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President Biden has signed the Inflation Reduction Act of 2022, which includes significant measures related to tax, climate, energy, and healthcare. It has been reported that potential opposition was averted by scaling down the corporate alternative minimum tax and removing the prior language on carried interests. As a revenue raiser to replace the purged carried interest provision, the Act includes a new 1% tax on corporate stock buybacks.
Total revenues expected from the package would be about $737 billion, of which about $300 billion would go toward deficit reduction. Approximately $370 billion would go toward energy and climate initiatives, $64 billion would go to support Affordable Care Act subsidies and another $4 billion would go towards Western drought assistance. (Note: As of the date of publication, the Congressional Budget Office had not yet issued an updated score on the bill.)
Despite the title, there are questions as to how much the bill would reduce inflation. Notably, the Penn Wharton Budget Model on the Inflation Reduction Act projected it would reduce inflation by about 1/10th of one percent by the middle of the first decade, an estimate “not statistically different from zero.” Here are some of the highlights of the package:
An alternative minimum tax (AMT) of 15% on “adjusted financial statement income” would be imposed on large corporations that report large profits but pay little or no tax. Companies could still use net operating losses and credits – including a corporate AMT foreign tax credit – so may still pay less than 15%. In addition, a late change to the legislation would allow accelerated depreciation used for tax purposes, rather than financial statement depreciation.
The regular corporate income tax rate of 21% would not be changed, and the bill does not include a separate 15% minimum tax on U.S. companies’ foreign profits, meaning that it does not align with the OECD’s framework for a global minimum tax.
The tax would apply only to corporations with an average annual adjusted financial statement income of over $1 billion for the three prior years. A special rule applies for foreign-parented multinational groups, lowering the income threshold to $100 million for the domestic corporation where the group exceeds the $1 billion threshold. The Joint Committee on Taxation estimates this would only apply to about 150 corporate taxpayers, or about 30% of existing Fortune 500 companies. The new AMT is effective for tax years beginning after 12/31/2022.
A 1% excise tax would be assessed on the value of stock buybacks for publicly traded U.S. corporations. The buybacks are reduced by the value of any stock issued during the tax year. The excise tax is not deductible for income tax purposes. There are several exceptions to the tax for specific situations:
Currently, small businesses that do not have enough income tax liability to utilize research and development (R&D) credits are allowed to offset up to $250,000 of the employer portion of the Social Security tax. For purposes of this special rule, a small business is one with less than $5 million in gross receipts and no gross receipts before the 5-taxable-year period ending with the current taxable year. Under the bill, the amount eligible for the payroll tax offset is increased by an additional $250,000.
A late change in the legislation includes an extension of the limitation rules for deducting excess business losses for non-corporate taxpayers. The Tax Cuts and Jobs Act imposed this limitation, which was set to expire in 2026. Under the bill, the limitation will continue through 2028.
The bill would allow Medicare to negotiate for prescription drug prices, starting with 10 high-priced drugs in 2026. The price for insulin covered under Medicare Parts B and D would be limited to $35 per month beginning in 2023. Medicare Parts B and D rules are also revised to include prescription drug inflation rebates from drug companies. There will also be a new maximum out-of-pocket cap for individuals on Medicare with a limit of $2,000 beginning in 2025.
The IRS would get an additional $80 billion, which would go towards improving enforcement – mainly on corporations and high-income individuals – as well as customer service. The increase in the IRS budget could mean an additional 80,000 IRS employees. This is expected to generate $146 billion in additional revenue. Both Treasury Secretary Yellen and IRS Commissioner Rettig have stated that the new enforcement resources would not result in additional audits for taxpayers making less than $400,000.
A credit of up to $7,500 would apply to new electric vehicles and a $4,000 credit for used vehicles. The manufacturer limitation on electric vehicles sold, which was fully phased in only for Tesla and GM, would not apply to cars sold after December 31, 2022. There will be an MSRP limitation of $80,000 for SUVs, pickups, and vans and $55,000 for other vehicles. No additional credit will be provided for autos manufactured in union shops, which was in previously proposed legislation. However, there is a North American final assembly requirement effective for vehicles sold after the date of enactment (a transitional rule applies where there was a binding contract to purchase a vehicle before the date of enactment). In addition, there are separate requirements for the source country for battery components and the critical minerals in the battery, which would phase in from 50% in 2023 to 100% in 2029.
An adjusted gross income limit of $300,000 for married filing jointly, $225,000 for head of household, and $150,000 for other taxpayers would apply for new cars with no phase-out. For used cars – defined as where the model year is at least two years earlier – the limits are lower: $150,000 for married filing jointly, $112,500 for head of household, and $75,000 for other taxpayers. Except as noted above, the new rules for clean vehicle credits generally apply to vehicles placed in service after December 31, 2022.
The Energy Department has released a list of the vehicles that would be eligible for the credit under the act, taking into consideration the North American assembly requirement. That list totals only 21 vehicles because of the manufacturer limitation in effect through the end of 2022. As a result, around 70% of the EV and plug-in hybrids currently sold in the U.S. would no longer qualify for the credit.
Incentives would be provided under the bill to invest in clean energy production and the use of many types of fuel, including hydrogen, nuclear, renewables, and, importantly, fossil fuels. This would include, for example, biodiesel and other alternative fuels. According to Joe Manchin, “It is truly all of the above, which means this bill does not arbitrarily shut off our abundant fossil fuels”.
The bill also provides tax credits to homeowners for renewable energy improvements, including solar roof systems, energy-efficient heat pumps, and other energy-saving expenses, plus incentives for solar and wind farms. In addition, there is a new credit for qualified commercial clean vehicles.
Under the deal, the subsidies under the ACA set to expire at the end of this year would be extended through 2025.
There are a few things that are not in the proposed package that were in earlier bills. The most notable absence is the carried interest limitation that would have extended the required holding period from 3 years to 5 years. Other provisions that were considered, but not included are:
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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.
