On August 15, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law. The $437 billion package is designed to combat inflation, invest in energy production and manufacturing, and minimize carbon emissions.
The IRA will invest approximately $300 billion in deficit reduction and $369 billion in energy security and climate control programs in the next decade. There are several key provisions that will affect business owners and individuals. Below are the highlights:
Corporate Alternative Minimum Tax - The Inflation Reduction Act imposes a 15% tax on the adjusted financial statement income of corporations with an average annual adjusted financial statement income exceeding $1 billion over a three-year period ending in the applicable tax year. Corporations that have a foreign parent will be subject to the tax if the adjusted financial statement income of the corporation and all foreign members of such group exceed $1 billion, and the corporation's own adjusted financial statement income exceeds $100 million, over a three-year period. This is effective for tax years beginning after December 31, 2022.
1% excise tax on repurchase of public stock - Effective January 1, 2023, companies will face a new 1% excise tax on the fair market value of purchases of their own shares.
Green energy credits for corporations - The IRA extends multiple credits through 2024 including Electricity Produced from Renewable Sources and the Energy Investment Credit. A new business credit is available to corporations that produce solar energy components, wind energy components, inverters, qualifying battery components, and applicable critical materials. The IRA aims to lower energy costs, increase cleaner production, and reduce carbon emissions by roughly 40 percent by 2030.
Energy Efficient Home Improvement Credit - The IRA extends many expired residential energy credits through 2032. Beginning in 2023 this credit will be 30% of all eligible home improvements made during the year, up from 10%. Eligible improvements include installation of energy efficient windows and doors as well as certain HVAC systems and heat pumps. The previous $500 lifetime limit is replaced with a $1,200 lifetime limit.
Clean vehicles - The credit for the purchase of clean vehicles is extended through 2032. This credit includes both plug-in electric vehicles and fuel cell vehicles. A few provisions apply including:
- The maximum amount of the credit remains at $7,500, but includes income limitations, as well as limitations on the manufacturer's suggested retail price.
- A new credit of up to $4,000 is also available for the purchase of a previously-owned clean vehicle, subject to income limitations, through 2032.
- The bill also proposes a new credit for up to 30 percent of the basis of a qualified commercial clean vehicle acquired after 2022 and before 2033.
- The bill imposes sourcing requirements on the critical components of the vehicle and battery systems.
Research and Development credit claimed on payroll tax returns — The maximum payroll research tax credit available to qualified small businesses will increase from $250,000 to $500,000 for tax years beginning in 2023.
Medicare and Affordable Care Act - The law includes several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government. Under the new law, the U.S. government is now able to negotiate prices on the costliest prescription drugs and cap costs at $2,000 per year for people on Medicare.
If you have any questions on how the Inflation Reduction Act may affect your specific, situation please feel free to contact us. Our team is well-versed in the many facets of the IRA and we will be proactive in assisting clients in maximizing savings opportunities.