By Judy Mason, CPA, CVA – Partner
The Inflation Reduction Act (IRA) of 2022 was signed into law on August 16, 2022. This bill impacts a wide variety of areas, from climate to health care. Although the bill is just a portion of President Biden’s overall social agenda, it still provides significant changes. Here are some of the highlights:
HEALTH CARE AND MEDICINE
Marketplace Health Insurance Credits
The Affordable Care Act provided health insurance premium credits for certain taxpayers who purchased health insurance through the marketplace. The American Rescue Plan (also known as the COVID-19 Stimulus Package, passed in March 2021) extended and increased those credits. The IRA continues those tax credits for an additional three years through 2025.
Medicare Costs and Caps
The United States Department of Health and Human Services (DHHS) for the first time can negotiate Medicare drug pricing directly with pharmaceutical companies. The hope is that the government will save significant money by making this change, and consumers may see a drop in prescription drug prices through Medicare.
The IRA also caps certain drug costs, including an out-of-pocket limit of $2,000 per year beginning in 2024. In addition, monthly copayments for insulin are capped at $35.
CLIMATE AND CLEAN ENERGY
Many energy-related tax incentives were included in the IRA, totaling $270 billion (including both new and existing provisions). Clean energy and transportation were both target areas for these benefits.
Residential Energy Credits
Individuals can receive up to $1,200 annually for certain energy-efficient remodeling expenses. Previously, this credit was $500 per lifetime. The credit applies to qualified energy improvements and qualified energy property such as water heaters, heat pumps, or central air conditioning.
The residential energy-efficient property credit for larger items (like solar water heaters and geothermal heat pumps) that was set to expire in 2024 was also extended.
Credits are available for improvements or property placed in service after 2022 and before the end of 2032.
Tax Credits for Clean Vehicles
Clean vehicles received a $14 billion tax break in the IRA. The credit is up to $4,000 for used electric or hybrid plug-in vehicles or up to $7,500 for new qualifying clean vehicles. There is no limit to the number of credits available per model and manufacturer. While these credits are not necessarily new, they have some new restrictions. They are limited by income, and the final assembly of the vehicle purchased must be within North America. These revised vehicle credits apply to vehicles acquired after 2022. For new vehicles, the credit is not available if adjusted gross income exceeds $300,000 for married filing joint and $150,00 for single filers. The income phaseout is lower for the used vehicle credit.
TAX CHANGES FOR CORPORATIONS
Several tax increases within the IRA are generally aimed at corporations.
The IRA places a new minimum tax on companies with revenues over $1 billion. This corporate alternative minimum tax (AMT) is equal to the excess of 15 percent of a corporation’s adjusted financial statement income (AFSI) over its corporate AMT foreign tax credit. This applies to C corporations which, for a three taxable year period, have an average annual AFSI greater than $1 billion (and at least $100 million for members of foreign-parented international financial reporting groups). AFSI is net income stated in an applicable financial statement and applies to taxable years beginning after 2022.
Beginning in 2023, there will be a new 1 percent excise tax on publicly traded companies for repurchasing corporate stock over any new issues to the public or employees.
BUSINESS LOSS LIMITATION EXTENDED
For noncorporate taxpayers, the business loss deduction in 2022 is limited to $540,000 for joint filers and $270,00 for single files. This limitation provision, adjusted for inflation, has been extended to 2028. It is a complicated rule that affects business owners who take business losses. Essentially, it limits the taxpayer’s ability to offset investment or employment income with a business loss, even if that business owner is actively engaged in the business that created the loss.
CHANGES TO THE IRS ENFORCEMENT PROGRAMS
As part of attempts to raise revenue, the IRA also added more funding to the IRS. This money is slated to be used to increase enforcement activities and operations support and for updating their current systems. This funding amounts to roughly $80 billion, which is a huge increase from their reported budget of $13.16 billion in 2022.
Roughly half of the funds provided to the IRS must be used to assist with collection efforts, conduct criminal investigations, monitor digital assets, and increase compliance-related activities.
WHAT THE IRA DID NOT DO
Many of the tax increases proposed as part of the original Build Back Better bill did not end up getting signed into law:
- No increase on capital gains tax
- No increase on the current individual income tax rates
- No added surcharges on individuals, estates, and trusts over certain threshold amounts
- No changes to gift tax rates or exemption amounts
- No changes to the Medicare surtax for active business owners
While these changes might still occur later, they have not been enacted into law now.
GETTING HELP AT TAX TIME
A tax professional will be able to help you plan effectively to take advantage of the credits and deductions available under the IRA and other federal laws. Now is a great time to start planning!
If you have any questions or would like additional information, please contact us at 847.982.0333. We’re here to help.
Judy Mason, CPA, CVA – Partner has over 20 years of tax, accounting, business consulting, and compliance experience, serving closely-held and start-up businesses, entrepreneurial and family-owned companies, their owners, and families. Her expertise is in federal, state, and local taxation. Judy has a broad depth of expertise in state and local tax research, planning, and compliance matters for entities and individuals with multi-state businesses and/or investments. She has successfully managed a broad range of federal income, and state sales and use tax audits for entities and individuals. As a Certified Valuation Analyst (CVA), Judy prepares business valuations used for various purposes such as estate and gift planning, business succession, buy/sell agreements, and litigation support.
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