How New Tax Law Changes Affect Tax Professionals
Congress has enacted a reconciliation package containing several significant tax law changes, many of which will likely impact your clients. President Biden is expected to sign the legislation into law on Tuesday, August 16, 2022.
Inflation Reduction Act
The climate, healthcare, and tax reconciliation package (HR 5376) was previously named the Inflation Reduction Act (IRA) of 2022. However, during consideration on the Senate floor, the name “Inflation Reduction Act of 2022” was removed because the inclusion of the name violated the budget reconciliation rules being used to drive the bill through the Senate. The measure is now formally named “An Act to provide for reconciliation pursuant to title II of S. Con. Res. 14.” But to keep things simple here, we’ll continue to refer to it as the IRA.
The legislation cleared both chambers of Congress without a single Republican vote.
Note. The IRA comes in over 700 pages and makes for quite a lengthy and complicated read should you be so adventurous. It’s worth noting that the final text as enrolled, which includes two amendments, isn’t presented as straightforward as one might expect and requires some jumping around to and from the amendments to get an accurate reading of the law.
So, what does the IRA mean for tax professionals and your clients?
1% Excise Tax on Stock Buybacks
Tax pros need not study the details of the previously proposed tax treatment of carried interest because that was taken out of the bill. In its place, however, the 1% excise tax for certain corporations on stock buybacks was enacted, applicable to repurchases of stock after December 31, 2022.
Although this may not affect many of our corporate clients, you may see increased dividends from corporations. Corporations may use their cash to pay dividends to their shareholders instead of buying back their own stock. We shall see if this means increased dividend income starting in 2023. Also, there may be an uptick of stock buybacks in 2022 before this new tax takes effect.
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15% Book Income Tax
Currently, the new 15% corporate alternative minimum tax (AMT) will not affect many of our clients as the threshold is $1 billion of book income. This has already created great controversy and confusion in the tax and accounting community.
Extension of Limitation on Excess Business Losses of Noncorporate Taxpayers
The IRA would extend the application of section 461(l) for two additional years. Thus, section 461(l) would apply for tax years beginning after December 31, 2020, and before January 1, 2029.
IRS Funding
The IRA provides close to $80 billion of additional, sustained funding for the IRS for increased enforcement, operational improvements, customer service, and systems modernization over the next ten years.
Notably, $45 billion is going towards enforcement – does this mean we are going to see more examinations? The answer is likely yes, though IRS Commissioner Chuck Rettig has said these examinations will be targeted toward wealthy taxpayers and not for those making less than $400,000 annually. Either way, it will take years to recruit, hire, and train the new employees. Congress is hoping this funding will increase collections by $124 billion over ten years.
Climate-Related Provisions
Our clients are likely going to be most interested in the climate-related tax provisions, so let’s dig in:
Energy Efficient Home Improvement Credit
Previously, expenses incurred to make your home more energy efficient were limited to a $500 lifetime credit that expired on December 31, 2021. Now the credit limit for qualifying energy-efficient improvements is a $1,200 annual tax credit with an expiration date of December 31, 2032.
The credit rate increases from 10% to 30% with a new annual limit of $600.
- The credit for efficient windows in increased from $200 to $600.
- The credit for exterior doors, which includes garage doors, goes to $250 each with a $500 maximum.
- The credit for qualified heat pumps, woodstoves and boilers are going from $150 lifetime limit to $2,000 lifetime limit.
In other words, home improvement planning is now tied to tax planning.
Clean Vehicle Credit
This was previously called the Qualified Plug-in Electric Drive Motor Vehicle Credit with a maximum $7,500 credit per vehicle. This credit is renewed starting in 2023 and will last until the end of 2032. Previously there was no MSRP or AGI limits, but that has changed.
The previous tax credit had a cap of 200,000 vehicles and many manufacturers have exceeded that limit which means no tax credits for certain EVs. The new credit removes the 200,000-vehicle limit starting in 2023.
Tax practitioner planning. Instead of waiting to file your tax return, the credit can be obtained at the time you buy the vehicle. However, there are new requirements to get the full credit. The cars must be assembled in North America and that materials and “critical materials” in the battery must come from the US or a country with a free trade agreement with the US. The mineral and material guidelines go into effect in 2024. Stay tuned for guidance on how much credit is available for specific EV cars.
Additionally, there are new MSRP guidelines that did not previously exist. Cars must have an MSRP below $55,000 and SUVs and trucks must have an MSRP below $80,000. Also, there are AGI limitations: under $150,000 for single, $300,000 for married, and $225,000 for head of household.
This also applies to plug-in hybrids (such as the Prius Prime) that have a battery over 7kWh.
Accordingly, if your clients are affected by the AGI or MSRP limits, they may consider getting their EVs in 2022.
Used Electric Vehicles
Also, there is a new credit for used EVs. The credit is the lesser of $4,000 or 30% of the sale price of the cars priced under $25,000 and subject to AGI thresholds: $75,000 for single, $150,000 for married, and $112,500 for head of household.
Qualified Refueling Property Credit
This credit expired at the end of 2021 but is now extended through 2032. This is primarily for electric car charging devices but can also apply for natural gas outlets for a natural gas-powered vehicle. The credit is 30% for individuals and 6% for businesses. The maximum amount for businesses increases to $100,000 from $30,000.
Note. If you client owns a shopping center or apartment building, adding charging stations can be lucrative. Not only will they get a tax credit, but they generate revenue for the electricity from the charging station.
Clean Energy Credit
Those who installed solar panels in 2022 just got a break. The 30% tax credit for solar electric, solar water heaters, fuel cells, wind, biomass, and geothermal energy generating systems will be getting a tax credit to 2034. This 30% credit is retroactive to the beginning of 2022. Before this change, the credit was at 26% and was scheduled to continue to decline. This credit also applies to energy storage, such as the back-up batteries for your home, biogas property, and microgrid controllers.
There is no cap on the amount of the credit, and it is not limited based upon AGI.
Energy Security
Although $369 billion of the IRA is allocated for Energy Security, there are many provisions that will not be reviewed here because they are not expected to have a direct impact upon your clients.
Affordable Care Act
The expanded health insurance subsidies remain intact for 13 million people through the end of 2025 who get their health insurance through the public marketplace. These subsidies would have expired after 2022.
Medicare
The IRA also would allow Medicare to negotiate the price of certain drugs and would cap yearly outlays on prescription drugs under Part D to $2,000, as well cap beneficiaries’ monthly insulin prices at $35.
What’s Missing?
Most notably, Democrats’ longstanding push to repeal the $10,000 cap on the state and local tax (SALT) deduction was not included in the IRA. However, the legislation’s first amendment enacted includes language with a revenue offset that would have extended the SALT limitation. But the second amendment, which was adopted immediately thereafter, in effect replaced the first approved amendment’s SALT limitation revenue offset with a two-year extension of the section 461(l) limitation. Happy reading!
Stay tuned for additional Western CPE updates and courses related to the IRA’s tax law changes.