Inflation Reduction Act – Tax Provisions Included in Proposed Legislation

Late in July, Senator Joe Manchin (D-WV) announced that he had reached an agreement with Senate Majority Leader Chuck Schumer (D-NY) on a budget reconciliation package that would replace the stalled Build Back Better legislation which had lacked Senator Manchin’s support (in part over his concerns of its impact on the federal deficit and its potential inflationary impact).  The agreement addresses initiatives on clean energy, health care and taxes.  

Draft language of proposed legislation, named the Inflation Reduction Act of 2022 (IRA Act or the Act), was released shortly after the agreement was announced.  Over 525 pages of tax provisions are included under Title I of the proposed IRA Act. 

Title I of the proposed IRA Act tax provisions include:

  • Create a new corporate alternative minimum tax regime based on financial statement income (as adjusted for items including net operating loss carryovers) on corporations with profits exceeding $1 billion.
  • Modify the “carried interest” rules: (updated on 8/9/2022 Final Senate Version Eliminates the Change in Carried Interest Rules)
    • Replace the three-year holding period with a five-year holding period requirement (with an exception for real property businesses) for taxpayers with adjusted gross income of $400,000;  
    • Expand the scope of income subject to the rules to include income from regulated futures contracts marked to market under IRC Section 1256, long-term capital gain under IRC Section 1231, and qualified dividend income; 
  • Expand, extend, and create numerous investment tax credits and production tax credits supporting green energy initiatives;
  • Increase the research & development tax credit amount that can be claimed against payroll taxes for small businesses;  
  • Provide additional funding to IRS;
  • Create prescription drug pricing incentives by proposing up to a 95% excise tax;
  • Extend the Affordable Care Act health insurance premium tax credits, including allowing higher-income households to qualify for the credits and boosting the subsidy for lower-income households, through the end of 2025.

Just as critical (for many taxpayers) as the tax provisions included in the proposed IRA Act are the tax provisions excluded from the Act contained in other proposed legislation such as the Build Back Better legislation that had passed the House of Representatives in 2021 (but had stalled in the Senate) (https://www.schneiderdowns.com/our-thoughts-on/tax-reform-build-back-better-act-update) or proposals from other sources such as those included in the General Explanations of the Administration’s FY2023 Revenue Proposals (the so-called Greenbook) released in March 2022 (https://www.schneiderdowns.com/our-thoughts-on/greenbook-2023-budget-revenue-and-tax-proposals).  

Proposals excluded from IRA Act include the following 

(Although this is not a complete list, it includes many proposals that have been floated at various times over the past 1½ - 2 years):  

  • Expansion of the 3.8% net investment income tax to include active flow-through income from partnerships and S corporations,
  • The millionaire income surtax coupled with a separate increase to the highest individual marginal tax rate,
  • Increase the corporate tax rate from 21% to 28%,
  • Taxation of capital gains at higher ordinary income tax rates, 
  • Limitation on ability to utilize like-kind exchange provisions on sale of real estate; and
  • Increasing the state and local income tax (SALT) deduction above the current limit of $10,000.

Finally, while the bill is moving forward, there are still obstacles that could delay or even prevent passage.  These obstacles include:

  • Will the Senate Parliamentarian approve the provisions?  The bill is still being reviewed by the Senate Parliamentarian to ensure that it meets the rules required under the Senate reconciliation process.    
  • Will Senator Kyrsten Sinema, Democrat of Arizona, vote in favor of the bill?  It’s still unclear whether Senator Sinema will vote yes on the bill.  All 50 Democratic senators need to support the bill (assuming no Republican senators decide to vote in favor of the bill).  Further, senate vote must be in person and some senators might not be able to attend due to COVID restrictions (and, depending upon the party of a senator, nonattendance could swing the vote either way). 
  • Will enough Democratic House members support the bill?  Some Democratic party House of Representative members previously voicing opposition to any bill lacking an increase in the SALT deduction might now be on board, providing sufficient yes votes in the House. 

Many of the effective dates included in the proposed legislation are for tax years beginning after December 31, 2022.  

If you have questions on the proposed IRA Act, please reach out to your Schneider Downs tax consultant for additional insights. 

About Schneider Downs Tax Services

Schneider Downs’ tax advisors have experience and expertise in a wide range of industries, including Automotive, Construction, Real Estate, Manufacturing, Energy & Resources, Higher Education, Not-for-profits, Transportation and others. Our industry knowledge and focus ensure the delivery of technical tax strategies that can be implemented as practical business initiatives.  

To learn more, visit our dedicated Tax Services page. 

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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