Once again, Congress has passed and the President has signed legislation into law that has material tax implications. As with anything that comes out of Washington DC, the experts and opinions are so varied that the information being presented has more to do with which news outlet you connect with and less about the numbers and context of the new law.
I am going to give y’all an overview of the information with as little of that nonsense as possible. And of course, more details will be forthcoming over the next few months.
Let’s start with the name. Inflation Reduction Act. The Act is not meant to target Inflation, the name was chosen for marketing purposes and numerous interviews with various elected officials have documented this as such. Point of interest here, we have gone from things being done for “political” reasons to now being done for “marketing” reasons. When you comb through so many different resources to find the truth as we do, it is important to keep track of the how the buzz words are changed but the underlying meaning has not. For the purpose of our information, we will NOT refer to this law as IRA because that was a bad idea. It is confusing and we believe tax is confusing enough.
Will the Act reduce inflation? In the short run, NO. In the long run, it is estimated to have a reduction of .02%.
Will the Act create jobs? No. It is estimated to eliminate 29,000 jobs. Understand, it was NOT written for the purpose of job creation so to judge it on that basis is irrelevant but it seems to be a talking point so I’m adding it as well.
Will the Act increase taxes for all taxpayers? Yes
Will the Act increase tax credits and incentives? Yes
Will the IRS acquire 87,000 new employees? Yes
Will the IRS be carrying guns? Yes. This is NOT NEW!!! Criminal Investigations is the law enforcement division of the Internal Revenue Service, as such, they were already armed. They are one of the most effective law enforcement agencies with regard to financial crimes on the planet. A few months ago, you were likely hearing about the seizures of the Russian yachts due to sanctions placed in response to the Russian/UK War. What was not widely publicized was the who or how these assets were located and seized. These results were from the efforts of the Internal Revenue Service Criminal Investigations. They really are the best at locating and seizing assets. Law enforcement and weapons are not new the Internal Revenue Service.
Will the IRS go after middle class families? Yes. Of course, they will, it is their job. Roughly 80% of audits are correspondence audits and low-income wage earners are five times more likely to be audited than everyone else. This is largely due to the Earned Income Tax Credit. However, the FY 2021 indicated that 4.1% of taxpayers were audited. Currently the IRS employs 81,600 with an annual budget of $11.3 billion (2019). The Act adds an additional $80 billion over the next ten years and an additional 87,000 employees.
Now for the highlights…
Individual Income Taxes
- Pass Through Business Loss Limitations were extended through 2028. These limitations are not lost, they are limited and carried forward.
- Premium Tax Credits for health insurance purchased through the Marketplace has been expanded. The credit is taken against monthly health insurance premiums all year and reconciled in your individual tax return. This can create large adjustments especially when the expected credit is higher than the actual. Many taxpayers have experienced large “tax bill” as the result of changes income from one year to the next.
- It is important to note that this applies to corporations and LLCs that are reporting as a C Corporation on form 1120. 15% minimum tax on BOOK income, applies to corporations with profits over $1 Billion. Think of this like the Alternative Income Tax, those that are subject to this new tax calculate their tax in two ways to determine if they are paying the minimum. A couple of noteworthy differences between book income and tax income are the treatment of items such as depreciation and loss carry forwards. Neither are allowed in the Book income calculations.
- New excise tax was created. 1% excise tax on the value of stock repurchased during a year. The tax is applied after the consideration of new stock issued. This does not apply to stock contributed to retirement plans or Employee Stock Ownerships Plans (ESOP)
- Energy Efficient Home Improvement Credit. For simplicity, I am not including how things are changing, just what is now available. $150 for home energy; $250 for an exterior door ($500 for all exterior doors); $600 for exterior windows and skylights, central AC, electric panels, certain related equipment; natural gas, propane or oil water heaters; natural gas, propane or oil furnaces or water boilers; and $2000 for electric or natural gas heat pump water heaters, etc. With the exception of the last category, there is an annual limit of $1200 for these credits.
- Residential Clean Energy Credit. This is the credit that was previously called Residential Energy Efficient Property Credit. Basically, the credit we used for solar related installations. 30% until 2032. Year 2033 it reduces to 26% and then to 22% for 2034. It is set to expire after 2034. Battery storage will be eligible beginning in 2023.
- High Efficiency Electric Home Rebates. This is a rebate with income qualifying considerations that applies to energy efficient electric appliances. $840 for stove, cooktop, range, oven, or heat pump clothes dryer; $1,750 for heat pump water heater; and $8,000 for a heat pump for space heating or cooling. Additional rebates for non-appliances, $1,600 for insulation, air sealing and ventilation; $2,500 for electric wiring; and $4,000 for an electric load service center upgrade.
- EVs. Qualifying EVs can receive a credit up to $7,500 for new EVs and up to $4,000 for used EVs. Please verify the model prior to purchase. Also noteworthy, in July (yes while this bill was making its way through Congress) Ford increased the price of its EV by $6,000 to $8,500. Chevrolet lowered the price of Bolt by $6,300. Buyer beware of who is actually receiving the benefit of this credit.
Other Tax Provisions
- R&D Credits. This payroll tax credit increases from $250,000 to $500,000 beginning after December 31, 2022.
- 16.4% tax per barrel of oil imported or produced domestically
Tax Planning is becoming more and more important to ensure you are maximizing opportunities and mitigating exposures.
The Act includes other topics that are beyond my scope so I encourage you to reach out to other professionals (i.e., health insurance industry) for further details.