Inflation Reduction Act of 2022

On August 16, President Biden signed the Inflation Reduction Act of 2022 into law after months of negotiations and changes. Key tax provisions are highlighted below.

August 17, 2022

On August 16, President Biden signed the Inflation Reduction Act into law after months of negotiations and changes. Key tax provisions are highlighted below.

TAX PROVISIONS

Corporate Minimum Tax – The Act creates a 15% corporate minimum tax. The tax is imposed on financial statement income, less foreign tax credits. It applies to corporate taxpayers with an average annual adjusted financial statement income for a three-year period exceeding $1 billion. The Act proposes how to calculate financial statement income for purposes of determining the tax and authorizes the Treasury Secretary to issue regulations and guidance to implement the tax.

1% Excise Tax Replaces Carried Interest Provision– As originally proposed, the bill included provisions that would change the preferential long-term capital gains rate on carried interest. However, the carried interest provision was eliminated to secure the vote of Sen. Kyrsten Sinema, D-Ariz. It was replaced with a 1% excise tax on corporate stock redemptions. As part of its elimination, the Act exempts companies controlled by the same private equity fund from the 15% corporate minimum tax. Absent such an exemption, the “book income” of all companies controlled by the same private equity fund would be aggregated to determine if the “book income” exceeds the $1 billion threshold for imposing the 15% corporate minimum tax. To pay for the change, the Act extends a rule enacted by Republicans in 2017 limiting deductions on business losses that companies can take.

IRS Appropriations and Enforcement – The Act appropriates funds for the Internal Revenue Service to ramp up taxpayer services, enforcement, operations support and business system modernization. It is intended that none of the funds for enforcement be used to increase taxes on any taxpayer with taxable income below $400,000. The Act also proposes an appropriation of $15 million to finance a task force to design an IRS-run free “direct file” tax return system.

WHAT IS NOT INCLUDED

Noticeably missing from the Act is a provision that would change the state and local income tax (SALT) limitation. Senator Manchin has indicated that he opposed changes to the SALT limitation. Under current law, the individual income tax deduction for state and local income tax is limited to $10,000. The reduction or increase in the SALT limitation has been an important issue for many high-tax states.

Also, there are no changes to individual income tax rates or estate, gift and generation skipping tax rates or exemption. Thus, traditional estate planning techniques will not be impacted.

OTHER PROVISIONS

The Act provides provisions for energy security and climate change, which are projected to lower energy costs, increase cleaner energy production and reduce carbon emissions by up to 40% by the year 2030. It also includes provisions for prescription drug pricing reform, which would allow Medicare to negotiate drug prices and caps out-of-pocket cost at $2,000. In addition, the Act lowers Affordable Care Act premiums and extends the expanded Affordable Care Act program for three years, through 2025. The only other major change was the Senate parliamentarian’s removal of a provision to cap the cost of insulin at $35 per month.

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