The Inflation Reduction Act (IRA) became law on August 16, 2022. There are wide-ranging provisions that are intended to reduce the budget deficit, address climate change and clean energy, lower the cost of health insurance and prescription drugs and reform parts of the tax code. It is projected that the IRA will reduce the budget deficit by approximately $90 billion over the next decade. The provisions of this bill likely will impact most Americans. I have highlighted the most significant ones affecting businesses and individuals.
Income Tax Provisions
The key income tax provisions of the law are:
New corporate tax rate for large corporations: A new minimum tax rate of 15% will be imposed on corporations (other than S Corporations) with annual earnings of more than $1 billion in total over the previous three years. This tax is effective for tax years beginning after December 31, 2022. The tax is imposed on a corporation’s financial statement income, meaning that some of the favorable tax deductions, such as bonus depreciation, cannot be used to reduce net income. It is estimated that about 150 corporate taxpayers will be subject to this new provision.
New tax on repurchases of stock by corporations: The IRA will impose a new tax equal to 1% of the fair market value of any stock repurchased by a publicly traded domestic corporation after December 31, 2022.
Extension of the limitation of excess business losses for individuals: The IRA provides for a two-year extension of the limitation on excess business losses of noncorporate taxpayers. This limitation, originally set to expire for tax years after 2026, now is extended through 2028. The limitation was originally set in 2018. Losses are limited to $250,000 per year ($500,000 in the case of a joint return), with these threshold amounts indexed for inflation.
Funding for Improved IRS Operations
$80 billion of money generated by the tax provisions of the IRA will be used to improve the operation of the IRS. The focus will be tax enforcement activities and better technology. The goal is for the IRS to collect $203 billion over the next 10 years. Since COVID-19 was declared a pandemic in March of 2020, the IRS has faced significant backlogs because of implementing and enforcing previous legislation aimed at keeping businesses going during the pandemic. To reduce the backlog, the IRS plans to increase the number of agents and improve its use of technology.
Climate and Energy Provisions
The IRA also includes a $376 billion funding package designed to address climate issues and provide incentives for clean energy. The legislation provides tax incentives for climate and clean energy initiatives when those projects meet certain wage, domestic content or location requirements. The goal is for carbon emissions to be reduced by 40% by 2030.
Some of the provisions are:
- Tax credits for the production and related manufacture of solar panels, wind turbines, batteries and other renewable energy projects
- Tax credits for electric vehicle (EV) purchases; $7,500 for new and $4,000 for used
- Tax rebates for projects to increase home energy efficiency, such as efficient water heaters and heat pumps
- Tax credits for emerging technologies, including energy storage and clean hydrogen
To achieve at least 50% EV adoption by 2030, the IRA aims to increase production and deployment of EV’s in the US market. The previous phase out on manufacturers at a maximum of 200,000 EV vehicles being eligible for the credit has been removed. Instead, the bill imposes EV cost and purchaser income limits on the credit. EVs with a MSRP for new cars of more than $55,000 and pickups and SUVs more than $80,000 are not eligible for this credit. Income limitations for the EV credit are $150,000 for a single taxpayer and $300,000 for joint filers.
Health Care Provisions
The health care provisions of the IRA aim to reduce the cost of prescriptions drugs for those with Medicare. The Secretary of the US Department of Health and Human Services will be required to negotiate and reduce Medicare drug prices for certain expensive drugs. Ten drugs are subject to this negotiation in 2026 and a total of 20 will require negotiation by 2029. These drugs include those that have the highest Medicare Part D and B spending. Drug companies will also be required to pay certain rebates if their prices outpace inflation. Some of the other Medicare related provisions are:
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- Limiting insulin copays to $35 a month
- Capping out-of-pocket drug costs at $2,000 for Part D beneficiaries starting in 2025
- Limiting annual increases for Part D premiums to 6% for the years from 2024 to 2030
The Inflation Reduction Act (IRA) also will extend the premium tax credits available to those obtaining health insurance coverage through the Federal Health Insurance Marketplace from 2022 to 2025.
As with all legislation, there are many nuances and details that must be considered before taking action. Our tax team at Weinstein Spira can help identify which provisions are applicable to your specific situation and how to best navigate through the details.