After numerous twists and turns, the Inflation Reduction Act (the IRA) was finally signed into law by the president on August 16. Among other aspects, the new law addresses climate control, extends health insurance subsidiaries and permits Medicare to negotiate drug prices. But it also includes the following key tax provisions for individuals and businesses.

Corporate minimum tax: The massive Tax Cuts and Jobs Act (TCJA) imposed a flat tax rate of 21% on corporations, but some corporate heavyweights are able to sidestep the tax. Beginning in 2023, the new law imposes a 15% minimum tax on corporations with average annual adjusted financial statement income above $1 billion for three consecutive tax years. A $100 million threshold applies to certain foreign-backed corporations. Other special rules may come into play.

Stock buybacks: Due to a late addition to the IRA, corporations will be required to pay a 1% excise tax when they purchase their own stock from shareholders. As opposed to corporate dividends, which are currently taxable, stock buybacks result in capital gains that may effectively go untaxed for years or even forever. This new law provision, which takes effect in 2023, reduces the tax advantage.

Energy credits: The new law enhances several tax credits for “going green.” Consider these points:

  • Buyers of new electric vehicles (EVs) will be eligible for a credit of up to $7,500 for qualified EVs placed in service before 2033. Also, the manufacturer’s maximum threshold of 200,000 vehicles sold is eliminated after 2022. But certain high-income taxpayers cannot claim the credit.
  • A credit of up to $4,000 may be available for buying a used EV subject to more modest income eligibility limits.  Side note:  Mercedes has started production of their EQS electric vehicle in Alabama (down the road) in August 2022. 
  • The IRS expands and extends a 30% credit for installing solar panels or other renewable energy equipment. Costs incurred from the beginning of 2022 may qualify before the credit begins to phase out in 2033.
  • A 30% residential energy credit is generally available up to a maximum of $1,200 ($2,000 in some cases), with annual caps on certain items, for 2023 through 2032.

We will have more details on the “new and improved” energy credits in future issues.

Excess business losses: Under the TCJA, owners of pass-through entities—including S corporation owners, partners in a partnership and some limited liability company (LLC) owners, as well as sole proprietors—cannot claim excess business losses against non-business income. The thresholds are $250,000 for single filers and $500,000 for joint filers. (The indexed thresholds for 2022 are $270,000 and $540,000, respectively.) This provision was scheduled to expire after 2025 but was extended through 2026 by subsequent legislation. Now the IRA extends it again through 2028.

Research credits: Currently, a qualified start-up business can elect to use up to $250,000 of qualified research credits to offset payroll taxes instead of income taxes. This tax break may be available to businesses with annual gross receipts of $5 million or less. The new law increases the $250,000 cap to $500,000 after 2021.

IRS administration and enforcement: The IRA sets aside an additional $3.18 billion for the IRS to provide taxpayer and other services. In an attempt to close an estimated $441 billion tax gap and provide more resources for the agency, which has been underfunded for years, the new law also appropriates $45.6 billion more for various tax collection and investigation services. Note: The new law establishes that the likelihood of families with taxable income below $400,000 being targeted for audits will not increase.

Significantly, the final version of the new law did not crack down on the “carried interest” loophole, as was initially proposed. This tax break enables certain investment managers to benefit from favorable capital gain rates after a three-year holding period. Nor did the IRA eliminate the $10,000 annual cap on state and local tax (SALT) payments imposed by the TCJA, for which some members of Congress had advocated.

Reminder: This is only an overview. Contact your JMF professional tax advisors concerning your situation.