Key Senators Announced a Deal to Pursue the Inflation Reduction Act of 2022 Many Potential Tax Changes Included On July 27, 2022, Senator Schumer and Senator Manchin announced a deal on updated legislation known as the Inflation Reduction Act of 2022 (IRA). The primary focus of this Act is to combat inflation, invest in energy production and manufacturing, and minimize carbon emissions. Previous legislation targeting such causes stalled in the Senate in December 2021. This new agreement puts the legislation back at the forefront with several important tax changes included.
Through the budget reconciliation process, the IRA proposes to invest approximately $300 billion in deficit reduction and $369 billion in energy security and climate control programs in the next decade. While the IRA proposes less spending and tax provisions compared to previously proposed legislation, there are several key provisions that may affect business owners and individuals. Below are the highlights:
- 15% book minimum tax - A new tax of 15% would be imposed on the financial statement income of corporations with an average annual 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 proposal would be effective for tax years beginning after Dec. 31, 2022.
- Energy credits - The IRA aims to lower energy costs, increase cleaner production, and reduce carbon emissions by roughly 40 percent by 2030. The IRA includes numerous relevant tax credits specific to energy production, equipment manufacturing, and purchase of electric vehicles. The bill allows for consumer credits for making homes energy efficient and sustainable with clean energy. Consumers who purchase electric vehicles will also be eligible for a tax credit. Additionally, the bill allows for a $10 billion investment tax credit to build clean manufacturing facilities to produce energy efficient products such as electric vehicles, wind turbines, and solar panels.
- Carried interest modifications - Effective for tax years beginning after Dec. 31, 2022, the current carried interest rules would be modified in the following ways:
- A new five-year holding period would be used in place of the existing three-year rule. Exceptions would allow for continued use of the current three-year rule for both gains attributable to real property trades or businesses and individual taxpayers with adjusted gross income of less than $400,000.
- The holding period of an applicable partnership interest (API) would not begin until the later of: (1) the date that the taxpayer acquires substantially all of the API, or (2) the date that the partnership in which the API is held acquires substantially all of its assets.
- Additional technical modifications would expand the gains subject to Section 1061 and direct the Treasury Department to issue new regulations targeting planning techniques, such as carry waivers.
- Research credit claimed on payroll tax returns — The bill doubles the limitation on research credits to $500,000 for tax years beginning after Dec. 31, 2022. Currently, certain taxpayers can claim up to $250,000 of research credits on their payroll tax return. This permits that portion of the credit to be monetized to the extent the company doesn't currently have any income taxes to claim the credit against.
- Increased IRS enforcement - The bill includes an $80 billion increase to IRS funding, primarily targeting enforcement activity. The implication of this would be greater IRS scrutiny and enforcement.
- Medicare and Affordable Care Act - The bill would expand the Affordable Care Act through 2025. Additionally, Medicare would be able to negotiate prescription drug prices.
As the Inflation Reduction Act of 2022 moves forward, we will keep you apprised of any modifications and the impact of the bill if it becomes finalized. The bill still has some hurdles to overcome before gaining final approval, but it is expected to move through the Senate this week. Please be on the lookout for continued updates and, as always, let us know if you have any questions.