On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (IRA) into law as PL 1217-169.
The IRA will make a historic down-payment on deficit reduction to fight inflation, invest in domestic energy production and manufacturing, and reduce carbon emissions by roughly 40% by 2030. The act will also allow Medicare to negotiate prescription drug prices and will extend the expanded Affordable Care Act program for three years, through 2025. The IRA is estimated to reduce the deficit by $300 billion, in addition to reducing the current rate of inflation. Exhibit 1 shows the IRA’s estimated effect on the deficit over a 10-year period.
The IRA does the following:
- Expands Medicare benefits: free vaccines (2023), $35 per month insulin (2023), and caps out-of-pocket drug costs to an estimated $4,000 or less in 2024 and $2,000 or less in 2025
- Lowers energy bills: by $500 to $1,000 per year
- Reduces carbon emissions: by roughly 40% by 2030
- Lowers healthcare costs: saves the average enrollee $800 per year in the ACA marketplace, allows Medicare to negotiate prices for 100 drugs over the next decade, and requires drug companies to rebate back price increases that are higher than inflation
- Creates manufacturing jobs: more than $60 billion invested will create millions of new domestic clean manufacturing jobs
- Invests in disadvantaged communities: $60 billion for cleaning up pollution and environmental justice
- Closes tax loopholes: a 15% corporate minimum tax, a 1% fee on stock buybacks
- Protects families and small business making $400,000 or less
- Provides funding for the IRS: to modernize, hire more auditors, and reduce the backload of unprocessed tax returns.
This article will discuss some of the tax provisions of the IRA.
The IRA’s Effect on the Deficit
|TOTAL REVENUE RAISED||$737 billion|
|15% Corporate Minimum Tax||222 billion*|
|Prescription Drug Pricing Reform||265 billion***|
|IRS Tax Enforcement||124 billion**|
|1% Stock Buybacks Fee||74 billion*|
|Loss Limitation extension||52 billion*|
|TOTAL INVESTMENTS||$437 billion|
|Energy Security and Climate Change||369 billion*|
|Affordable Care Act Extension||64 billion**|
|Western Drought Resiliency||4 billion***|
|TOTAL DEFICIT REDUCTION||$300+ billion|
|* Joint Committee on Taxation estimate
** Congressional Budget Office estimate
*** Senate estimate, awaiting final CBO score
Corporate Alternative Minimum Tax
Before enactment of the IRA, the corporate tax rate was 21%. Some 200 or more large corporations, however, use various tax loopholes to avoid paying that rate and actually pay below 15% [IRA section 10101(a)(1) amending IRC section 55(b)(2)].
The new corporate alternative minimum tax (AMT) will impose a 15% minimum tax on adjusted financial statement income for applicable corporations with profits in excess of $1 billion. Corporations would generally be eligible to claim net operating losses and tax credits against the AMT and would be eligible to claim a tax credit against the regular corporate tax for AMT paid in prior years, to the extent their regular tax liability in any year exceeds 15% of the corporation’s adjusted financial statement income.
Unlike the traditional AMT, which starts with taxable income, the IRA’s corporate AMT’s starting point is the average of a corporation’s annual adjusted financial statement income, based on the corporation’s financial statements prepared in accordance with generally accepted accounting principles (GAAP).
Applicable corporation. The law defines “applicable corporation” to mean, with respect to any taxable year, any corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) which meets the average annual adjusted financial statement income test [IRA section 10101(a)(2), adding IRC section 59(k)(1)(A)].
”Applicable corporation” does not include any corporation that otherwise meets the above requirements if such corporation has a change in ownership, or has a specified number (to be determined by the Treasury Secretary) of consecutive taxable years, including the most recent taxable year, in which the corporation does not meet the average annual adjusted financial statement income test.
Average annual adjusted financial statement income test. A corporation meets the average annual adjusted financial statement income test for one taxable year if the average annual adjusted financial statement income of such corporation for the past three–taxable-year period exceeds $1,000,000,000 [IRA section 101(a)(2) adding IRC section 59(k)(1)(B)(i)]. Domestic corporations that are part of an international financial reporting group where the common parent is a foreign corporation, must include in the adjusted financial statement income all foreign members of such group if the average annual adjusted financial statement income of the group for the three–taxable-year period exceeds $100,000,000 [IRA section 101(a)(2), adding IRC section 59(k)(1)(B)(ii)(II)].
Corporations in existence for less than three years. If the corporation was in existence for less than three taxable years, the annual adjusted financial statement income test is applied on the basis of the period it was in existence [IRA section 10101(a)(2) adding mew IRC section 59(k)1)(E)(i)].
Short taxable years. The adjusted financial statement income for any taxable year of less than 12 months must be annualized by multiplying the adjusted financial statement income for the short period by 12 and dividing the result by the number of months in the short period [IRA section 10101(a)(2), adding new IRC section 59(k)1)(E)(ii)].
Adjusted financial statement income. The term “adjusted financial statement income” is defined as the net income or loss of the taxpayer set forth on the taxpayer’s applicable financial statement for the taxable year.
If an applicable corporation is a partner in a partnership, the corporation must take into account the corporation’s distributive share of the adjusted financial statement income of this partnership [IRA section 10101(b), adding new IRC section 56A].
It is estimated that the new corporate alternative minimum tax will affect approximately 30% if the Fortune 500 (Joint Committee on Taxation, Proposed Book Minimum Tax analysis, July 28, 2022). The corporate AMT provisions are effective for taxable years beginning after December 31, 2022 [IRA section 10101(f)].
Excise Tax on Repurchase of Corporate Stock
Effective for repurchases of stock after December 31, 2022, an excise tax of 1% is imposed on the fair market value of any stock of a covered corporation which is repurchased during the taxable year [IRA section 10201(f), adding new IRC Chapter 37, section 4501(a)].
A covered corporation is defined as any domestic corporation whose stock is traded on an established securities market [IRA section 10201(f), adding new IRC Chapter 37, section 4501(b)].
A repurchase is defined [IRA section 10201(f), adding new IRC Chapter 37, section 4501(c)(1)] as follows:
- a redemption by a covered corporation if the corporation acquires its stock from a shareholder in exchange for property, whether the stock so acquired is cancelled, retired, or held as treasury stock; or.
- any transaction determined by the Treasury Secretary to be economically similar to the transaction described above.
The acquisition of stock of a covered corporation by a specified affiliate of a covered corporation, from a person who is not the covered corporation or a specified affiliate of the covered corporation, will be treated as a repurchase of the stock of the covered corporation.
A specified affiliate, with respect to any corporation, is defined as follows:
- any corporation in which more than 50% of the stock is owned, directly or indirectly, by such corporation; and
- any partnership in which more than 50% of the capital interests or profits interests is held, directly or indirectly, by such corporation.
The amount subject to the 1% excise tax for any stock repurchased by a covered corporation is reduced by the fair market value of any stock issued by the covered corporation during the taxable year, including the fair market value of any stock issued or provided to the employees of the covered corporation or employees of a specified affiliate of the covered corporation during the taxable year, whether or not such stock is issued or provided in response to the exercise of an option to purchase such stock [IRA section 10201(f), adding new IRC Chapter 37, section 4501(a)].
Research Credit for Small Businesses
Effective for tax years beginning after December 31, 2022, the IRA increases the amount of the research credit that certain small businesses may claim against their payroll tax to $500,000 (formerly $250,000) [IRA section 13902, amending IRC section 41(h)(4)(B)(i)].
Renewable Electricity Production Credit
The IRC section 45 renewable electricity production credit for qualified renewable electricity production facilities has been extended for three years through January 1, 2025, for renewable electricity production facilities the construction of which began before January 1, 2025 [IRA section 13101, amending IRC sections 45(d)(2)(A), 45(d)(3)(A), 45(d)(6), 45(d)(7), 45(d)(9), and 45(d)(11)(B)].
The renewable electricity production facilities that are included in this extension include the following:
- closed-loop biomass renewable electricity production facilities;
- open-loop biomass facilities;
- landfill gas facilities;
- other trash facilities; and
- qualified hydroelectric production facilities.
New Clean Vehicle Credit
The IRA extends the period for which a taxpayer may claim a credit for the purchase of new clean vehicles purchased after December 31, 2022 and by December 31, 2032.
Only one credit is allowed for any new vehicle. In order to claim the credit, the vehicle identification number (VIN) must be included on the tax return [IRA section 13101, adding new IRC sections 30D(f)(8), (f)(9)].
The IRS amends the definition of a clean vehicle to include, in addition to qualified plug-in electric drive motor vehicles, new qualified fuel cell motor vehicles [IRA section 13101(c)(1)(D), adding new IRC section 30D(d)(6)].
A new qualified fuel cell motor vehicle is defined as a motor vehicle that meets the following criteria:
- It is propelled by power derived from one or more cells which convert chemical energy directly into electricity by combining oxygen with hydrogen fuel that is stored on board the vehicle in any form and may or may not require reformation prior to use.
- In the case of a passenger automobile or light truck, it has received a certificate that it meets or exceeds the Bin 5 Tier II emission level established in Environmental Protection Agency regulations.
- Its original use commences with the taxpayer.
- It is acquired for use or lease by the taxpayer, and not for resale.
- It is made by a manufacturer. [IRA section 13101(c)(1)(D), adding new IRC section 30D(d)(6), Referring to IRC section 30B(b)(3)]
No credit is allowed on any clean vehicle whose suggested manufacturers’ retail price exceeds $80,000, in the case of a van; sport utility vehicle, or pickup truck; or $55,000, for any other vehicle.
The IRA also increases the amount of the credit for any new qualified plug-in electric drive motor vehicle. It is now the total of the base amount of $3,750 (formerly $2,500); and, in the case of a vehicle that draws propulsion energy from a battery with not less than 5 kilowatt hours of capacity, $417, plus $417 for each kilowatt hour of capacity in excess of 5 kilowatt hours, up to a maximum of $5,000.
The IRA also eliminates the credit’s limitation on the number of clean vehicles produced by a specific manufacturer [IRA section 13401(d), repealing old IRC section 30D(e)]. The IRA places new requirements on the sourcing of the critical components of the vehicle [IRA section 13401(d), adding new IRC section 30D(e)].
In addition, the final assembly of the vehicle must take place within North America [IRA section 13401(b)(1), amending IRC section 30D(d0(1)(E)].
Credit for Previously Owned Clean Vehicles
The IRA allows a new credit for the purchase of a previously owned clean vehicle purchased after December 31, 2022, and by December 31, 2032 [IRA section 13401].
Only one credit is allowed for any new vehicle. In order to claim the credit, the vehicle’s VIN must be included on the tax return.
The amount of the credit is limited to the lesser of: $4,000, or an amount equal to 30% of the sales price [IRA section 13402(a) adding new IRC section 25E(a)–(a)(2)].
A previously owned clean vehicle is defined as a motor vehicle as meeting the following requirements:
- The model year is at least two years earlier than the calendar year in which the taxpayer acquires the vehicle.
- The original use commences with a person other than the taxpayer.
- It is acquired by the taxpayer in a qualified sale.
- It is made by a manufacturer, treated as a motor vehicle for purposes of title II of the Clean Air Act, and a gross vehicle weight rating of less than 14,000 pounds. [IRA section 13402(c), adding new IRC section 25E(c)(1)(A)–(D)]
- It is propelled to a significant extent by an electric motor which draws electricity from a battery that has a capacity of not less than 4 kilowatt hours, and is capable of being recharged from an external source of electricity. [IRA section 1341(d), adding new IRC section 30D(e)(2)(A)]
A qualified sale is defined as a sale of a motor vehicle by a dealer for a sale price $25,000 or less, and which is the first transfer since the date of the enactment of this section to a qualified buyer other than the person with whom the original use commenced [IRA section 13402(c)(2), adding new IRC section 25E(2)(A)–(C)].
A qualified buyer is defined as an individual who purchases such vehicle for use and not for resale, with respect to whom no deduction is allowable with respect to another taxpayer, and who has not been allowed a credit for a previously owned vehicle for any sale during the three-year period prior to the sale [IRA section 13402(c)(3), adding new IRC section 25E(3)(A)–(D)].
No credit is allowed if the lesser of:
- the modified adjusted gross income (AGI) of the taxpayer for the year; or
- the modified AGI of the taxpayer for the preceding year, exceeds—
- in the case of a joint return or a surviving spouse, $300,000,
- in the case of a head of household, $225,000, or
- in the case of any other taxpayer, $150,000.
- Modified AGI is defined as AGI increased by any amount excluded from gross income under IRC section 911, 931, or 933. [IRA section 13402(c)(3), adding new IRC section 25E(10)(A)–(B)]
Refundable Credit for Coverage under a Qualified Health Plan
The refundable credit for coverage under a qualified health plan under IRC section 36B has been extended through tax years beginning before January 1, 2026 [IRA section 12001(a), amending IRC section 36B(b)(3)(A)].
Extension and Modification of Energy Credit
The energy credit under IRC section 48 has been extended respect to property that begins construction before January 1, 2025 (formerly January 1, 2024), with respect to the following energy property:
- Equipment that uses solar energy to generate electricity, to heat or cool (or provide hot water) a structure, or to provide solar process heat, except property used to generate energy for the purposes of heating a swimming pool;
- Equipment that uses solar energy to illuminate the inside of a structure using fiber-optic distributed sunlight;
- Qualified fuel cell property;
- Qualified microturbine property;
- Combined heat and power system property;
- Qualified small wind energy property; and
- Waste energy recovery property.
In addition, the following items are now eligible for the IRC section 48 energy credit if the construction begins before January 1, 2025: energy storage technology property, qualified biogas property, and microgrid controllers.
The credit for combined heat and power system property has been extended for construction that begins before January 1, 2035 (formerly January 1, 2024).
Monetization of Certain Tax Credits
Applicable entities may make an election with respect to any applicable credit it is entitled to receive. These applicable credits may be treated as a payment against the tax imposed by subtitle A of the IRA (for the taxable year in which the credit was determined) equal to the amount of such credit [IRA section 13801(a), adding IRC section 6417(c)(1)].
Partners in partnerships, members of LLCs, and shareholders of S corporations are entitled to their pro rata share of any applicable credit generated by the partnership, LLC or S corporation.
An applicable entity is defined as:
- any organization exempt from the tax imposed by subtitle A;
- any state or political subdivision thereof;
- the Tennessee Valley Authority;
- an Indian tribal government [as defined in IRC section 30D(g)(9)];
- any Alaska Native Corporation (as defined in section 3 of the Alaska Native Claims Settlement Act [43 USC 1602(m)]; or
- any corporation operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural
The applicable credits are as follows:
- The credit for alternative fuel vehicle refueling property allowed under section 30C;
- The renewable electricity production credit determined under section 45(a);
- The credit for carbon oxide sequestration determined under section 45Q(a), as attributable to carbon capture equipment originally placed in service after December 31, 2022;
- The zero-emission nuclear power production credit determined under section 45U(a);
- The credit for production of clean hydrogen determined under section 45V(a), as attributable to qualified clean hydrogen production facilities that are originally placed in service after December 31, 2012;
- The credit for qualified commercial vehicles determined under IRC section 45W;
- The credit for advanced manufacturing production under IRC section 45X(a);
- The clean electricity production credit under IRC section 45Y(a).
- The clean fuel production credit under IRC section 45Z(a);
- The energy credit determined under IRC section 48 ;
- The qualifying advanced energy project credit determined under IRC section 48C; and
- The clean electricity investment credit determined under IRC section 48E.
The taxes included in Subtitle A of the IRA are normal taxes and surtaxes; the tax on self-employment income; unearned income Medicare contributions; the withholding tax on nonresident aliens and foreign corporations; and the tax to enforce reporting on certain foreign accounts;
Extension of Limitation on Excess Business Losses of Noncorporate Taxpayers
The expiration date for the limitation on the SALT deduction of $10,000 has been extended for one year to December 31, 2027 (formerly December 31, 2026) [IRA section 13901(a), amending IRC section 164(2((b)6)].
Extended Limitation on Excess Business Losses of Noncorporate Taxpayers
The IRA extends the expiration date for the limitation on excess business losses of noncorporate taxpayers for one year, to December 31, 2027 (formerly December 31, 2026) [IRA section 13901(b)(1), amending IRC section 461(l)(1)].
Improve Affordability and Reduce Health Insurance Costs
The IRA extends the health insurance premium tax credit enacted in the American Rescue Plan Act of 2021 (P.L. 117-2) for three years, through 2025 [IRA section 12001(a)(2) amending IRC section 34B(b)(a)(iii)].
More than Inflation
Although some may feel that the law’s title, “Inflation Reduction Act,” is a misnomer, because the IRA authorizes $437 billion in additional spending, reducing the cost of living over several years, the IRA additionally generates $737 billion in additional revenue, a net deficit reduction of $300 billion. Only time will tell if the law is ultimately successful in meeting the ambitious goals set for it.
Mark H. Levin, CPA, MST, own account, is a member of The CPA Journal Editorial Advisory Board.