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Inflation Reduction Act Extends Tax Credits, Increases IRS Budget

On Tuesday, August 16, President Biden signed the sweeping Inflation Reduction Act of 2022 into law. The Act is intended to lower the national deficit and, as a result, fight the rising inflation rate that has affected all aspects of the economy, including interest rates, consumer spending, employment rates and business development. The legislation, introduced by Senate Majority Leader Chuck Schumer and Senator Joe Manchin, includes plans to raise corporate taxes, invest in clean energy, extend the Affordable Care Act and lower prescription drug costs.

According to the Committee for a Responsible Federal Budget, the Act will reduce the deficit by $305 billion through the next decade, cut net taxes by $2 billion per year through expanded energy and climate tax credits and generate almost $300 billion in net revenue, primarily attributable to improved tax compliance efforts and the effects of higher wages as a result of lower health premiums. While the legislation aims to address multiple issues facing the country, many want to know how it would affect the average American, particularly as it relates to their taxes. Key highlights of the Act include:

Higher Taxes – For Large Corporations

While the Inflation Reduction Act imposes a 15% minimum tax on corporations with profits over $1 billion, it does not include any new taxes on small businesses or families making less than $400,000. Lawmakers explicitly stated that there will be no new taxes for small businesses and middle-class income families.

Increased IRS Budget

As a method of generating revenue and improving tax compliance efforts, the Act will increase the IRS budget an additional $80 billion over the next ten years. $46.5 billion of the budget will go toward enforcement activity, while the remaining funding will be used to enhance IRS operational efficiency, improve customer service and modernize technology. Forbes predicts that the increase in enforcement spending will not affect small businesses or working families, but rather will be directed toward collecting tax revenue from large corporations.

Clean Energy Tax Credits

The Act includes provisions that could benefit homeowners and certain car buyers. As part of the efforts to encourage clean energy production, the Act includes a tax credit extension for homeowners installing solar projects and purchasing other clean energy items, including energy efficient water heaters and HVAC systems. The Act extends tax credits for those buying a new or used electric vehicle to 2032, excluding high priced luxury vehicles, and also includes an option to take advantage of the tax credits at the time of purchase rather than waiting until tax season to reap the plan’s benefits.

The Act also extends the Fuel Tax Credit to December 31, 2024, allowing taxpayers additional time to claim credits for biodiesel, renewable diesel and alternative fuel sold at retail by or used in the taxpayer’s trade or business.

Energy Efficient Building Deduction & Credit

Intended to incentivize the construction and renovation of energy efficient buildings, the Inflation Reduction Act will extend and expand the 179D deduction and 45L tax credit. The 179D deduction allows building owners to claim a tax deduction for the installation of qualified energy efficient building systems – the Act is extending the deduction to December 31, 2022 and increasing the deduction from $1.88 to $5 maximum per square foot. It is also extending the 45L tax credit through December 31, 2032. Beginning January 1, 2023, qualified developers will be able to claim a $5,000 tax credit for energy efficient multifamily and single-family homes, increased from $2,000.

Increased Payroll Tax Credits for R&D Expenditures

The Act will increase refundable payroll tax credits for research and development for small businesses from $250,000 to $500,000. The tax credit could apply to business owners investing in business improvement projects, including implementing new products, processes, software and more. This provision is very beneficial to many business owners that can’t claim the R&D tax credit against their income tax but can claim the credit against their payroll taxes.

1% Stock Buyback Tax

As an additional tax generation method, the Act will impose a 1% excise tax on stock buybacks. The tax is projected to raise $74 billion over the next ten years and is key to funding many clean energy initiatives. Taxing a firm’s repurchased shares is a newer funding solution, as stock buybacks were illegal until 1982 and have never been taxed before.

Excess Business Loss Limitation Extended

The Inflation Reduction Act will extend Sec 461(I) of the Internal Revenue Code an additional two years to 2028. Currently, noncorporate taxpayers’ business losses are limited to $262,000 for single taxpayers and $524,000 for joint filers due to Sec 461(I). The provision was temporarily lifted in 2020 as a result of the CARES Act.

What’s Next?

While the Act will not directly impact many Americans’ taxes, it could provide more tax credit options for small business owners, homeowners and electric car buyers. We will continue to monitor the implications of the Act and report any updates. If you have questions about how the newly enacted law could affect you or your business, contact a member of the Janover team today.

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