Debates abound on whether the recently passed Inflation Reduction Act of 2022 will have any real influence on inflation, but what we do know is that the funding, credits, and changes included in the Act have the potential to impact many of the individuals and small businesses that we work with.
Highlights from the Inflation Reduction Act
The signing of the Inflation Reduction Action (IRA) into law includes changes that address environmental objectives and healthcare costs with funding for it coming from an expected increase in Internal Revenue Service (IRS) collections and an excise tax on stock buybacks.
- Credits for residential homeowners and commercial businesses to implement clean air initiatives
- An expansion of alternative-fueled vehicle credits that will include pre-owned and commercial vehicles beginning in 2023
- A cap on insulin prices and the ability for Medicare to negotiate drug pricing with pharmaceutical companies
- An extension to the Affordable Care Act’s premium subsidies for individuals
- Extended deadlines and threshold changes to existing legislation
- $80 billion in funding to the IRS to aid in tax collection and compliance
Beginning in 2023, the $35 cap on insulin costs is a welcome change for the 37 million Americans who live with diabetes. The cost-sharing formula has the potential to drive the cost even lower beginning in 2026 when insurance companies must also consider the maximum fair price and negotiated price of insulin when determining their co-pay amounts.
While the introduction of the Drug Price Negotiation Program is a welcome step for those not in the pharmaceutical industry, it isn’t set to reach individuals before 2026, and even then, currently is restricted to 10 drugs that will be chosen for the program.
The Affordable Care Act’s premium subsidies for individuals is extended through 2025 for those with income that exceeds 400% of the federal poverty level. Non-subsidized small businesses, however, will likely face inflation-impacted premiums in 2023.
Tax Filing and Enforcement
Substantial funding will be available to the IRS and related tax enforcement bodies (Treasury inspector, U.S. Tax Court, etc.) beginning September 20, 2022. For the IRS, the funds are to be utilized for specific areas:
- Taxpayer Services – such as education and taxpayer advocacy services
- Enforcement – including digital asset monitoring
- Operations Support
- Business Systems Modernization
Whether individuals and businesses are in compliance or not, it’s natural to have concerns about the potential for audit and whether you interpreted the tax laws in the same way that the IRS would. Consult with your tax professional about any concerns you have or to receive guidance on managing your digital assets.
Clean Air Initiatives
Several welcome changes that affect both individuals and small businesses were packaged in the clean air initiatives within the Inflation Reduction Act with incentives added for automakers to produce more vehicles in a lower price range. The calculation of the vehicle tax credit has also changed so take care to ensure that the updated regulation is followed.
- The energy-efficient property credit placed in service date has been extended to January 1, 2023 and it’s amount increased to 30% for qualified energy efficiency improvements. The credit available for a home energy audit was increased to $150.
- The lifetime limitation was removed and was replaced by an annual allowable credit of $1,200 per taxpayer. Other limits apply to specific items such as exterior doors and heat pumps.
- The Act extended a personal tax credit—known as residential energy efficient property or REEP— for items installed to 2035. This includes items such as solar hot water and geothermal heat pumps and now includes qualified batter storage technology expenditures.
- The New Energy Efficient Home Credit (NEEHC) was extended to 2033. It offers eligible contractors credits based on the energy efficiency requirements the home satisfies and whether the construction of the home meets wage requirements. In place of the $1,000 and $2,000 credits, the amount available can range from $500 to $5,000.
- The limit on the number of vehicles eligible for the credit was removed.
- Final assembly of the vehicle must take place in North America.
- The credit is limited by adjusted gross income (AGI) thresholds of $300,000/$225,000/$150,000 for joint filers, heads of households, and individuals.
- The manufacturer’s suggested retail price (MSRP) is capped at $55,000 or $80,000 for pickups, vans, and SUVs.
- Starting in 2023, pre-owned vehicle purchases will also be allowed an income tax credit equal to the lesser of $4,000 or 30% of the vehicle’s sale price, with a maximum eligible sales price of $25,000.
- Qualified AGI limitations for preowned vehicles are $150,000/$112,500/$75,000.
- Beginning in 2023, commercial vehicles will be eligible for clean air tax credits.
- There is a maximum credit of $7,500 for vehicles rated under 14,000 pounds or $40,000 for heavier vehicles. The credit requires that other criteria are considered in its calculation.
- Starting in 2023, research credits (up to $250,000) can be taken against both their portion of Medicare as well as Social Security tax. Unused credit being carried forward.
- Credits for sales and use of biodiesel, renewable diesel and alternative fuels have been extended through December 31, 2024. Refunds of excise taxes, when used for purposes other than for which they were sold or for resale, can also be taken when utilized before December 31, 2024.
Planning and Preparation
The broad range of issues addressed in the Inflation Reduction Act may feel intimidating, but with resourceful planning with the tax professionals at BKM Sowan Horan, businesses and individuals can minimize their tax liability while reducing the risk of errors and missed opportunities.