After passing the House of Representatives in the preceding week, the Senate approved the Inflation Reduction Act over the weekend and officially passed the new bill into law this week.
Following on the heels of the previously defeated Build Back Better spending bill and budget proposal, the Inflation Reduction Act aims to pick up where the last failed measure left off.
Considering the bill’s 750-page length, there’s plenty to unpack, scrutinize, criticize, and debate. All of which will happen in the coming months.
In the meantime, the question at hand is: What are the tax ramifications of this newly passed legislation?
Minimum Tax Rate On $1 Billion Corporations
Those corporations with an annual adjusted gross income of $1 billion or more can expect to pay a 15% yearly minimum tax.
Carried Interest Holding Extention
Previously, carried interest earned from investment gains must be held for at least 3 years to be taxed at the “long term hold rate” of 20% (which is the same rate applied to capital gains) rather than at the normal income tax rate of 37%. The Inflation Reduction Act extends the required hold period to 5 years, making this approach a significantly less attractive tax loophole.
$80 Billion IRS Operating Budget Increase
In an effort to improve operations, efficiency, and enforcement, the IRS will receive $3.1 billion for taxpayer services, $4.7 billion for technology upgrades, $25 billion for operations support, and $45.7 for enforcement (reportedly, the agency will be hiring 87,000 new employees). All of which will likely make the IRS “more diligent” in pursuing audits and seeking fines.
Cap On Loss Off-Set Deductions
Pass-through corporations, such as LLCs, Limited Partnerships, and other similarly organized business entities, have been allowed to use business losses to offset tax liabilities on non-business income. The new legislation limits loss offset claims to $250,000 for single filers and $500,000 for married couples filing jointly.
Climate Change Related Measures in The Inflation Reduction Act
Build Back Better included many provisions addressing climate change issues. Much of this was missing from the Inflation Reduction Act, but the following items are still included:
Increased Energy-Efficiency Home Improvement Credit
Homeowners have been eligible for up to a $500 (lifetime maximum) credit on energy efficiency upgrades. The new legislation increases this credit to $1,200 (lifetime maximum).
No Limit on Electric Vehicle Credit
Electric vehicle buyers have been eligible for a tax credit that ranges between $2,500 and $7,500. But the credit was limited to the first 200,000 electric cars sold by each manufacturer. And several popular automakers (Telsa and GM are already over the limit, and Toyota is nearly there) have already hit this cap. The Inflation Reduction Act tosses out the 200,000 car cap and offers the credit across the board. However, the replacement credit, which is set at a flat $7,500, only applies to electric cars with North American-made batteries.
Electric Vehicle Credit Subject to Annual Earnings Limits
The Inflation Reduction Act limits electric vehicle credits to single filers with an adjusted gross income of $150,000 or less and married couples filing jointly with an adjusted gross income of $300,000 or less.
Credit For Used Electric Vehicle Purchases
Under the new legislation, used electric car buyers will receive a credit of $4,000 or 30% of the total purchase price, whichever is lesser.
Expansion of R&D Credit For Small Businesses
Small businesses investing in qualifying research and development projects are eligible for a credit that can be used to reduce taxation on certain expenses. The new legislation increases the amount of this credit that can be applied to payroll taxes.
Extension of Residential Clean Energy Credit
Homeowners are eligible for a credit of up to 30% on the purchase of Solar panels, geothermal heat pumps, small wind generators, and battery storage devices. The Inflation Reduction Act extends this credit for another 10 years through 2033.
Questions About How The Inflation Reduction Act May Impact Your Taxes?
As is always the case with new legislation, there’s a lot to wade through, 750 pages worth! Thus, it takes a while to pin down all the details.
But if any of the items noted above caught your attention, I suggest you get in touch for a FREE consultation!