On August 16th, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. The IRA contains provisions that increase funding for Internal Revenue Service (IRS) enforcement and modernization, introduce a new corporate minimum tax and stock buyback taxes, and create significant new credits and incentives related to renewable energy development and climate change. It is largely a reworking and repackaging of prior legislative efforts, principally the proposed Build Back Better Act that stalled in the U.S. Senate in early 2022. The new bill also aims to change how Medicare handles prescription drug payments.
Business Tax Provisions
15% Corporate Minimum Tax
As part of the IRA, the Alternative Minimum Tax (also known as the book minimum tax) has been reinstated for corporations with book profits above $1 billion for the three consecutive years preceding the tax year. Companies that previously had the ability to pay little to no taxes because of credits and/or deductions will now be subject to a 15 percent corporate Alternative Minimum Tax which is applied to the amount of income corporations publicly report to shareholders on their financial earning statements instead of taxable income. This provision will ensure that the 125 corporations with average profits of roughly $9 billion and effective tax rates of barely 1.1 percent pay their fair share of tax and raise $222 billion.
Extension of Limit on Deductions for Business Losses
The Limitation on Excess Business Losses was implemented by the 2017 Tax Cuts and Jobs Act. This law disallows pass-through owners (sole proprietorships, some limited liability companies, partnerships, and S-corporations) from deducting business losses from non-business income that exceeds $250,000 for single filers and $500,000 for married couples filing joint returns. This is law was set to expire in 2026 but has been extended until 2028 by the IRA. Due to an inflation adjustment, these limitations will be greater in 2022: $270,000 and $540,000, respectively. The bill would raise an additional $52 billion by extending the limitation on excess business losses for two years.
1 % Excise Tax on Stock Buybacks
A new 1% excise tax applies to corporate stock repurchases after December 31, 2022. The tax is paid on the stock’s fair market value (FMV). The excise tax does not apply if (1) the total value of stock repurchased during a tax year is $1 million or less; (2) if repurchased stock is contributed to an employer-sponsored retirement plan, employee stock ownership plan (3) for stock repurchases that are part of a reorganization in which the shareholder recognizes no gain or loss. According to projections, the stock buyback tax will raise $74 billion over the next ten years, which will be essential for paying for some of the major programs like the subsidies for electric car purchases.
Increased Small Business Research Tax Credit
Before the IRA, a small business with qualifying research expenses had the option of claiming a payroll tax credit of up to $250,000 against the employer’s share of Social Security tax to increase research activities. For tax years beginning after December 31, 2022, the credit doubles to $500,000. The first $250,000 of the credit will be applied against the FICA payroll tax liability. After that, the additional $250,000 will be applied against the employer portion of Medicare payroll tax liability.
Extended Premium Tax Credits
The IRA extends these premium tax credits, which were initially scheduled to lapse at the end of 2022, to last until 2025 so that millions of Americans can avoid significant premium increases and obtain the tax credits they require to access affordable healthcare. The American Rescue Plan Act of 2021 initially expanded the eligibility for the premium tax credits for Affordable Care Act plans. For those whose earnings are below 400 percent of the federal poverty line (FPL), ARPA increased the premium subsidies and extended eligibility to those with higher incomes, allowing them to obtain subsidized coverage through the marketplaces.
Prescription Drug Provisions
Among the many significant provisions of this Act are numerous modifications to Medicare’s prescription medication coverage and safeguards to protect patients from high drug costs.
$ 45.5 Billion for Tax Enforcement
The IRA would give the IRS $45.6 billion for actions related to tax collection, including recruiting more enforcement agents, offering legal assistance, and investing in “investigative technologies.” Additionally, the funds will also be used to keep track of and enforce taxes on digital assets like cryptocurrency.
According to the government, the average individual taxpayer should anticipate little to no change in how taxes are enforced. In the upcoming years, the audit rates for high-net-worth individuals and large corporate taxpayers are expected to increase.
However, the IRS will actively invest money in improving its audit targeting, so taxpayers should be aware that they may be more likely to be audited if they engage in specific transactions. The IRS routinely publishes lists of issues where more enforcement is necessary.
$ 3.2 Billion Taxpayer Services
A total of $3.2 billion would be made available through the IRA for tax-related services such as filing and account support, help with prefilling, and education.
The COVID-19 pandemic, several stimulus-related tax law changes that Congress authorized the IRS to implement, years of budget cuts, and a reduced workforce all played a part in the perfect storm that resulted in the IRS having a backlog of millions of incomplete returns and delayed tax refunds.
The National Taxpayer Advocate reported that the IRS had 21.3 million unprocessed paper tax returns in its backlog at the end of May 2022, an increase of 1.3 million from the same time the previous year.
$ 25.3 Billion for Operations Support
IRA allocates $25.3 billion to support IRS operations. Funding for operations support will support taxpayer services and enforcement programs.
When the IRS receives funding for operations support, it will be used to support taxpayer services and enforcement initiatives, as well as “rent payments, facilities services, printing, postage, physical security, headquarters and other IRS-wide administration activities, research and statistics of income, telecommunications, information technology development, enhancement, operations, maintenance, and security, and the hiring of passenger motor vehicles.”
Also included in the funding is $15 million to support a task force that would research the costs and viability of establishing a direct e-file program that would enable individual taxpayers to file their own returns without the assistance of a third-party supplier.
$2.8 Billion for Business System Modernization
A budget of $4.8 billion will be used to modernize some of the extremely outdated digital business systems that are used to manage operations, cybersecurity, and taxpayer services.
In the upcoming months, the IRS will provide further guidance about these and other provisions.
Tax Planning Services
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