The Inflation Reduction Act is a significantly scaled back version of the proposed “Build Back Better Act” floated in 2021. Build Back Better included many tax proposals which would impact individuals and businesses, including an increase in the top marginal tax rate, a change in capital gains taxation and imposition of the Net Investment Income Tax (NIIT) on S Corporations. In the Inflation Reduction Act, the most impactful items related to taxation are:
- Corporate Alternative Minimum Tax – this would establish a 15% minimum tax rate on the adjusted financial statement income of corporations with average annual adjusted financial statement income of $1,000,000,000. Adjusted financial statement income is, for all intents and purposes, income as reported on a GAAP audited financial statements, adjusted for certain items.
- Closing the Carried Interest Loophole – in order for applicable service providers to share in the long-term gain character of income, it would require a five-year holding period.
- Increase in IRS Fundings – this would include $3.1 billion to increase taxpayer services, $45.7 billion for IRS enforcement, $25 billion for operations support and $4.7 billion for technology upgrades.
Most notably, many of the provisions of the Build Back Better Act have not been included, which should be a relief for many taxpayers. Additionally, House Representatives from the New York and New Jersey area have stated they will not vote for the bill if it does not change the State and Local Tax (SALT) cap, which has not been included in this bill.
The uses of raised revenue will include health care and programs to address climate change along with deficit reduction. The climate change programs are typically in the form of various tax credits. The bill is 725 pages long and still being analyzed (and again, we caution that the current form is not yet law and changes may be coming), but such credits would include:
- Increase from a $500 lifetime limit for qualifying energy-efficient improvements to a $1,200 annual credit.
- Removal of the manufacturing limit on qualifying electric vehicles – currently impacting General Motors, Tesla, Lexus, and Toyota electric vehicles, which have passed the limit of sold vehicles to allow for the credit under current law and are phasing out or are completely phased out.
- Adjusted Gross Income (AGI) limits of $300,000 for married, $225,000 for head of household and $150,000 for single filers to claim the electric vehicle credit.
- Electric vehicle credits for used electric vehicles of 30% or $4,000, whichever is lower, with AGI limits of $150,000 for married, $112,500 for head of household and $75,000 for single filers.
- Increase of $250,000 for the R&D Credit that can be applied to payroll taxes for qualified small businesses.
- Extensions of the nonbusiness energy property credit (solar credits) for ten years at a credit rate of 30%.
The above changes would all be effective for tax year starting January 1, 2023.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.