Breaking down the Inflation Reduction Act

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With the Inflation Reduction Act of 2022 signed into law by President Joe Biden last week, here’s an in-depth breakdown of what it includes for tax provisions.

IRS Funding

While it may not directly impact tax law, the additional funding is meant to help address the backlog and taxpayer services. Most of the funding will go to adding agents for compliance purposes, although the IRS has stated publicly that it will not increase its audit ratio for taxpayers with less than $400,000 in income.

Corporate Tax Changes

A 1% excise tax will be instituted on stock buybacks that occur after 12/31/2022. Corporations have long used stock buybacks as a means to put money back in the hands of stockholders or bolster stock prices. The hope with this excise tax is to encourage more companies to reinvest in their organizations including through salaries for their employees.

A 15% minimum corporate tax will be instituted for corporations with more than $ 1 billion in book basis net income. This is a huge change from any previous legislation which would have only applied to tax basis net income. However, given the $1 billion mark, this particular provision is only expected to impact roughly 200 organizations.

Non-corporate filers will continue to have loss limitations through 2027 as a result of an expanded provision included in this act. Research and development tax credits are also expanded, however. Up to $250,000 in credits can now be applied to Medicare tax in addition to the $250,000 already allowed to be applied to payroll taxes, effectively doubling the opportunity for businesses to take advantage of the credit.

Personal Tax Changes

Energy credits are given life back and expanded with higher dollar credits beginning in 2023. Residential energy credits for new homes built that meet energy standards are eligible for up to $2,500 in credits beginning next year. Credits are also available for multi-family residences and the bill requires builders to satisfy prevailing wage requirements.

The overall objective and hope of the bill is the creation of jobs focused on energy efficiency, lowering healthcare costs (the affordable care provisions are extended as well as provisions for Medicare prescription drug costs), and focusing on larger corporations for tax increases. However, many of the provisions will not result in tangible impacts until 2024.

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