August 24, 2022
The U.S. House and Senate have passed the Inflation Reduction Act (IRA) and President Biden signed it into law on August 16. This $740 billion law contains many tax breaks and raises revenue through a new minimum tax on large, profitable corporations and an excise tax on stock buybacks. It’s intended to reduce the U.S. deficit by about $300 billion. Other revenue would come from stricter enforcement of tax compliance by the IRS.
Here are some highlights of the new legislation.
Clean Vehicle Tax Credit
The current tax credit for qualified plug-in electric vehicles is significantly revised in the IRA. Currently, a taxpayer can claim a maximum credit of $7,500 for each new qualified plug-in electric drive vehicle placed in service during the tax year. Certain vehicle requirements must be met.
Currently, the credit phases out beginning in the second calendar quarter after a manufacturer sells more than 200,000 plug-in electric drive motor vehicles for use in the U.S. after 2009. Under the IRA, the plug-in vehicle credit has been renamed the “clean vehicle credit” and the manufacturer limitation on the number of vehicles eligible for the credit has been eliminated after December 31, 2022.
However, the new law changes how the clean vehicle credit is calculated. Specifically, a vehicle must meet critical mineral component requirements and the batteries must be made in America. There are also price and income limitations. The clean vehicle credit isn’t allowed for a vehicle with a manufacturer’s suggested retail price above $80,000 for vans, SUVs, and pickups; and above $55,000 for other vehicles.
A clean vehicle credit isn’t allowed if a taxpayer’s modified adjusted gross income for the current or preceding tax year exceeds $150,000 for single filers, $300,000 for married couples filing jointly, and $225,000 for heads of household.
Due to all these requirements, auto manufacturers and dealers are complaining that many electric vehicles and buyers won’t qualify for the tax credit.
Previously Owned and Commercial Vehicles
The IRA also contains a tax credit for used plug-in electric vehicles purchased after 2022. The tax credit is $4,000 or 30% of the vehicle’s sale price, whichever is less. There are also price and income limitations. An eligible previously-owned clean vehicle is one with a model year that’s at least two years earlier than the calendar year when a taxpayer acquires it.
In addition, the IRA adds a new commercial clean vehicle credit for qualified vehicles acquired and placed in service after December 31, 2022. The credit is a component of the general business credit.
Residential Energy Improvements
Individual taxpayers can also receive tax breaks for home energy efficiency improvements, such as solar panels, energy-efficient water heaters, heat pumps, and HVAC systems. The new law also extends, increases, and modifies a tax credit for new home construction that meets certain requirements.
Provisions Related to Climate, Energy and Health Care
The legislation includes many new, extended and increased tax credits intended to incentivize both businesses and individuals to boost their use of renewable energy. For example, it provides tax credits to private companies and public utilities to produce renewable energy or manufacture parts used in renewable projects, such as wind turbines and solar panels. Clean energy producers that pay a prevailing wage also may qualify for tax credits.
In addition, the IRA allows Medicare to negotiate the price of prescription drugs and prohibits future administrations from refusing to negotiate. It also caps the annual out-of-pocket drug costs of Medicare enrollees at $2,000, caps monthly insulin costs at $35, and provides free vaccines. Additional provisions to rein in drug costs include a requirement that if a pharmaceutical company raises the prices on drugs purchased by Medicare faster than the rate of inflation, it will rebate the difference back to the program.
The IRA should reduce health care costs for Americans who obtain coverage from the federal Health Insurance Marketplace. It extends the expansion of subsidies — in the form of refundable premium tax credits — through 2025. These subsidies were scheduled to expire at the end of 2022.
Increase in Qualified Small Business Payroll Tax Credit for Research
Another provision in the IRA would boost the payroll tax credit for increasing research activities. Currently, a qualified small business (QSB) may elect to take part of the research credit as a payroll tax credit against its employer FICA tax liability. A QSB must have gross receipts of less than $5 million and meet other requirements. An eligible business with qualifying research expenses can then opt to apply up to $250,000 of its research credit against its payroll tax liability.
Under the IRA, beginning after December 31, 2022, a QSB can choose to apply another $250,000 in qualifying research expenses (for a total of $500,000) against its payroll tax liability.
Excise Tax on Corporate Stock Repurchases
The IRA generally imposes a tax on each “covered corporation” equal to 1% of the fair market value of any stock of the corporation that’s repurchased by the business during the tax year. A “covered corporation” is any domestic corporation with stock traded on an established securities market.
The 1% excise tax applies to repurchases of stock after December 31, 2022.
15% Corporate Alternative Minimum Tax
The IRA imposes a new 15% corporate alternative minimum tax on the adjusted financial statement income of applicable corporations, effective for tax years beginning after December 31, 2022. The minimum tax will apply if it exceeds the taxpayer’s regular tax including its base erosion and anti-abuse tax for the tax year. An applicable corporation is any corporation (other than an S corporation, regulated investment company, or a real estate investment trust) that meets an average annual adjusted financial statement income test of more than $1 billion for one or more earlier tax years that end after December 31, 2021. Other rules apply. According to the Joint Committee on Taxation, an estimated 150 taxpayers would be subject to the corporate minimum tax annually.
These are only some of the provisions in the legislation. The IRS will be issuing guidance about these and other provisions in the coming months. We’ll continue to monitor developments from the legislation and provide updates as more information becomes available.
For more insights, CPAmerica has released a tax briefing with commentary on the new law.
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