Proposed Legislation: Inflation Reduction Act of 2022

On July 27, 2022, Senator Joe Manchin and Senate Majority Leader Chuck Schumer announced an agreement on a slimmed-down reconciliation package stemming from negotiations on the proposed Build Back Better Act. Here’s a look at the proposed legislation and how it would affect taxes, climate change and drug prices.

August 1, 2022

On July 27, 2022, Senator Joe Manchin (D-WV) and Senate Majority Leader Chuck Schumer (D-NY) announced an agreement on a slimmed-down reconciliation package stemming from negotiations on the proposed Build Back Better Act. The proposed legislation includes a deal on taxes, climate change and drug prices.

Tax Provisions

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

Carried Interest – The Act includes provisions that would change the preferential long-term capital gains rate on carried interest. Congress has previously attempted to close this preferential treatment with limited success. A carried interest, in general, is the performance-based compensation (usually 20%) paid to managers of certain investment partnerships and is taxed at long-term capital gains rates. The Act would increase the long-term capital gains holding period of carried interest from the current three years to five years. Income from carried interest held less than the five-year holding period would be taxed at the higher short-term capital gains rate. The provision would not apply to those with adjustable gross income below $400,000. Those individuals would be subject to a three-year holding period in order to obtain preferential long-term capital gains treatment on carried interest. 

IRS Appropriations and EnforcementThe bill would appropriate 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 bill 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 for the bill is a provision reducing the state and local income tax (SALT) limitation. Senator Manchin has indicated that he opposes 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 may high tax states.

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

Other Provisions

The bill 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. The bill also includes provisions for prescription drug pricing reform, which would allow Medicare to negotiate drug prices and caps out-of-pocket cost to $2,000. In addition, the bill would lower the Affordable Care Act healthcare premiums and extend the expanded Affordable Care Act program for three years through 2025.

Where the Bill Goes From Here

The Senate leadership intends to bring the bill up for consideration under the budget reconciliation rules prior to the Senate’s August recess. Under the budget reconciliation process, only 51 Senate votes are needed to pass legislation rather than the normal 60 votes. Given the Republican opposition, the bill would need the support of all 50 Democratic Senators, with Vice President Harris casting the 51st vote to ensure passage. Given the delicate nature of the negotiations with Senator Manchin, it is likely that there will be no further changes to the bill.

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