ALKEME Overview of the Inflation Reduction Act
President Biden signed the Inflation Reduction Act (IRA) into law on August 16, 2022. The IRA includes significant provisions related to climate change, health care, and, of course, taxes. The IRA also addresses the federal budget deficit. According to the Congressional Budget Office (CBO), the IRA is projected to reduce the deficit by around $90 billion over the next ten years.
Although the IRA falls far short of Biden’s originally proposed $2 trillion Build Back Better Act, it is, nonetheless, a sprawling piece of legislation bound to affect most Americans over time. Here is an overview of some of what the bill includes.
Here are the big provisions:
Creation of a 15% Corporate Minimum Tax Rate
Corporations with at least $1 billion in income will have a new tax rate of 15%. Taxes on individuals and households won’t be increased. Stock buybacks by corporations will face a 1% excise tax.
Prior to the IRA, certain qualified small business startups were able to claim up to $250,000 of the R&D credit against payroll taxes. The IRA has increased the limit up to $500,000 for tax years beginning after 2022.
Prescription Drug Price Reform
One of the most significant provisions of the Inflation Reduction Act will allow Medicare to negotiate the price of certain prescription drugs, bringing down the price beneficiaries will pay for their medications. For Medicare beneficiaries, out-of-pocket drug costs are capped at $2,000 per year, monthly insulin co-payments are capped at $35, and cost-sharing for adult vaccines is eliminated.
Business Loss Limitation
The excess business loss limitation was extended and additional 6 years through 2028. No additional changes were made to the limitations.
IRS Tax Enforcement
The IRA includes almost $80 billion in new funding for the IRS, of which almost $46 billion is allocated to enforcement. The $80 billion will be invested over the next the years – with the intention of increasing audits and collection efforts, ultimately hoping to increase government revenues by over $200 billion. The IRS has come out publicly to reinforce the fact that no families making under $400,000/year will see an increase in audits.
Affordable Care Act (ACA) Subsidy Extension
Currently, medical insurance premiums under the ACA are subsidized by the federal government to lower premiums. These subsidies, which were scheduled to expire at the end of this year, will be extended through 2025.
Energy Security and Climate Change Investments
The bill includes numerous investments in climate protection, including tax credits for households to offset energy costs, investments in clean energy production and tax credits aimed at reducing carbon emissions.
Individuals are expected to benefit the most from residential energy credits — including a 30% credit for certain energy-efficient remodeling costs, subject to a $1,200 annual limit beginning in 2023 (as opposed to a $500 lifetime cap under the old rules). The 30% clean energy credit — previously referred to as the residential energy efficient property (REEP) credit — for more expensive items (e.g., solar water heaters and geothermal heat pumps) that was scheduled to drop in 2023 and expire in 2024 was also extended.
More than $14 billion in tax breaks will support clean vehicles. More than half of these funds will come from the clean vehicle credit (previously called the “new qualified plug-in electric drive motor vehicle” credit). The credit is up to $4,000 for used electric and hybrid plug-in vehicles and up to $7,500 for new qualifying vehicles. However, the final assembly of the vehicle must occur within North America to qualify for the incentive. New income restrictions also apply.
The many tax provisions of the Inflation Reduction Act are complex, and worth discussing with a trusted ALKEME agent or advisor to learn how they may impact you, your business or project. We will be monitoring the continued development of these new elements and will keep you posted with any additional insight.