The Inflation Reduction Act of 2022 was signed into law by President Biden on August 16, 2022. In addition to new taxes and credits, the Act directs $80 billion to the Internal Revenue Service (IRS). In this blog post, we summarize the Act’s tax revenue provisions, tax credits and deductions, IRS provisions, and how your personal or business tax could be affected.
Tax revenue provisions
Summary: The Inflation Reduction Act’s (IRA’s) tax revenue provisions include a corporate alternative minimum tax and a 1% excise tax on repurchase of corporate stock.
Let’s look at each of these in more detail.
Corporate alternative minimum tax
Summary: The IRA imposes a new 15% corporate alternative minimum tax on the adjusted financial statement income of applicable corporations.
The reason behind enacting the corporate alternative minimum tax is to focus on the phenomenon of large, publicly traded corporations (with significant earnings) paying little or no tax. Under the new Act, corporate alternative minimum tax is calculated based on book income rather than taxable income.
What is an applicable corporation for a tax year?
Any corporation (other than an S corporation, regulated investment company, or a real estate investment trust) that meets the average annual adjusted financial statement income test is seen as an applicable corporation. A corporation meets the income test if its average annual adjusted financial statement income for the three-tax-year period exceeds $1 billion.
Applicable corporations retain this status in perpetuity, unless there has been an ownership change or the corporation has not met the income test for a specified number of consecutive tax years.
It’s worth noticing, however, that the application of the corporate alternative minimum tax is not entirely clear in certain contexts, and it will likely take the IRS several years to work out all the various permutations.
1% excise tax on repurchase of corporate stock
Summary: The IRA imposes a tax equal to 1% of the fair market value of any stock of the corporation that is repurchased by the corporation during the tax year. The 1% excise tax applies to repurchases of stock after December 31, 2022.
The 1% excise tax does not apply:
- If the repurchase is part of a reorganization, and no gain or loss is recognized on such repurchase by the shareholder
- If the stock repurchased is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan
- When the total value of the stock repurchased during the tax year doesn’t exceed $1 million
- Under regulations prescribed by the IRS when the repurchase is by a dealer in securities in the ordinary course of business
- To repurchases by regulated investment companies or real estate investment trusts, or to the extent that the repurchase is treated as a dividend
Tax credits and deductions
Summary: The IRA has introduced and expanded on a number of energy credits that can be used by individuals and businesses, including more than $200 billion in energy-related tax subsidies over the next decade.
- Credits for electric vehicles, such as a credit of up to $7,500 for a new electric vehicle and a credit of up to $4,000 for a used electric vehicle (with some limitations based on income as well as the type of car)
- Increased scope of the non-business property credit, with up to 30% of any energy-saving mechanisms that you put in your home (such as energy-efficient windows or doors)
- An extension of wind and solar tax credits
- New ability to take the production tax credit for solar deals
- Expansion and increased value of tax credits for carbon capture
- New tax credits for zero-emission nuclear power production and clean hydrogen production
Summary: The IRA provides $3,181,500,000 towards taxpayer services, including filing and account services, prefiling assistance and education, and taxpayer advocacy services.
This funding should help improve taxpayer services and also step up enforcement efforts, which could lead to increased scrutiny of small businesses.
At $45,637,400,000, the enforcement category comprises over half of the total amount appropriated to the IRS. It is intended to cover the following expenses:
- Determining and collecting taxes owed
- Conducting criminal investigations
- Providing legal and litigation support
- Monitoring digital assets and carrying out related activities for compliance
- Enforcing criminal statute violations and other financial crimes
The Act also sets aside $4,750,700,000 to help modernize the IRS’ computer systems and upgrade related in-house technologies; with another $25,326,400,000 allocated to operational expenses.
If you have a business, know that the risk of audit is increasing. Ensure you are keeping careful records and working with an experienced, ethical tax preparer. Here are a few additional considerations:
- See how you can take advantage of new and revised green credits.
- Commit to better record-keeping by keeping original receipts and documenting the business purposes of all your spending and deductions.
- Be sure to execute the strategies of certain tax credits and tax deductions properly.
- Be open and honest with your tax preparers and expect the same from them.
- Start your tax planning sooner rather than later.
Consult the experts
This article summarizes (and, we hope, simplifies) some of the many provisions in the IRA. There may be other tax business or personal tax benefits to take advantage of, as well as potential pitfalls to avoid. Please don’t hesitate to get in touch with us if you have questions about the new law and the nuances of your unique situation.