The House of Representatives passed The Inflation Reduction Act (IRA) Friday, August 12, and President Joe Biden sign into law August 16. The legislation, which is a pared-down version of the proposed Build Back Better plan, was passed through the budget reconciliation process and is expected to pay for itself and decrease the budget deficit.
The IRA will not enforce any new taxes on families making $400,000 or less (or small businesses). With the goal of fighting inflation, the IRA invests $300 billion in deficit reduction and will allow Medicare to negotiate drug prices, cap out-of-pocket costs for Medicare beneficiaries at $2,000 per year, and lower ACA health care premiums for millions of Americans.
Many of the tax increases initially considered in the bill last fall were not included in the final legislation, as there are no rate increases or surtaxes on individual taxpayers, no expansion of the net investment income tax, and no changes to the carried interest provisions proposed in the original draft of the IRA.
The IRA does not include several of the rate increases originally proposed by President Biden, raising the U.S. corporate tax rate to 28%, raising the top individual marginal income tax rate to 39.6%, and taxing capital gains income for high-income individuals at ordinary income tax rates, did not make it into the final version of the bill.
Key provisions in the IRA include funding for clean energy tax credits, an infusion of funds to the Internal Revenue Service, changes to Medicare prescription drug policies, and new corporate taxes.
Read on to learn about how these provisions could impact you and your business.
Research credits to payroll taxes
Currently, the research tax credit allows for up to $250,000 to be deducted against qualifying payroll taxes which do not include the Medicare portion of FICA taxes. The IRA expands this credit to a $500,000 limit that also includes Medicare payroll taxes.
This goes into effect for tax years beginning after December 31, 2022 and allows for unused credit amounts to be carried forward in certain circumstances.
Prescriptions & Medicare
The IRA features significant changes to federal prescription drug pricing with the policies aiming to reduce costs for individuals receiving care through Medicare. The bill’s prescription drug pricing provisions will allow Medicare the power to negotiate the price of some high-cost, single-source prescription drugs. In part, the IRA redesigns the Medicare drug program, while also placing a cap on Part D of Medicare prescription drug out-of-pocket costs at $2,000 per year.
An extension of the premium tax credit that was part of the 2021 American Rescue Plan Act, will lower ACA health care insurance premiums with the expansion of the affordability percentages to make the credit available for individuals with incomes above 400% of the federal poverty line.
Drug companies, not consumers will be responsible for drug prices as the IRA will now penalize drug companies for price increases that exceed inflation. This prohibition will save Medicare an estimated $71 billion. Low-income seniors will see an increase in help, with Medicare beneficiaries, will now receive the full low-income subsidy under Medicare part D, with the average assistance around $5,000 per person.
Renewable, clean energy tax provisions
Much of the funding for the IRA – about $370 billion – is dedicated to green or renewable energy tax deductions. Of that amount, $60 billion is earmarked for growing the renewable energy infrastructure within manufacturing targeted at solar panels and wind turbines.
The IRA does modify, extend, and increase credits for individuals that make energy efficiency improvements to their homes. With the purpose to incentive individuals to invest in clean energy and efficiency incentives, such as:
- Nonbusiness energy property credit
- Residential energy-efficient property credit
- Energy efficient home credit
- Clean Vehicle credit
Under the IRA, individuals who purchase a new or used (two-years-old) vehicle, that fit the new increases to the minimum battery capacity requirement from four to seven kilowatt-hours, and it requires the seller of the new clean vehicle to provide a report to the buyer and to the IRS containing certain details about the vehicle and the available credit amount, as well as meet the adjusted gross income in the credit year or preceding taxable year (less than $150,000 for joint filers, $112,500 for head of household filers, and $75,000 for single filers).
The IRA also modifies and extends through 2024 tax credits for producing electricity from qualified renewable resources, investments in qualified energy properties, and using alternative fuels and fuel mixtures (including biodiesel and renewable diesel).
New tax credits will be available in the coming years for the production and/or sale of:
- Zero-emissions nuclear power products,
- clean hydrogen or clean electricity for investment in zero-emissions electricity generation facilities or energy storage technology,
- clean fuel production, and
- Qualifying solar and wind energy systems components.
With the modifications, businesses that use energy-efficient commercial buildings may see additional tax deduction opportunities. The IRS introduces a new credit for commercial clean vehicles and modifies the refundable tax credit on plug-in electric vehicle purchases.
The IRA provides funds so the Environmental Protection Agency (EPA) can create a greenhouse gas reduction fund and support existing programs that provide financial incentives to reduce air pollution emissions. These include replacing eligible medium- and heavy-duty vehicles with zero emissions options, identifying and reducing emissions from diesel engines, and monitoring air pollution and greenhouse gases.
Increased tax enforcement, customer service
The IRA provides additional funding for the IRS to hire more customer service representatives, processors, and auditors to decrease the time it takes to process returns for each tax year, lessen the hold times for taxpayers calling in, and increase audits. Audits are expected to target larger businesses and individuals with higher incomes.
The Inflation Reduction Act is expansive and could affect many business tax strategies. We’ll keep you updated as new information comes to light. In the meantime, consider scheduling your annual tax strategy review with one of our tax professionals to discuss how the IRA could impact you and your business.