On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act of 2022 which includes significant provisions related to climate change, health care, and, of course, taxes. This stripped-down version of last year’s Build Back Better proposal aims to reduce the federal deficit, lower the cost of prescription drugs, extend certain healthcare subsidies, provide funding for environmental projects, and increase energy security. The new law is funded by various tax increases and potential improvements to existing tax enforcement.
15% alternative minimum tax (AMT)
The most significant tax increase is the creation—or, more properly, the reintroduction—of a corporate minimum tax. This new provision imposes a 15% minimum tax on the annual “adjusted financial statement income” (aka, “book income”) of corporations with profits over $1 billion. While the existing corporate tax rate is a flat 21%, many corporations are able to effectively defer paying tax through various jurisdictional and structural maneuvers. This new minimum tax is intended to cut through such corporate financial maneuvers and tax the total income shown on a corporation’s annual “applicable financial statement” as developed according to the generally accepted accounting principles at a minimum rate of 15%. This new tax applies to C Corporations only and has no impact on other entity structures.
1% excise tax
The new legislation also creates a new 1% excise tax on corporations buying back their stock. This new tax applies to any stock repurchase by a domestic corporation with stock traded on an established market, like the New York Stock Exchange. This excise tax is levied against the value of the stock repurchased during the tax year, but reduced by the value of any stock issued during the same year. The excise tax includes several exceptions, notably: repurchases that are part of a reorganization for tax purposes, repurchases associated with an employer’s retirement plan or employee stock ownership plan, and repurchases that are otherwise treated as dividends for tax purposes.
Climate and energy provisions
The IRA includes new, extended and increased tax credits intended to incentivize both businesses and individuals to boost their use of renewable energy. For example, it provides tax credits to private companies and public utilities to produce renewable energy or manufacture parts used in renewable projects, such as wind turbines and solar panels. Clean energy producers that pay a prevailing wage also may qualify for tax credits.
Clean vehicle credit
The tax credit for qualified plug-in electric vehicles has been significantly revised by the IRA. First, the plug-in vehicle credit has been renamed the “clean vehicle credit.” Second, the manufacturer limitation on the number of vehicles eligible for the credit has been eliminated after Dec. 31, 2022. The law changes how the credit is calculated. Specifically, a vehicle must meet critical mineral and battery component requirements.
There are also new price and income limitations. The credit isn’t allowed for a vehicle with a manufacturer’s suggested retail price above $80,000 for vans, sport utility vehicles and pickups, and above $55,000 for other vehicles. And the credit isn’t allowed if a taxpayer’s modified adjusted gross income (MAGI) for the current or preceding tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly and $225,000 for heads of household.
Finally, the IRA contains a tax credit for a used plug-in electric drive vehicle purchased after 2022. The tax credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. There are also price and income limitations.
Home energy improvements
Individual taxpayers can receive tax breaks for home energy efficiency improvements, such as solar panels, energy-efficient water heaters, heat pumps and HVAC systems.
Health care premium tax credits
The IRA will reduce health care costs for Americans who obtain health insurance coverage from the federal Health Insurance Marketplace by extending the expansion of subsidies — in the form of refundable premium tax credits — under the America Rescue Plan Act through 2025. These subsidies had been scheduled to expire at the end of 2022.
Boosting IRS enforcement
In addition, the law also substantially increases funds available to the Internal Revenue Service for more stringent enforcement of existing tax laws. The new spending for the IRS is an extra $80 billion over the next ten years. This will allow the hiring and training of an estimated 87,000 new IRS employees. A major portion of these new employees will be directed at review, audit, and enforcement to increase compliance with existing tax laws. The general expectation is that such new spending and hiring will allow the IRS to increase total tax revenue by more than $200 billion over the coming decade. Instructions from Treasury Secretary Janet Yellen to the IRS tend to indicate that such additional revenue will come from increasing numbers of audits to detect “high-end noncompliance” and not from additional audits to individuals making less than $400,000 per year.
If you have questions or would like additional information, please contact David Frederick.
Content provided by LBMC tax professional, David Frederick.
David Frederick, J.D., LL.M. is a Senior Manager of Taxation in the Private Client Group of LBMC, PC. David is an attorney by background and his practice at LBMC is focused on advising high net worth individuals on matters of estate planning, business succession planning, and tax mitigation. He can be reached at david.frederick@lbmcstage2.webservice.team or 615-690-1931.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.
