The Inflation Reduction Act includes extensive tax provisions – part one

IRA new tax provisions

The Inflation Reduction Act (IRA) has its approval from the U.S. Senate and House of Representatives. The bill should be signed into law shortly by President Biden. The IRA includes significant provisions concerning climate change, health care, and taxes. The IRA also addresses the federal budget deficit. The Congressional Budget Office (CBO) estimates that the IRA will cut the deficit by about $90 billion over the next ten years. The expansive $430 billion package is a piece of legislation that will eventually have an impact on the majority of Americans. Here is a summary of some of the new tax provisions:

New tax provisions

First off, how will the federal government pay for everything? Naturally, additional taxes are a factor in the situation (along with savings from, for example, lower drug prices). However, the legislation stands not to increase taxes for individuals, small enterprises, or taxpayers who make less than $400,000. Instead, those who are more wealthy are the targets.

The first target is U.S. corporations (other than S corporations) with yearly earnings of $1 billion or more during the previous three years. Although the current corporation tax rate is 21%, it is well-known that many of these businesses pay little to no federal income tax, partly because of credits and deductions. The IRA imposes a 15% corporate alternative minimum tax on financial statement income, commonly referred to as book income (as opposed to tax income), less depreciation, and net operating losses, among other factors. The new minimum tax is in force for tax years beginning after December 31, 2022.

More exceptions

As a result of last-minute discussions, private equity businesses and hedge funds are exempt from the minimum tax. Protection comes from a clause that considers subsidiaries when calculating annual earnings. The trade-off is that the IRA now extends the excess business loss limits for specific firms for two years.

Although the bill text initially closed the so-called “carried interest” loophole, it eventually persisted. The loophole permits these interests to have a tax rate of long-term capital gains rather than ordinary income. In exchange for Sen. Kyrsten Sinema’s (D-AZ) support, Democrats agreed to remove the clause that would have shut it down. Still, they also inserted another tax to compensate for the lost money. When firms purchase back their stock, the IRA will levy a 1% excise tax on the fair market value.

Sinema announced in a statement that she and Sen. Mark Warner (D-VA) would collaborate on separate legislation to implement carried interest tax reform. However, without going through the budget reconciliation procedure, it would require a majority of the House and 60 votes in the Senate.

Tax enforcement activities

The IRA also gives the IRS roughly $80 billion over ten years to support its “tax enforcement activities” and advance its technology. Notably, the IRS budget has decreased drastically; it will be 20% lower in 2020 than in 2010. According to the CBO, the additional funding will enable the IRS to collect $203 billion from prominent firms and wealthy individuals over the next ten years.

The IRA is a comprehensive piece of law that impacts the majority of Americans and many areas of American industry. Therefore, new information, advice, and regulations are unavoidable regarding its various, extensive tax provisions. Keep an eye out for part two, but feel free to contact our RRBB accountants and advisors in the meantime!

© 2022


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