The Inflation Reduction Act (IRA) was introduced last week to help reduce inflation. The bill is estimated to increase net revenues by $304 billion from 2022 to 2031.
The updated draft legislation of the IRA would include the following significant changes, effective beginning after December 31, 2022, unless otherwise stated. The latest proposal does not have some of the significant tax rate increases in the House-passed Build Back Better Act. Over the long run, the IRA would raise marginal income tax rates that higher earners and corporations face. The carried interest changes would eliminate favorable capital gain for private equity and hedge manager funds.
Corporate and International Taxes
- Imposes a 15 percent minimum tax on corporate book income for corporations with profits over $1 billion, effective for tax years beginning after December 31, 2022. Corporations would generally be eligible to claim net operating losses and tax credits against the AMT. They would be eligible to claim a tax credit against the regular corporate tax for AMT paid in prior years to the extent that regular tax liability exceeds 15 percent of the corporation’s adjusted financial statement income in any year.
Individual Income Taxes
- Extends the expanded health insurance Premium Tax Credits provided in the American Rescue Plan Act (ARPA), including allowing higher-income households to qualify for the credits and boosting the subsidy for lower-income households through the end of 2025.
- Extends the required holding period for carried interest to be taxed as a long-term capital gain from three to five years for taxpayers with an adjusted gross income equal to or greater than $400,000.
Other Tax Proposals
- Modifies, extends, and creates a variety of tax credits for green energy through 2031-2033 including:
- 10 years of consumer tax credits to make homes energy efficient and run on clean energy, making heat pumps, rooftop solar, electric HVAC and water heaters more affordable.
- $4,000 consumer tax credit for lower/middle income individuals to buy used clean vehicles, and up to $7,500 tax credit to buy clean vehicles.
- Reinstates the Superfund tax on crude oil and imported petroleum at 16.4 cents per gallon (indexed to inflation) and increases other taxes and fees on the fossil fuel sector.
- Additional funding for the IRS.
- Health care changes (prescription drug pricing) and Affordable Care Act extension. Imposes a 95 percent excise tax penalty on drug manufacturers to lower drug prices.
- Increases the research & development tax credit amount that can be claimed against payroll taxes for small businesses by $250,000.
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Maria is a Partner at Wilke & Associates, serving closely held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.