UPDATED – What Does the Inflation Reduction Act Mean to Taxpayers? by Richard Cabrera, JD, LLM, CPA
The Inflation Reduction Act signed into law on Aug. 16, 2022, represents an investment of more than $430 billion in new federal spending to combat climate change, reduce consumers’ healthcare costs and lower the deficit. To help raise the revenue required to accomplish these goals, the bill includes a package of tax reforms impacting consumers and businesses.
New Taxes for Businesses
The Inflation Reduction Act imposes a new 15 percent corporate minimum tax on the average annual adjusted financial statement income reported by companies with annual profits of $1 billion or more, calculated over a three-year period. Tax credits for manufacturers that increase domestic production and other businesses that produce clean energy will ultimately reduce the amount of minimum tax they pay. The new tax, which goes into effect on Jan. 1, 2023, specifically excludes S corporations, real estate investment trusts (REITs) and regulated investment companies (RICs).
The bill also introduces a new 1 percent excise tax on stock buybacks, which are on pace to reach record highs in 2022. According to the S&P Dow Jones Indices, buybacks set a record $984.6 billion for the 12 months ending March 2022, a 97.2 percent increase from the $499.2 billion spent in the March 2021 period. The new tax, which goes into effect in 2023, specifically excludes stocks contributed to retirement accounts and employee stock ownership plans (ESOPs).
New and Expanded Tax Credits for Businesses
By doubling the cap on refundable research & development (R&D) tax credits, the bill enables eligible small businesses and startups to claim as much as $500,000 in R&D credits against their payroll taxes.
The bill also offers tax credits to businesses that manufacture steel and other components in the U.S. while also expanding tax credits to those that produce and invest in wind, solar and geothermal energies as well as other clean energy sources, such as nuclear and biofuel.
New and Expanded Tax Credits for Consumers
One way the Inflation Reduction Act aims to lower carbon emissions is by making tax credits and rebates available to consumers who purchase electric vehicles and make energy-efficiency improvements to their homes.
For example, the bill extends the $7,500 tax credit for new electric vehicles while introducing a new $4,000 credit for used electric, hybrid or hydrogen cell vehicles purchased after Dec. 31, 2022. It is important to recognize, however, that, like much of the tax code, the availability of these credits is subject to limitations based on such factors as the taxpayers’ modified adjusted gross income, the cost of the vehicle and where it was manufactured.
Lower Health Care Costs
To help lower the costs of prescription drugs for seniors enrolled in Medicare, the bill sets a $2,000 cap on patients’ annual out-of-pocket costs beginning in 2025 and allows Medicare to negotiate prices directly with pharmaceutical companies. Beginning in 2023, seniors with Medicare Part D coverage will receive free vaccines and a $35 monthly cap on insulin costs.
For Americans who buy health insurance coverage on federal and state exchanges established by the Affordable Care Act, the bill extends for three years expiring healthcare subsidies that have kept out-of-pocket plan premiums at a minimum.
About the Author: Richard E. Cabrera, JD, LLM, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he provides tax planning, consulting, and mergers and acquisition services to businesses and their owners located in the U.S. and abroad. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
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