5 Big Takeaways from the Inflation Reduction Act
On August 16th, President Joe Biden signed the Inflation Reduction Act of 2022 into law, earmarking $740 billion for the reduction of carbon emissions, corporate tax reform, and domestic energy production and manufacturing.
For the Biden Administration, this will be the most impactful legislation so far - replacing the now defunct Build Back Better Act, which failed to gain enough approval from the U.S. Senate.
What's in the Inflation Reduction Act?
As a slimmed-down version of the Build Back Better Act, the so-called Inflation Reduction Act still includes some of the key provisions, and a fair share of its impact will be felt in the tax and accounting world.
Corporate Tax Reform
For tax years beginning after December 31st, 2022, the IRA "imposes an alternative minimum tax of 15% of the average annual adjusted financial statement income of domestic corporations (excluding Subchapter S corporations, regulated investment companies, and real estate investment trusts) that exceeds $1 billion over a specified 3-year period."
This tax reform, along with the 1% fee on stock buybacks, and increased funding for IRS enforcement is aimed at helping close tax loopholes used by the wealthy. According to the Joint Committee on Taxation estimate, the 15% Corporate Minimum Tax is expected to raise $222 billion in revenue.
The AICPA did raise some concerns, though. In a news release from August 5th, before the act had been signed into law, the ACIPA wrote, "The AICPA believes that the Corporate Alternative Minimum Tax proposal contained in Section 10101 violates numerous elements of good tax policy and may result in unintended consequences that must be carefully considered. Imposing tax according to financial statement income takes the definition of taxable income out of Congress’ hands and puts it into the hands of industry regulators and others. Among the many key conceptual differences between financial income and taxable income is the concept of materiality. Public policy taxation goals should not have a role in influencing accounting standards or the resulting financial reporting."
Excise Tax on Repurchase of Corporate Stock
The IRA imposes a "1% excise tax on the fair market value of stock repurchased by a domestic corporation after 2022, with certain exceptions."
Excise taxes are most commonly associated with fuel, tobacco, and alcohol - now they will also apply to the repurchase of corporate stock, beginning after December 31, 2022.
This provision also covers affiliates of corporations, such as any corporation that owns more than 50 percent of the stock or a partnership that represents more than 50 percent of the capital interests or profits.
"The bill provides additional funding for the Internal Revenue Service for taxpayer services and enforcement, including for operations support, business systems modernization, and the development of a free direct e-file tax return system."
According to the Congressional Budget Office estimate, this increased IRS funding investment should generate $124 billion in revenue. Some of the biggest enhancements will be via enforcement such as collecting owed taxes, providing legal support, conducting criminal investigations, providing digital asset monitoring and compliance activities, and enforcing criminal statutes related to violations of IRS laws.
Alongside their comments on the Corporate Tax, the AICPA also released a statement regarding the enhancement of IRS funding, "The AICPA believes that the Internal Revenue Service (IRS) should be funded at necessary levels to allow it to handle all the duties required of it by Congress, including properly administering and enforcing our nation’s tax laws as well as providing needed assistance to taxpayers and their advisors in a timely and professional manner. However, the AICPA also believes that enforcement actions must be in balance with the services the IRS provides to taxpayers. Given the historic low levels of IRS taxpayer services, the AICPA is concerned about a possible imbalance between the funding for taxpayer services and enforcement."
Climate Change, Renewable Energy, and Energy Security
A large section of the law will be aimed at curbing climate change and encouraging renewable energy among manufacturers and consumers, including creating programs that will provide rebates, funding for the Department of Energy, funding for many natural resource programs, and much more which will ultimately invest $370 billion into expanding renewable energy infrastructure.
There's a lot to take in under the renewable energy umbrella but what is going to be particularly relevant for the accounting world are the renewable energy tax credits that will be created, as well as some that will be modified and extended under IRA.
Tax Credit Extensions
- "The bill modifies and extends through 2024 tax credits (1) for producing electricity from renewable resources, specifically for wind, biomass, geothermal and solar, landfill gas, trash, qualified hydropower, and marine and hydrokinetic resources; (2) for investment in certain energy properties (e.g., solar, fuel cells, waste energy recovery, combined heat and power, small wind property, and microturbine property); and (3) for alternative fuels and fuel mixtures, and biodiesel and renewable diesel."
- The bill modifies and extends through 2032 (1) the tax credit for nonbusiness energy property and increases its rate to 30%, with certain limitations; (2) the new energy efficient home credit; and (3) the tax credit for alternate fuel refueling property expenditures.
- The bill modifies requirements for the tax deduction for energy-efficient commercial buildings.
New Tax Credits
- "The bill creates new tax credits for (1) qualifying zero-emission nuclear power produced and sold after 2023, (2) the sale or mixture of sustainable aviation fuel beginning in 2023, (3) the production of clean hydrogen, (4) the production of clean electricity and for investment in zero-emissions electricity generation facilities or energy storage technology, (5) domestic clean fuel production beginning in 2025, and (6) the domestic production and sale of qualifying solar and wind components."
- "The bill creates a new credit for commercial clean vehicles and modifies the refundable tax credit for the purchase of plug-in electric vehicles and previously-owned electric vehicles."
Whew! There is a ton to digest from the sprawling 273-page Inflation Reduction Act, including additional provisions regarding medicare and prescription drug reform, natural resource programs, and more that won't immediately impact the accounting realm.
As far as the changes to Corporate Tax Reform, Excise Taxes, IRS funding, and new or extended tax credits, MRPR is ready to put our nearly 50 years of experience to work. With most of these provisions going into effect next year, we're happy to guide you through the changes your company may need to make now to prepare for the Inflation Reduction Act of 2022.