What is the Inflation Reduction Act?

On August 16, 2022, President Joe Biden signed the Inflation Reduction Act (hereafter the Act) into law.  The bill introduced a number of measures to decrease household costs for the average American, while additionally making efforts to lower prescription drug prices for Medicare recipients and cut down domestic greenhouse gas emissions.  The bill intends to lower inflation through two primary measures: the first aims to reduce the Federal deficit by decreasing costs to acquire prescription drugs for Medicare recipients.  The second measure is a series of revisions to the tax structure, as noted below.  Some of the provisions in the Act are complicated, so please reach out to our firm with any questions.

What does the Act mean for individuals and their families?

The Act introduced a number of new opportunities for individuals to reduce their tax liability with clean energy-related tax credits.  For the next 10 years, credits will be available for consumers who make their homes more energy efficient and more adaptable to clean energy.  There are varying rules for the 2022 tax year versus 2023 and beyond, but the credit is expanded to cover additional costs of energy efficiency cost.  For example, homeowners that opt to purchase and install energy-efficient windows and doors, as well as qualifying heat pumps and HVAC systems, will be able to claim an annual credit of $1,200.  The bill also adds provisions to increase the accessibility of solar panels for lower-income earners.  Under the Act, individuals will receive a credit of up to 30% of the cost for solar panels purchased and installed in their homes.  The credit has been retroactively approved for taxpayers who obtained their solar energy system starting on January 1, 2022.  Additionally, some of the available credits have the potential to be transferred to another taxpayer.

Clean energy home improvements are not the only development subsidized by the Act.  The bill also provides one-time credits for qualifying new and used “clean” vehicles.  New clean vehicles will come with a $7,500 tax credit, while qualifying used clean vehicles will receive a tax credit of up to $4,000.

Prior to the Act, one could claim a credit for each new qualified plug-in electric motor vehicle placed in service during the tax year.  The Act eliminates the limitation on the number of vehicles eligible for the credit.  No credit is allowed if your modified adjusted gross income for the year of purchase, or the preceding year, exceeds $300,000 for joint returns or $150,000 for single taxpayer returns.  In addition, no credit is allowed if the manufacturer’s suggested retail price for the vehicle is more than $55,000 ($80,000 for pickups, vans or SUVs).  The way the new vehicle credit is calculated has changed and the rules are complicated, so please contact us with any questions.

The new provision for used clean vehicles allows for lower-income earners to have access to energy-efficient vehicles.  A qualified buyer who acquires and places in service a used clean vehicle after 2022 is allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price.  There are also modified adjusted gross income limits to buyers of used vehicles as well.

What does this mean for businesses?

It would be impossible to lower inflation purely by offering tax credits.  The Act created a new Alternative Minimum Tax (AMT) for corporations.  Corporations with an adjusted financial statement income above $1 billion for each of the past three years will be subject to a 15% AMT.  In some cases, certain foreign corporations will be subject to a lower floor of $100 million.

The Act adds a tax on domestic stock repurchases.  Starting on January 1, 2023, corporations that buy back stock will be subject to a 1% excise tax.  This includes stocks bought back from the general population, non-affiliated businesses, and certain affiliated businesses.  Foreign stock repurchases will be subject to a buyback excise tax under qualifying conditions.  Buybacks are one way corporations shift their profits to shareholders, and are taxed at capital gains rates, but may not be taxed for years until the stock is sold.  The Act would subject corporations to a tax equal to 1% of their stock repurchases, thereby ensuring the taxing of the shifted profits in some form.

One of the most relevant parts of the bill to the typical business is the extension of the passthrough loss limitation from the American Rescue Plan of 2021.  Partnership and S Corporation businessowners will only be able to use up to $250,000 ($500,000 if married filing jointly) of business losses to offset non-business income.  For example, take a taxpayer who files as single and has a loss of $300,000 from a partnership they own.  That taxpayer also made $275,000 in interest income during the same tax year.  The result is the taxpayer will only be able to offset $250,000 of their partnership loss against the interest income and will still be required to pay tax on the remaining $25,000.  Fortunately, the remaining $50,000 in losses from the partnership can be carried forward and applied to following tax years.

What about the new investments into IRS personnel?

An extremely pertinent section of the Act is the additional funding to the IRS.  This funding is to be used to hire an additional 87,000 IRS agents for the purpose of ensuring compliance of taxpayers earning more than $400,000 annually.  Due to the increased level of scrutiny, taxpayers need to be correct and compliant on their filings.  It is likely that possible audit targets will be Schedule E passthrough entities – Partnerships and S Corporations, Schedule C freelancing activities and sole proprietorships, and Schedule E rental activities.

Although the provisions in the Act stipulate that the new IRS agents will only target high-income earners, this will reduce the pressure on agents focusing on lower income earners.  This will allow those agents to spend more time and energy on audits below $400,000, all of which results in a more complete and aggressive review of financial and tax return information.  Individuals and businesses will need to be certain they have correctly accounted for all potential income, expenses, and any related tax implications.

If you have questions regarding any of the information included in this article, please contact us at info@tgccpa.com.

Written by Ethan Swain – Tax Staff

Ethan B. Swain
Ethan B. Swain

Ethan Swain joined Thompson Greenspon during the Summer of 2022. As a staff tax accountant, Ethan is responsible for preparing a number of different tax forms, as well as providing the highest level of service to clients. In Spring 2021, Ethan graduated from James Madison University with Bachelor’s degree in Economics and is currently pursuing his CPA license. Outside of work, he is the treasurer for the Sterling Youth Soccer Association and due to his involvement is developing a specialization in Non-Profits.