses and individuals. Many of your clients will begin looking into these new credits, making it important to understand the basics and limitations.
The Act provides relief for citizens using Medicare to purchase medications while providing incentives to adopt clean energy processes. The clean energy incentives include the purchase of electric vehicles, energy-efficient improvements to buildings, and improvements in energy-intensive manufacturing processes. The Act provides for new taxes on large businesses to offset the tax revenue lost due to tax credits. The IRS will develop new regulations as these provisions of the Inflation Reduction Act become law, so be sure to look for additional information in future blogs on the Illinois Tax School website.
The White House. “Fact Sheet: The Inflation Reduction Act Supports Workers and Families.” The White House, 19 Aug 2022. Accessed 26 Aug 2022.
The Senate Democratic Majority. “Summary: The Inflation Reduction Act of 2022.” The Senate Democratic Majority, 11 Aug 2022. Accessed 26 Aug 2022.
Congress.Gov. “H.R.5376 – Inflation Reduction Act of 2022.” Congress.Gov, 7 Aug 2022. Accessed 26 Aug 2022.
Forbes. “Will The Inflation Reduction Act Increase IRS Tax Audits?”. Accessed 30 Aug 2022.
By Kelly Golish, CPA
University of Illinois Tax School
Assistant Director, Tax Materials