“The Inflation Reduction Act of 2022” or the “Reconciliation Tax and Spending Bill” or the “Build Back Better Bill” — no matter what you call it, it has some important tax implications.
Below are some of the highlights. Later, we’ll get into go a little more in-depth on the ones that might affect your wallet and taxes:
The Build Back Better Bill
- Provides incentives for alternative energy and carbon reduction
- Allows Medicare to negotiate the price of prescription drugs
- Increases IRS funding to add 86,000 more employees
- Creates a 15% minimum tax for corporations with profits of more than $1 billion
The corporate tax, a 1% excise tax on stock buybacks, and more revenue from IRS collections are how the bill is supposed to pay for itself and reduce the government’s deficit.
Of the $80 billion earmarked for the IRS, about $46.5 billion is meant for enforcement activity, i.e., more audits. The increase in audits is supposed to be aimed at businesses and individuals making more than $400,000 a year.
The rest of the funding is for better agency operations, improving taxpayer services, and modernizing the IRS’s technology. That’s supposed to include developing a free e-filing system for individuals.
ENERGY IMPACTS
The legislation extends or expands some green energy incentives while also expanding some support for fossil fuels. Individuals can take advantage of a few different credits and rebates. For plug-in electric vehicles, there’s $7,500 for new ones and $4,000 for used ones. But those credits come with some pretty strict limits.
For example, vehicle components can only come from the U.S. or countries we have a free-trade agreement with. Also, there are limits on the prices of the vehicles as well as taxpayers’ incomes. So, those restrictions might limit which vehicles are eligible and affect supply.
Right now, homeowners who invest in energy-efficiency improvements — whether that’s new appliances, windows, or doors — could claim as much as $1,200 on their taxes. Later, there’s $8 billion set aside for a couple of rebate programs meant for low- and middle-income households. Those programs would be aimed at replacing old appliances and cutting down on wasted energy in homes.
States will first need to apply for that money and make sure there are systems in place to distribute the funds.
The 30% tax credit to encourage homeowners to put in small solar and wind installations is extended through 2023. Other credits include those for apartment complexes and lower-income community solar projects. Also, small businesses could get as much as $1 a square foot for energy-efficiency improvements as well as credits if they convert to electric or other qualifying “clean” vehicles.
On the fossil fuel front, the legislation expands oil and gas leasing in the Gulf of Mexico and Alaska and encourages some pipeline construction.
HEALTHCARE
In addition to giving Medicare the power to negotiate the price of certain prescription drugs, the bill also extends subsidies for the Affordable Care Act for three years.
It gives more financial help to those who could already buy subsidized health plans on the ACA Marketplaces. And it also expands subsidies for more middle-income people who previously couldn’t afford coverage.
R&D TAX CREDIT
Small businesses that qualify will be able to claim up to $500,000 in research and development tax credits, an increase of $250,000.
BUSINESS LOSSES
The new legislation also extends a provision that currently limits non-corporate business losses — like those for S corps, partnerships, sole proprietorships, some limited liability companies, and the self-employed — above a certain amount each year.
Right now, the cap is currently at $540,000 for married couples and $270,000 for single filers.
The limits could apply to any pass-through business that racks up a large operating loss. However, it’s most likely to affect real-estate businesses.
At more than 700 pages, there’s obviously a lot more to the new bill, so watch for more updates on our blog. And if you have questions about how the new legislation could impact your taxes, let us know.