The Inflation Reduction Act – What US Companies and Individual Taxpayers Need to Know

September 13, 2022

At a glance

  • The main takeaway: On August 16, 2022, President Biden signed the Inflation Reduction Act into law. The $750 billion bill, passed through the Budget Reconciliation Process, contains a number of provisions that address healthcare, climate change and energy efficiency.
  • Impact on your business:  The act includes several tax increase provisions largely aimed at high-revenue US and multinational companies, and indirectly, high-income individual taxpayers. However, the extension of the rules limiting loss deductions for noncorporate taxpayers will impact taxpayers doing business through pass-through entities, and the excise tax on corporate stock buybacks may provide a disincentive for companies to continue repurchases, which would in turn trickle down to investors.
  • Next steps: The rules governing the new Chips tax credit are complex and will continue to evolve as a lot of details remain to be clarified. Aprio’s Manufacturing and Distribution team as well as the R&D Tax Credits and Incentives Consulting team are both monitoring these developments and are beginning to advise clients on the particulars of the Inflation Reduction and CHIPS Acts. Your Aprio tax advisor can help you determine whether your business may benefit from this potentially valuable tax credit.

Schedule a consultation with Aprio’s Manufacturing and Distribution Services team today.

The full story:

The Inflation Reduction Act (IRA) of 2022, signed by President Biden on August 16, creates, extends, or expands a significant number of tax credits, rebates and grants designed to increase investment in clean energy for both individuals and businesses. 

Favorable benefits for individual taxpayers

Provisions intended to benefit individual taxpayers include the extension and/or expansion of several tax credits for making energy-efficient home improvements. This includes an extension of the nonbusiness energy property credit, which is generally applicable for the installation of heat pumps, solar rooftops, electric HVAC systems and energy-efficient water heaters. The modification of this credit also removes the lifetime limitation on the credit amount in favor of a $1,200 annual limitation.

Additionally, the act includes a new tax credit of up to $4,000 for used electric vehicles and an expanded $7,500 credit for the purchase of new electric vehicles. These credits may be transferred to the dealer selling the car in exchange for payment, effectively making them immediately refundable. New zero-emissions sedans will qualify for the credit if they have an MSRP up to $55,000 while zero-emissions trucks, vans and SUVs will qualify if their MSRP is up to $80,000. The credits are available to taxpayers with an adjusted gross income (AGI) lower than $150,000 ($300,000 MFJ). The bill has certain limitations and phase-ins related to requirements that the vehicles must be assembled in the US, which will exclude many vehicles that would have qualified under earlier tax credit programs.

The act also contains funding for initiatives aimed at businesses.

In particular, there is program funding to accelerate domestic manufacturing of components of clean energy generation, funding for production of heat pumps and critical processing of minerals, grants for retooling auto manufacturing facilities to build clean vehicles and loans for building new clean vehicle manufacturing facilities among other clean energy projects.

Several existing business energy credits were extended and, in some cases, modified. Generally, the modifications to existing credits serve to extend the duration of the credit; some of the modifications add a wage and/or apprenticeship requirement to claim credit amounts. A key component of the new and extended business credits allows the company that originally generates the credit to transfer those credits to unrelated taxpayers, essentially allowing businesses to sell their credits to eligible entities.

The bill contains several revenue-raising provisions to offset direct spending and tax expenditures.

The bill includes three specific tax increases to offset the spending provisions of the bill by raising revenues.

  1. First, the bill reinstates a version of the corporate alternative minimum tax (AMT). This is a 15% tax on a corporation’s adjusted financial statement income (AFSI). AFSI is the corporation’s book net income or loss with certain adjustments. In a last-minute change, Senators agreed that one of the permitted adjustments would be to allow corporations subject to the tax to apply accelerated depreciation to reduce ASFI. This corporate AMT will be applicable to C corporations that have an average annual AFSI over a three-year window in excess of $1 billion.
  2. Multinational groups consisting of a foreign parent corporation and at least one U.S. subsidiary (“Foreign-Parented Multinational Group, or “FPMGs”) must meet two separate tests with a lower threshold applicable to the U.S. subsidiary member of the controlled group:
    • First, the corporation must meet the $1 billion threshold, determined by including the AFSI of all members of the FPMG in the controlled group;
    • If the U.S. subsidiary members of the FPMG have an Average Annual AFSI of $100 million or greater, then the U.S. subsidiary is subject to the corporate AMT
  3. There is a new 1% excise tax on the fair market value of stock repurchased by a publicly traded US corporation. This value is reduced by the value of stock issued by the corporation during the taxable year. Certain transactions, such as some types of tax-free reorganizations, repurchases that are treated as dividends and certain other transactions are exempt from the tax. However, there are circumstances where a foreign corporation stock could be subject to this excise tax. While it is uncertain at the outset how this new tax may change corporate behavior in the use of buybacks as a way to reward shareholders and boost share prices, it is possible that some companies may change their strategies to increase dividends to stockholders to avoid the tax.
  4. The final tax increase is the extension of the limitation of excess business losses incurred by nonbusiness taxpayers. The excess business loss limitation was set to expire at the end of 2025 but will now expire at the end of 2027. This limitation generally prevents individuals from deducting more than $250,000 ($500,000 MFJ) in net losses from one or more pass-through entities, including disregarded entities such as sole proprietorships. These amounts are indexed for inflation. Disallowed losses are converted to net operating losses under the applicable rules.

The act also provides for increased IRS funding for additional enforcement, as well as system improvements.

A provision in the act that has generated significant attention, as well as misunderstanding, is a section granting $87 billion in additional funding to allow the IRS to improve its systems, clear its backlog of unprocessed returns and taxpayer responses, and enhance its examination and enforcement regime. The bill provides for increased audits of high-earning individuals and large corporations. The act explicitly bars the use of the additional funding to increase tax audits or collections on individuals with less than $400,000 in taxable income.

It is unlikely that most taxpayers will see an immediate impact of this additional funding, since the lead time to hire and train IRS revenue officers can be significant. One benefit many tax advisers and preparers hope to see is an improvement in processing and response time from the IRS in dealing with both tax returns and taxpayer inquiries.

The bottom line

While the specific tax increases may not create an immediate impact for the majority of American taxpayers, those business entities that will be subject to some, or all, of the provisions will see drastic changes. There are several details to be worked out regarding both the revived corporate AMT and the excise tax on stock share buybacks, but businesses facing these taxes need to begin planning now to meet complex and costly new filing and payment obligations.

Aprio’s Manufacturing and Distribution Services team and R&D Tax Credits and Incentives Consulting team are closely following the impact and specifics of this new tax law. Aprio tax advisors can provide you with the guidance you need to determine whether your company can benefit from these tax credit provisions or be negatively impacted by the tax increases included in the bill.

Schedule a consultation with Aprio’s Manufacturing and Distribution Services team today.

Related resources

Stay informed with Aprio.

Get industry news and leading insights delivered straight to your inbox.

Stay informed with Aprio. Subscribe now.

About the Author

Chris Henderson

Manufacturing & Distribution | Senior Tax Manager | Advises manufacturing and distribution clients on R&D tax credits to advance their business goals

David Fraser

Tax Partner | Focus on helping high-net-worth individuals make more money and keep more of the money they make