On Tuesday, August 16, the Inflation Reduction Act (IRA) was signed into law. This is a massive bill that is expected to direct more than $485 billion toward climate and energy efficiency measures, healthcare and the IRS. Here is an overview of the Act and how it may impact you.
Unlike the bills passed during the pandemic, which were intended to increase federal spending to help spur the economy, this bill is looking to raise over $790 billion in new federal revenues. Here is a snapshot of how money will flow:
- $227 billion to renewal energy projects
- $80 billion toward rebates for purchases of energy-efficient appliances (up to $14,000 per individual)
- $98 billion toward healthcare subsidies
- $80 billion to the IRS for investment into the country’s tax administration agency
- $305 billion toward deficit reduction
- The bill contains provisions that spread over 10 years, with a number of key initiatives hitting for 2023, 2024 and 2025 to curb long-term inflation.
As a revenue-raising bill, this means the government is looking to increase federal tax revenues by $790 billion from the following projected sources:
- $313 billion from a minimum corporate income tax on large corporations
- $204 billion from increased collections by the IRS
- $31 billion from imposing a 1% tax on stock buybacks
- $242 billion from healthcare price caps
(Admittedly, I’m not sure I understand how this was built into the revenue raising for the bill.)
Climate and clean energy projects make up the largest portion of the tax incentives. There are several favorable aspects for consumers who direct their household spending toward energy incentives.
CLEAN VEHICLE CREDITS are extended to 2032, and the total cap of 200,000 vehicles is lifted. Buyers can get up to $7,500 toward a qualifying purchase of electric vehicles and $4,000 toward the purchase of a qualifying electric used car. Rather than having to wait until you file your personal returns to claim the vehicle credit against your federal income tax, car dealers will provide a direct reduction of your total price when you purchase the vehicle.
NON-BUSINESS ENERGY PROPERTY CREDITS are available up to $1,200 per year when installing energy efficient windows, doors and other household appliances. This replaces the $500 lifetime energy credits.
RESIDENTIAL ENERGY EFFICIENT PROPERTY CREDITS, which include solar energy property and equipment (e.g., roof solar panels, geothermal units), return to the previous higher level. These credits have been phasing out, with lower credit limits of only 22% through 2023, but now they are reinstated back to 30% through 2032.
There will be a minimum tax of 15% on large corporations with book income of at least $1 billion.
Book income and taxable income are often different numbers with large corporations. Companies on the public stock exchanges use book income to drive their stock prices, and this minimum tax on large corporations is intended to make sure profitable, large corporations pay at least 15% federal income tax on those profits.
There will also be a $80 billion funding increase to help with IRS administration and enforcement efforts. Approximately $45 billion of this will go toward enforcing existing tax laws and compliance requirements. The other $35 billion will go toward modernization and operations support of an agency that is responsible for the largest economy in the world.
For those of you who might be concerned about the enforcement side of the additional funding, here is a summary of the enforcement activities the IRS is looking to improve:
- Collecting owed taxes and other criminal investigations
- Digital asset monitoring and compliance
- Enforcement of criminal financial crimes
Although the prospect of an additional 87,000 IRS agents is daunting, keep in mind that this is over a 10-year period, and not all of these positions are directed toward enforcement efforts. The IRS needs software developers, operations team members and other customer support representatives. Currently they are projecting to add 5,197 new employees in 2022. We also know that the IRS is expecting to lose approximately 50,000 current employees through retirement and attrition over the next five to six years.
What Does this Mean for You?
In our tax planning and reporting work with each of you, we are confident that you have little to be concerned about. Our processes and your cooperation help ensure that we are capturing all relevant information on your return filings.
We care about putting you in the best position tax wise. We also care enough to not do something that we would not do ourselves with our own returns. I believe you can have great confidence each year that if the IRS wants to inquire about anything, you have good substantiation and a reasonable basis for any position taken on a return.
As is often the case, implementing these legislative bills takes time and can look a little different than originally expected. We read and learn about things we see on the horizon for all of you, and we will continue to look out for your best interests with anything in this latest bill.
If you have any questions or concerns please contact us and we will be happy to assist.