On August 16, 2022 President Biden signed the Inflation Reduction Act into law. The IRA adds allowances (tax credits) in the form of expanded energy incentives, small business credits, healthcare provisions, as credits for individuals and much more.

This is an extensive bill with a lot of detailed information on new tax incentives and limitation. These are just some of the things you should know:

Revenue Raisers & Tax Increases

• Firms averaging over $1 billion annually over a three-year period will have a 15% tax minimum that goes into effect for tax years beginning after 2022.
• Stock buybacks by publicly traded companies are subject to a 1% excise tax. The tax is imposed on the corporation and is equal to 1% of the fair market value of shares repurchased. This applies to stock buybacks that occur in 2023 or later.
• The cap on the write-off for business losses on individual returns has been extended. Currently, trade or business losses over $540,000 for couples filing jointly and $270,000 for other filers is nondeductible with any excess carried forward. In 2021 this was set to end in 2026; now it is extended until 2028.

Small Businesses Credits

• Small business startups could potentially double the amount they can claim from $250,000 to $500,000 per year on the research and development tax credit. To qualify, the small business must have less than $5 million of gross receipts and be less than five years old. The credit can first be claimed for tax year 2023.

Clean Energy Incentives

• The tax break for adding solar panels and alternative or renewable energy sources to your home is extended through 2034. Starting in 2023, the credit is expanded to cover battery storage technology installed in private residences.
• The credit for adding energy-efficient improvements to your main home is back for 2022. The credit is enhanced for 2023 – 2032 as follows:
  • The credit percentage increases to 30% of costs.
  • The $500 lifetime limit is replaced with a $1,200 annual limit.
  • The annual limit is reduced to $600 for exterior windows and skylights and $500 for exterior doors as well as other items.
  • The annual limit increases to $2,000 for a biomass stove, hot water boiler, or an electric or natural gas heat pump put in the home.
  • Now you can take a credit for up to $150 of the cost of a home energy audit.
• Buyers of electric vehicles get a revamped tax credit starting in 2023 of up to $7,500. This credit has many limiting contingencies including the type of vehicle, MSRP, and where the vehicle and battery were manufactured.
• Businesses also get tax breaks to help reduce their carbon footprint. Among them:
  • Extended tax credits for energy production and investment in technologies including wind, solar, and geothermal energies. 
  • An expanded tax credit for energy efficiency in commercial buildings. 
  • New energy credits for sustainable aviation fuel, production of clean hydrogen, the purchase of qualified commercial clean vehicles for business or for lease to others, and power-generating facilities with greenhouse gas emission rates at or below zero.

Health Care Provisions

• Significant health care provisions include enabling Medicare to negotiate the prices of certain drugs. It would allow Medicare to negotiate lower prices for 10 high-cost drugs beginning in 2026, up to 20 drugs by 2029. The bill caps out-of-pocket drug costs at $2,000 per year and patients’ insulin costs at $35 per month for seniors on Medicare starting in 2025.
• Enhancements to the health premium tax credit, a refundable credit that helps eligible individuals and families cover the premiums for their health insurance purchased through the Health Insurance Marketplace, now go through 2025. It was previously slated to expire at the end of 2022.

Lastly, the IRS will receive approximately $80 billion in funding over the course of 10 years. The money is to be used for:

• Audits of big corporations, pass-through entities, high-net-worth individuals, cross-border activities, virtual currency transactions and the like.
• Hiring and training more revenue agents, tax specialists, collectors, and IT professionals.
• Investing more in data analytics for selecting returns for audit.

Please contact your Dermody, Burke & Brown advisor if you would like to discuss any of these tax regulations in more detail.

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.