At the time of this writing, in early August, the Senate voted in favor of this amended bill, the Inflation Reduction Act. The next step will be a vote by the House of Representatives, which is expected to occur in mid-August. The House previously voted in favor of Build Back Better by a vote of 220-213 on November 19, 2021. I expect it will be passed quickly, and Biden will sign it into law. What do we need to know for income tax purposes?
The original Build Back Better Act cost $3.5 trillion, which was negotiated to 2.2 trillion, then again to 1.75 trillion. The Inflation Reduction Act is now a $739 billion bill. Politicians aim to address issues we face, such as inflation, climate change, health insurance premium subsidy expansion, prescription drug costs, reducing the federal deficit, and raising tax revenue. Several tax credits will also be expanded.
Biden has repeatedly promised that taxes will not increase for those that make $400,000 or less (small business owners and middle-class families). In the current version of the bill, this appears to be true. We should watch to see if this aspect changes with the final bill. On the other hand, corporations will be funding a considerable part of the bill in the form of a 15% minimum tax. Companies that make over $1 billion in annual profit will pay 15% of their book income as a minimum tax. Book income uses a method of accounting called GAAP (Generally Accepted Accounting Principles) and to shareholders versus taxable income. The difference between book income and taxable income includes adjustments such as accelerated depreciation that can substantially reduce the income base that companies pay income tax on.
Taxpayers with health insurance under the Affordable Care Act will continue to receive subsidies through 2025, as extended by the bill. These taxpayers’ income shall not exceed 401% of the federal poverty line. Eligibility for the ACA premium tax credit was temporarily expanded during the Covid-19 pandemic. Individuals qualifying under the expansion would remain on the program until 2025.
The tax credit for homeowner-installed solar production systems will see a 10-year extension. It is also expanded to include energy-efficient water heaters, heat pumps, and HVAC systems. Solar production systems previously qualified for a 30% tax credit, which has been reduced to 26% for 2022. Without intervention, it was set to reduce to 22% in 2023 and eliminated in 2024. The bill calls for a restoration of the 30% tax credit. Note that this also applies to home storage batteries powered by the solar production system. Heat pumps can qualify for up to $8,000 in tax credits, and heat pump water heaters will be eligible for credits up to $1,750. Households earning up to 150% of their local median income can claim a maximum of $14000 in total rebates through 2031.
Another popular tax credit designed to increase electric vehicle adoption is the EV tax credit. They have created new language for these “clean vehicles,” which includes hydrogen fuel cell cars. There would be income limitations on individuals seeking to claim these credits, and high-priced luxury electric vehicles are expected NOT to qualify. Buyers of clean vehicles will have an option to tax the tax credit as a discount at the time of the care purchase, rather than waiting to claim it with the individual income tax return filing. I am interested to see if the final bill will eliminate the manufacturer’s sale quantity limitation of 200,000 per vehicle model. This adjustment would immediately impact Tesla’s vehicles’ sales, which have been mainly ineligible for this reason.
This act also provides IRS funding of $80 billion over ten years. Depending on how they allocate this money, this could be a win for taxpayers and tax professionals. In recent years, the IRS has been saddled with additional ACA compliance and was severely impacted by congressional tax changes during the pandemic (think Payment Protection Loans and Employee Retention Credits) and cryptocurrency tax compliance.
The IRS’s technology needs a significant overhaul. Older and more experienced agents are retiring. Audit rates are historically low. The bottom line is that the IRS does need more money to improve its service levels to a good status for taxpayers and tax professionals. They need money to hire more staff. According to lawmakers, the additional staff will also net more tax revenues through improved compliance (think, more audits). It is purported that they want to use the funds to hire 80,000 additional auditors and agents.
It has been said that the tax code is a form of social engineering. As energy costs, particularly gasoline, have skyrocketed this year, a popular response has been to move from gas to electricity to power vehicles. For people already considering these expenditures, it will push them over the edge. The same can be said for homeowners looking to add solar panels, energy-efficient appliances, and energy systems. Will these intended behavioral changes and increased tax revenues reduce inflation, though? Economists are divided on this; only time will tell.
Donovan Thiessen, CPA is the founder and owner of The Accountant, LLC. Our mission is to help business owners make better decisions by providing timely and accurate financial and tax analysis. You may reach Donovan at email@example.com, www.theaccountantcpa.com, and 702.389.2727.
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