Tax Provisions in the Inflation Reduction Act
On Aug. 16, 2022, President Biden signed the Inflation Reduction Act into law. The law incorporates many climate, healthcare and tax initiatives. In addition, it also includes approximately $80 billion of additional funding for the IRS to enhance taxpayer services, tax enforcement activities, operations support and business systems modernizations. Here are some of the important tax provisions of the Act:
- Corporate alternative minimum tax — A 15-percent corporate alternative minimum tax (AMT) is imposed on the adjusted financial statement income of an applicable corporation (a corporation with a three-year average annual income in excess of $1 billion) for tax years starting in 2023. This does not apply to S corporations, regulated investment companies and real estate trusts. There are adjustments to the financial statement income and allowable deductions for net operating losses (subject to limitation). AMT foreign tax credit and the base erosion and anti-abuse tax (BEAT) can also reduce the minimum tax.
- Excise tax on repurchase of corporate stock — A new 1-percent excise tax is imposed on each domestic corporation where the stock of which is traded on an established securities market (within the meaning of section 7704(b)(1)). The tax is applied to the fair market value of any stock of the corporation which is repurchased by such corporation during the taxable year. The repurchase subject to the tax is reduced by the value of new stock issued to the public or employees during the year. There are exclusions for repurchases related to certain reorganizations, transactions related to employee pension plans and employee stock ownership plans (ESOPs), and repurchases of less than $1 million in a year.
- Excise tax on drug manufacturer during noncompliance periods — In an effort to control the rise in prices, an excise tax will be imposed on drugs sold by manufacturers, producers or importers if they are not included in the Medicare Drug Price Negotiation Program starting in 2026.
- Residential clean energy credit — The residential clean energy credit, previously known as the residential energy efficient property credit, is extended through the end of 2034. The credit ranges from 22 to 30 percent of the cost of eligible property placed in service over specific years.
- Energy efficient home improvement credit — The energy efficient home improvement credit, previously known as the credit for nonbusiness energy property, has been extended. The credit rate is now 30 percent, and it applies to qualified energy property through 2032.
- Clean vehicle credit — Are you interested in purchasing a new car? There is a new $7,500 credit for purchasing a new clean vehicle.
- Previously-owned clean vehicle credit — How about purchasing a used car? A credit of up to $4,000 is available for the purchase of certain used clean vehicles.
- Research credit against payroll tax for small business — Beginning in 2023, the Medicare hospital insurance tax can be used to apply up to $250,000 in research credits. The credit is limited to the tax assessed during the quarter, but it can be carried forward.
- Excess business losses of noncorporate taxpayers — The limitation on excess business losses of noncorporate taxpayers is extended for two years.
P. Jeffrey Christakos, CPA/PFS, MBA, CFP, is a tax partner with Christakos & Co., PC; a senior investment advisor at Westfield Wealth Management, LLC and an adjunct professor at Seton Hall University. He is a member of several NJCPA interest groups and committees.
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