The Inflation Reduction Act of 2022 is what?
In order to combat inflation, the Inflation Reduction Act (IRA) of 2022 aims to “make a historic down payment on deficit reduction, invest in domestic energy generation and manufacturing, and reduce carbon emissions by approximately 40% by 2030.” What will it do, though, in reality?
We have produced a content series to provide you a concise overview of the Inflation Reduction Act’s provisions and what they represent for you. Our overview is not intended to be comprehensive; rather, it focuses on the areas in which we are best able to provide you with advice—your taxes and accounting—instead of covering all of the bill’s various components, such as energy production, corporate tax rates, and climate change. Visit our blog by clicking the link below to read more if you want to skip ahead and read everything.
- 15% IRS funding AMT \s1% Excise Limitations on Excess Business Losses for Stock Buybacks Update
- Update on Premium Tax Credit
- Credit for Energy-Efficient Home Improvement
- Residential Alternatives to Clean Energy Credit Property Pre-Owned Clean Vehicle Credit Fuel Refueling High-Efficiency Rebates for electric homes
Act to Reduce Inflation – IRS Funding
Although the IRS has been warning about its underfunding and inability to do its obligations for years, this may be one of the most contentious provisions of the Inflation Reduction Act (IRA). Over a ten-year period, the IRA will nearly raise the IRS’s budget by $80 billion. Four major criteria are used to separate the money:
enforcement, operational support, modernisation of business systems, and taxpayer services—a few more minor things like an exploratory research on the possibilities of a free-file system.
In order to put the projected funding amount into perspective, the IRS actually spent $13.7 billion in fiscal year 2021. This sum includes additional funding provided to the organization to cover COVID-19-related costs. This means that the agency’s budget would significantly grow with an increase from the IRA of almost $8.9 billion annually on average.
The IRA specifically allocates $45.64 billion for enforcement, $25.33 billion for operations support, $4.75 billion for business system modernization, and $3.18 billion for taxpayer services. It also allocates $15 million for the IRS to submit a study to Congress outlining the costs and viability of creating a free direct e-file tax return system, among other things.
How will this actually function in practice? The IRA states that the IRS may not utilize any of the monies it has been given access to in order to raise taxes on people with income under $400,000. Although it is usually accepted that audit rates climb along with income rates, the additional funds needed to hire more people and enhance operations would undoubtedly result in an increase in the overall number of IRS letters and audits. The IRS has seen a 19% reduction in budget since 2010, and audits are at their lowest levels in a decade. More letters and audits will probably result from this additional funding for everyone. Such actions, according to the Congressional Budget Office, enable the IRS to generate $124 billion in income.
The funding for enforcement activities serves a variety of purposes, including “to determine and collect owed taxes, to provide legal and litigation support, to conduct criminal investigations (including investigative technology), to provide digital asset monitoring and compliance activities, to enforce criminal statutes related to violations of internal revenue laws and other financial crimes, and to purchase and hire passenger motor vehicles.”
Rent payments, facilities services, printing, postage, physical security, headquarters and other IRS-wide administration activities, research and statistics of income, telecommunications, information technology development, enhancement, operations, maintenance, and security, and the hiring of passenger motor vehicles are all supported by IRS funding for operations support.
You are aware of how difficult this most recent point is if you have ever attempted to contact the IRS or get any kind of advice. Increased compliance costs for taxpayers are a real issue given the neglect of taxpayer service in favor of enforcement, with a budget increase for taxpayer service of 9% and an increase in funds for enforcement of 69%.
While adding some extra compliance expenses along the way, the IRS funding boost should generate more income and aid in closing the tax deficit. The package includes several ideas that should benefit everyone, such investing in information technology, which will both close the tax gap and lower taxpayers’ compliance expenses.
However, simplicity is the biggest win-win from the standpoint of lowering the tax gap and taxpayer compliance expenses. The IRS and taxpayers may both follow and comply with a simpler tax code. Sadly, the measure does not significantly simplify anything; instead, it introduces a number of credits and a challenging new corporate book minimum tax, which we will discuss later.
Corporate Alternative Minimum Tax of 15% under the Inflation Reduction Act of 2022 (CAMT)
The newly passed Inflation Reduction Act (IRA) includes an alternative minimum tax on corporations that, at first appearance, may appear to have been influenced by (or at least be similar to) the global minimum tax. Both taxes have a 15 percent rate, are directed at large businesses, and are based on financial accounting principles. The similarities stop at that point.
Tax credits and investment costs are exempt from the corporate alternative minimum tax under the Inflation Reduction Act. As a result, even if a tax credit or a sizable investment in machinery causes a company’s tax rate to drop below 15% on its financial statement, those credits and deductions would not be subject to the minimum tax.
Any corporation (other than a S corporation, regulated investment company, or real estate investment trust) whose average annual AFSI exceeds $1 billion for any three consecutive tax years before to the tax year is subject to the Corporate Alternative Minimum Tax (CAMT).
We will simply summarize the 15% CAMT, noting the following important facts because the majority of the companies we deal with won’t be affected by this tax: Companies will have to do two different calculations for federal income tax purposes under the new tax, and they will be required to pay the larger of the new minimum tax or their regular tax due. Companies must first identify whether their “average annual adjusted financial statement income” (AFSI) surpasses $1 billion for any three consecutive years preceding the tax year) in order to know whether the new tax applies to them. AFSI must be adjusted in a number of ways by impacted businesses when figuring the new tax.
The Act imposes a cap on general business credits as well as AMT foreign tax credits for creditable foreign income taxes paid or accrued by controlled foreign entities (CFCs). Comprehensive modeling can assist relevant corporations in taking into account and making plans for any prospective increase in their federal income tax due.
Act to Reduce Inflation: Buyback of Excise Stock at 1%
The Inflation Reduction Act advocates for a new 1% excise tax on stock buybacks, arguing that businesses investing their excess cash in the company rather than returning it to shareholders will be healthier for the economy. However, research indicates that buybacks really foster a dynamic economy rather than limiting investment options.
When businesses have extra cash, they have two options: keep it or give it back to the shareholders. A dividend payment, which is often made on a fixed timetable, is one way to give this value back to the shareholders. Firms have the option to repurchase the shareholder’s stock, nevertheless. Typically, businesses choose to return value to shareholders when they have run out of viable investment options. Or, to put it another way, businesses don’t hand out cash in place of investments, but rather after they’ve already made them. This is why younger, growth-oriented businesses are more likely to reinvest their profits than older, more established businesses do.
Stock repurchase income can be used by shareholders for personal expenses or to look for new investment opportunities. The latter fuels economic expansion. In this way, stock buybacks let investors finance start-ups and smaller businesses, where there are often more prospects for innovation and growth than there are in larger, more established companies. There are a variety of exclusions that may apply to reduce the impact of the Buyback Tax, and not all stock buybacks are subject to it. Transactions happening in taxable years beginning after December 31, 2022 are subject to the buyback tax. In terms of the effective allocation of capital, the new buyback tax raises uncertainty and potential drawbacks.
Update on the Excess Business Loss Limitations under the Inflation Reduction Act of 2022
A business that discloses its income on the owners’ tax returns is referred to as a pass-through or flow-through business. Their individual income tax rates are applied to such income. S-corporations, some limited liability companies, partnerships, and sole proprietorships are all examples of pass-through entities. The IRA restricts pass-throughs’ ability to deduct expenses like salaries and interest by using large paper losses. This cap, referred to as the Limitation on Excess Business Losses, is already in effect. The ban would be continued for an additional two years under the revised bill, instead of ending in 2027 as originally planned. The restrictions may theoretically be applied to any pass-through company that consistently posts a sizable operating deficit. But among the most impacted industries are probably real estate companies, which may manipulate depreciation regulations to constantly run up huge losses on paper. The business losses don’t necessarily go away, though. If Congress doesn’t further extend the cap, owners could be able to defer the tax benefits to subsequent years.
Premium Tax Credit Update under the Inflation Reduction Act
The American Rescue Plan Act’s (ARPA) advantageous premium tax credit regulations will now last through 2025. For context, the Affordable Care Act (ACA) established a refundable premium tax credit that is offered on a sliding scale to individuals and families who are enrolled in Exchange health plans and who are not eligible for other qualifying coverage or reasonably priced employer-sponsored health insurance plans that provide minimum value. For the tax years 2021 and 2022, the ACA premium tax credit was increased by ARPA. The ACA only allows taxpayers who buy insurance through an Exchange and have household incomes between 100% and 400% of the federal poverty level to qualify for the credit. By lowering the proportion of household income that individuals must contribute for Exchange coverage across all income bands, ARPA removed the maximum income threshold for eligibility and boosted the amount of the premium tax credit. The adjusted percentage lies between 0% and 8.5 %. Indexing was supposed to start up again in 2023, with a percentage range of 1.92% to 9.12%. The new law replaces the previously announced indexing changes, and the range of indexing adjustments will now be zero to 8.5 percent through 2025.]
Credit for energy-efficient home improvements under the Inflation Reduction Act
With the Inflation Reduction Act being officially law, you might be able to save some money on any home upgrades you have planned to increase your home’s energy efficiency. The bill’s key objectives include addressing climate change and reducing global warming. Additionally, there are incentives for common Americans to go green and save some green, even though the Act primarily supports corporations in adopting more environmentally friendly practices and accelerating the production of renewable energy.
For instance, installing new energy-efficient windows, doors, water heaters, furnaces, air conditioners, and similar appliances can help homeowners reduce their tax payment even further. This is due to the law’s enhancement and extension of two tax credits for “green” home improvements.
The Nonbusiness Energy Property Credit, one of the tax incentives that homeowners may be familiar with, really terminated at the end of 2021. However, it is revived, significantly improved, and even given a new name—the Energy Efficient Home Improvement Credit—by the Inflation Reduction Act.
10% of the price of installing certain energy-efficient insulation, windows, doors, roofs, and comparable energy-saving upgrades in your home was covered by the previous, expiring credit. Additionally, you could get a credit for 100% of the costs related to installing specific energy-efficient air conditioners, furnaces, heat pumps, hot water boilers, water heaters, and fans.
However, the credit had a lifetime cap of $500. (e.g., credits taken in previous years counted towards the limit). A lifetime cap of $200 also applied to new windows. The aggregate value of the credit was severely constrained by these constraints. Additional individual credit limits applied to certain water heaters, heat pumps, and air conditioning systems ($300), as well as to select furnaces and boilers ($150), air circulating fans ($50), and furnaces and boilers ($150).
For the 2022 tax year, the credit is reinstated, and the previous regulations are in effect. The credit will, however, only be worth 30% of the costs of all permissible home renovations performed in any given year beginning in 2023. Additionally, it will be extended to include the price of some biomass stoves and boilers, electric panels and associated hardware, and home energy audits. However, the credit will no longer apply to roofing or air circulation fans. Additionally, some energy-efficiency criteria will be modified.
The $500 lifetime restriction will also be changed to a $1,200 yearly credit amount limit (the lifetime limit on windows will go away, too). Therefore, you can claim the full credit each year if you spread out your eligible home improvement projects. Additionally, and much more favorably, the annual limits for particular classes of qualified improvements will change. They will start in 2023 and include:
$150 for home energy audits, $250 for an exterior door ($500 for all exterior doors), $600 for exterior windows and skylights, central air conditioners, electric panels and specific related equipment, natural gas, propane, or oil water heaters, natural gas, propane, or oil furnaces, or oil hot water boilers, and $2,000 for electric or natural gas heat pump water heaters, electric or natural gas heat pumps, and biomass stoves and boilers (for this one category, the $1,295 is for the entire list
The maker of any purchased item must create a product identification number for the item, and the person claiming the credit must include the number on his or her tax return. This requirement will not apply to qualifying home renovations made after 2024.
Residential Clean Energy Credit under the Inflation Reduction Act of 2022
The present Residential Energy Efficient Property Benefit, which also receives a new name under the Inflation Reduction Act, is the second credit that homeowners are interested in. The Residential Clean Energy Credit is the new name for it. The credit is also extended through 2034 from its original 2024 expiration date. The Inflation Reduction Act also increases the credit amount in addition to changing the name and lengthening the credit.
Previously, the credit was worth 26% of the cost to install qualifying systems that generate electricity, heat water, or control the temperature in your home using solar, wind, geothermal, biomass, or fuel cells. (The fuel cell equipment tax credit is capped at $500 for every half kilowatt of capacity.)
Additionally, the credit was supposed to be worth 23% in 2023 before it expired in 2024. The credit amount increases to 30% under the Inflation Reduction Act between 2022 and 2032. After that, it decreases to 26% in 2033 and 22% in 2034. After 2034, the credit will then become invalid.
The Inflation Reduction Act also makes changes to the credit’s reach. It will no longer apply to biomass furnaces and water heaters as of 2023, although it will continue to apply to battery storage technology with a three kilowatt-hour minimum capacity.
The Alternative Fuel Refueling Property Credit under the Inflation Reduction Act
The Inflation Reduction Act also changed the tax benefit for buying an electric vehicle. However, the Act also had an influence on a related tax benefit that would be of interest to some homeowners. By extending its application through 2032, the Inflation Reduction Act brought back the Alternative Fuel Refueling Property Credit, which had been set to expire at the end of 2021. The credit is worth up to $1,000 for homeowners and is worth 30% of the price of “qualifying alternative fuel vehicle refueling property” put in the home.
The “certified alternative fuel vehicle refueling property” that most homeowners might buy is apparatus for recharging electric vehicles. (Equipment used to store or dispense an alternative fuel (other than electricity) for motor vehicles) is also eligible for the credit.) The Inflation Reduction Act makes it clear that the credit is available beginning in 2023 for the purchase of “bidirectional” charging equipment, which can charge an electric vehicle’s battery and enable you to discharge electricity from the battery back into the power grid.
Act to Reduce Inflation in 2022: Credit for Pre-Owned Clean Vehicles
One of the IRA’s provisions is to offer tax credits to buyers of eligible electric vehicles (EVs).
The “qualified plug-in electric drive motor vehicle credit” will now be referred to as the “clean vehicle credit,” according to the Department of Energy. The act also includes a new requirement for final assembly to be carried out in North America, which became effective on August 16, 2022.
The law increases tax credits for EV owners by $7,500 but places a limit on claimant salaries. According to the bill’s language, the ceiling would be $150,000 for combined returns, $112,500 for heads of households, and $75,000 for single taxpayers. Incentives for buying secondhand electric vehicles are also included. As of January 1, buyers of EVs are eligible for a $4,000 credit. The bill’s language states that the vehicle’s retail price cannot be more than $25,000.
The National Highway Traffic Safety Administration’s (NHTSA) VIN decoder website allows users to check a car’s vehicle identifying number (VIN) to see whether it satisfies the final assembly requirement, according to information provided by the Internal Revenue Service (IRS) (NHTSA).
Learn more here: https://www.gobankingrates.com/taxes/tax-laws/inflation-reduction-act-why-isnt-my-car-on-the-clean-vehicle-credit/ to determine if your vehicle might qualify for the Clean Vehicle Credit.
Some consumers will soon find it much more affordable to purchase a used electric car, but not everyone. Consumers and businesses may both be eligible for tax credits as of January 1 for new commercial clean vehicles and used or previously owned vehicles, respectively.
The newly passed Inflation Reduction Act provides the first credit for used electric car purchases in addition to an updated federal tax credit program for the purchase of new plug-in vehicles. Nevertheless, it won’t be applicable to many of the cars you find on Craigslist or Facebook Marketplace until 2024.
Only automobiles that are sold through a licensed dealer for $25,000 or less and have been in use for at least two years are eligible for the credit. It only applies to the initial sale of a car after purchase.
The credit is capped at $4,000 or 30% of the purchase price of the vehicle, whichever is lower. Income restrictions also apply, but they are half those for the new electric car credit.
Rebates for high-efficiency electric homes under the Inflation Reduction Act
The High-Efficiency Electric Home Rebate Program will assist American families in going green even if it is not a tax benefit. The Inflation Reduction Act included the program, which offers rebates to low- and middle-income people who buy energy-efficient electric equipment. Your family’s annual income must be less than 150% of the local median income for you to be eligible for a rebate.
Homeowners who qualify may receive rebates up to:
A heat pump for room heating or cooling costs $8,000, a heat pump water heater costs $1,750, and a heat pump stove, cooktop, range, or oven costs $840.
Additionally, rebates for non-appliance renovations will be provided up to the following sums:
Insulation, airtightness, and ventilation will cost $1,600; electrical wiring will cost $2,500; and an upgraded electric load service center will cost $4,000.
However, there are restrictions on how much certain families may receive. For instance, if the family’s annual income is between 80% and 150% of the area median income, the refund cannot be greater than 50% of the cost of a qualified electrification project. Additionally, the maximum amount of rebates that may be awarded to each eligible family under the scheme is $14,000.
The state and tribal governments that create their own qualified programs will give families the $4.5 billion that has been set aside for rebates. The money is accessible until September 30, 2031.