On August 16, 2022, President Biden signed the Inflation Reduction Act into law. This bill includes a number of tax provisions (both revenue raisers and expenditures) that the Democrats say will decrease inflation and the Republicans say will make it worse. Both parties have studies and reports supporting their positions. What matters to you is how the bill will affect you and your business personally. Here is what you need to know.
The bill includes several tax increases, some of which will affect you. Some consist of extending the limits imposed under the Tax Cuts and Jobs Act of 2017 (TCJA) which were supposed to expire after 2025.
Extension of the SALT Deduction Cap. The TCJA imposed a $10,000 limitation on deducting state and local taxes on your federal income tax return. The bill amends IRC Section 164(b)(6)(B) to extend this cap one more year (to 2027). This affects most California taxpayers since we pay both income and property taxes here.
Limitation on Pass-Through Business Losses. Pass through businesses, like partnerships, limited liability companies (LLCs) and most S corps, are not subject to federal income taxes but pass their income through to their owners. The TCJA imposed a $500,000 limit on the amount of active pass-through business losses that owners can deduct against their other income, and limited carry forwards of excess losses to two years. The bill extends this cap two more years (to 2028).
New Tax on Stock Buy Backs. Corporations sometimes repurchase their stock from shareholders instead of distributing income in the form of dividends. After 2022, the bill imposes a new 1% excise tax on the fair market value of stock repurchases of $1 million in a calendar year. The value is reduced by any stock issued by the buyer including stock included to employees. There is an exception for stocks contributed to retirement accounts, pensions, and employee-stock ownership plans (ESOPs). There is concern that this rule will affect outstanding redeemable preferred stock and stock issued in an initial public offering by a SPAC (special purpose acquisition company). Mergers and other reorganizations may also be affected. The tax may discourage or limit some buy-backs or affect the timing (slit them into different calendar years). It appears likely some corporations may accelerate repurchases into this fall to avoid the new tax.
New 15% Minimum Tax on Large Corporations. C corporations pay tax on their income, then pass that income on to shareholders in the form of dividends. Shareholders then pay a second layer of tax on those dividends. Corporations were not taxed on the increase in the increase in value of the company from other sources, but could use that value when borrowing money. Beginning after 2022, the bill requires applicable corporations with average profits over a 3 year period of over $1 billion to annually report their “financial statement income” (i.e., book value) and imposes a new minimum 15% (after allowing a number of adjustments). The law does not apply to regulated investment companies, REITS or S corporations. This law may increase accounting and reporting expenses for corporations, and decrease investment in US corporations. It will likely decrease funds available for paying dividends to shareholders. Some analysts say the effect will be minimal for most large entities.
Increased Taxes on Crude Oil and Imported Petroleum. The bill will also increase fuel prices. It increases the Superfund tax on crude oil and imported petroleum imposed under IRC Section 4611(c) from 9.7 cents to 16.7 cents per barrel, and indexes this tax for inflation. It also increases other taxes and fees on the fossil fuel sector.
New IRS Enforcement. The bill also relies on expected revenue from increased enforcement by the IRS. The IRS Commissioner has stated that enforcement will be targeted at large corporations and wealthy taxpayers (those with over $400,000 of income).
Increased Drug Cost Sharing. The bill increases cost sharing for certain generic drugs and certain taxpayers under Medicare Part D.
What Do You Get From the Bill?
Extended Health Insurance Premium Tax Credits. The American Rescue Plan Act (ARPA) provided health insurance Premium Tax Credits for taxpayers whose income did not exceed 400% of the poverty line in 2021 and 2022. The bill extends this IRC Section 36B credit through 2025 and increases the subsidy for lower-income households.
Reduced Drug Costs for Seniors. The bill allows the government to negotiate drug prices for some drugs, and provides for free vaccines for seniors starting in 2023. Insulin prices are also reduced.
Reduced Costs for Hearing Aids. Hearing aids will now be available over the counter without a prescription. This is expected to make them available to more Americans who were unable to afford them before. Questions remain about proper diagnosis of hearing loss, and proper fitting of the devices.
Doubles Research Tax Credit. The bill also amends the research tax credit under IRC Section 41(h)(B). This credit is available to qualified small businesses to offset payroll tax. The bill doubles it to no more than $500,000.
IRS Improvements. Over recent decades, IRS funding has steadily declined, resulting in fewer employees and reduced services. Currently, the IRS has the same number of employees as in WWII, although the number of tax returns to process has increased substantially. In June of 2022, the IRS still had over 11 million suspended personal tax returns from 2021 awaiting manual review by IRS employees. The bill allocates $80 billion over 10 years for a number of IRS purposes, including $3.2 billion for taxpayer education and services, $45.6 billion for enforcement (including digital monitoring), $25.3 billion for operations (including hiring to fill open positions, including another 52,000 expected retirements), and $4.75 billion for new and improved call back services and other technology expected to improve taxpayer experience and improve efficiency.
Green Energy Improvements. The bill includes investment in green energy, including solar and wind power. The credit for electric vehicles under IRC Section 30D increased from $2500 to $3750 and applies to vehicles made in North America (including those built in Canada). It also requires increased wages be paid to workers in these green companies.