By Derek Gray, CPA, Director
The Inflation Reduction Act of 2022 (“IRA”) was signed into law by President Biden on August 16. This is the culmination of more than 18 months of work by the Biden administration.
The Act is a significant accomplishment, particularly in the realm of social and climate change policy. As with many bills, there will be some that say that the bill spends too much; while others will say it doesn’t spend enough.
A large part of President Biden’s campaign was spent discussing making families earning more than $400,000 annually pay “their fair share” of taxes. The thought was to take the additional revenue raised by tax increases, and use them to combat social issues and climate change.
However, if you’ve been watching the news over the last year, you’ll know that while the Democrats technically controlled the House, the Senate and the White House, passing any legislation was far from certain.
Almost immediately after President Biden took office, Senators Manchin (D-WV) and Sinema (D-AZ) opposed certain portions of President Biden’s plan. Due to the Senate being deadlocked between Republicans and Democrats, each Democratic Senator essentially had veto power.
This resulted in a gridlock in Washington that significantly reduced the IRA from a $3.5 trillion spending bill, to the $740 billion bill that was signed into law.
While the IRA fails to raise a significant amount of taxes on well-off individuals, it does raise a significant amount of revenue. While it may not necessarily be the size of a spending bill many Democrats had envisioned immediately following the 2020 elections, it is nevertheless a major piece of legislation.
We summarized the Senate version of the bill last week. What was signed into law by President Biden leaves the IRA largely unchanged.
The highlights of the Inflation Reduction Act of 2022:
- The legislation aims to make prescription drugs and health insurance cheaper. The bill should help approximately 50 million Americans on Medicare Part D benefit from having their prescription drugs costs capped at certain price points.
- The bill allows Medicare to negotiate the prices of certain drugs. Also, it requires drug companies to pay rebates for increasing their costs in excess of inflationary increases. The White House estimates that more than 5 million Americans could see their prescription drug costs decrease under the bill.
- Among the tax items in the bill is a new 15% corporate minimum tax. This tax would only be assessed on companies with financial statement income of more than $1 billion dollars. This is interesting for a few reasons. First, it applies only to a few hundred companies. Estimates this past November placed the number right around 200 companies that would be impacted by the new law. Secondly, and more important, is that while we have around 100 years of income tax code, regulation, and case law history, all of that is predicated on a system based on taxable income. We’re now leaving the world of defined tax law and heading into a large gray area of taxes based on US GAAP or IFRS. Grab your popcorn and pull up a seat – this is going to get interesting.
- One of the headline grabbers is an income tax credit for the purchase of new and used electric vehicles. There are income limitations that apply here, as well as a litany of other rules that go into effect 12/31/22. The hope is to place more electric cars on the road within the next ten years.
- Finally, there is a large part of the IRA that goes towards funding the IRS. If you’ve tried contacting the IRS recently, you’ll know the IRS is tremendously understaffed. A large portion of this bill is targeted to replace a very-outdated infrastructure that the Service uses. We are hopeful that this will lead to increased automation and use of technology by the Service. The goal is increased efficiencies in processing tax returns, notices, and any correspondence with taxpayers.
With mid-term elections on the horizon, it’s likely that this is the last major piece of tax reform we’ll see this year. A year ago, many of us were bracing for potential increases in tax rates across the board – individual, corporate, capital gains, estate, etc. Instead, substantial modification to those taxes have failed to materialize in the last 12 months.
Further, according to many political analysts, Republicans are expected to take control of both the House and Senate in November. Should this happen, the climate for tax law change is uncertain for the immediate future.
If there are any significant changes to the political environment, we’ll let you know. In the meantime, please reach out to Derek Gray, Amy Sandlin, or your Blue & Co., LLC tax advisor if you have any questions about the Inflation Reduction Act.