The Inflation Reduction Act: What’s Really In There?
The Inflation Reduction Act was signed into law on August 16, 2022.
In this time of rampant inflation and the drastic moves by the Federal Reserve in hiking interest rates, which is hitting us all painfully in the wallet, something called “The Inflation Reduction Act” sounds fantastic, right?
A law that will help bring down inflation? Bring it on!
Except…wait a minute, what is in this law, exactly? And how is this law going to reduce inflation?
Good questions. Let me take a few minutes to try and answer them for you as we take a brief tour of The Inflation Reduction Act.
Does the Inflation Reduction Act Actually Reduce Inflation?
First of all, it isn’t strictly inflation-reducing legislation. What the Inflation Reduction Act (or IRA, for short) actually does is both
a) create additional revenue for the federal government while at the same time,
b) authorizing the federal government to invest in a few key areas.
Because the revenue the law will create is greater than the cost of the investments,the extra revenue will help reduce our national deficit. Which should, in theory, reduce inflation.
An estimated $737 billion in new revenues will be generated, while a mere $437 billion will be invested, leaving a net $300 billion or so that can be used to reduce the deficit.
Okay, that sounds good. We are all for reducing the deficit if it will eventually bring down the price of everything back to normal levels.
So, how exactly are we going to generate an extra $737 billion in revenue?
I’m glad you asked.
How to Raise More Money if You Are the Government
There are 5 key ways in the IRA that the federal government proposes to raise revenue. They are:
- Instituting a 15% Corporate Minimum Tax on corporations that have over $1 billion in profits over any 3-year period. This should bring in over $220 billion from corporations currently paying less than that thanks to corporate tax loopholes, over the next 10 years.
- Creating a new 1% stock buyback excise tax on any corporate buybacks of stock sold on an open exchange. This is expected to create over $70 billion in revenue.
- Reforming the way Medicare negotiates on prescription drug prices, in order to save over $280 billion.
- Authorizing the IRS to modernize and also hire additional agents in order to aid the agency’s tax enforcement efforts, which is expected to drum up over $120 billion.
- And a 2-year extension of the Loss Limitation rules for excess business losses should raise over $50 billion
And Now What Will the Government Do With All that Cash?
Invest it, of course! The Inflation Reduction Act includes investment in:
- Energy Security and Climate Change. Expected investment: $369 billion. These include clean energy tax credits, with the goal of reducing carbon emissions. We will look at these tax credits in more detail in the next section.
- Extending the Affordable Care Act another 3 years, which will cost an additional $64 billion. The goal here is to continue enabling more affordable health care.
- And investing in Western Drought Resiliency, to the tune of $4 billion.
What’s in it for you?
There are some nice tax credits included in the IRA that will benefit business and consumers alike. For example;
- The Research & Development (R&D) Credit for small businesses will be increased from a maximum of $250,000 in credit they can claim against payroll tax (for years prior to 2023) to a maximum of $500,000.
- The Renewable Electricity Production Credit has been extended for 3 years for renewable electricity production facilities
- The New Clean Vehicle Credit is extended for individuals who purchase a clean vehicle before December 1, 2023. These include qualified plug-in electric drive motor vehicles and qualified fuel cell motor vehicles.There are limits to how much a taxpayer can spend on these vehicles however.
- Energy Efficient Home Improvements Credit was expanded from a $500 lifetime credit to an annual credit up to $1,200.
- The Residential Clean Energy Property Credit was created as a 30% credit on qualified expenditures for solar panels, solar water heating, small wind energy and geothermal heat pumps, among others.
Some of these credits are extensions or adjustments to existing tax credits. Others will be new for 2023 and beyond.
If you are a client and have any questions about how these credits may affect your taxes in 2023, please feel free to ask your Customer Ally. Or you can contact us at blumercpas.com.