Tax Provisions of the Inflation Reduction Act of 2022
A wiseman once said that two things in life are certain: (1) that the government will tax you up until, during, and after your death; and (2) they will make paying taxes as confusing as possible, giving you a headache in the process. Of course, I am paraphrasing a bit. The confusion of endless streams of new tax provisions come with each new administration, and the current one is no exception. Fortunately, at The Wilson Firm, we sift through the mess created by governmental entities like the IRS so you can worry about taxes a bit less.
Effective August 16, 2022, the Biden administration passed the Inflation Reduction Act of 2022 (The “IRA”). The law, as passed, will raise $738 billion and authorize $391 billion in spending on energy and climate change, $238 billion in deficit reduction, three years of Affordable Care Act subsidies, prescription drug reform to lower prices, and finally, tax reform. Whether the IRA will actually reduce inflation and get the country back on the right track has yet to be seen. However, the tax implications from the IRA are likely the most relevant to the average working American. Tax reform from the bill comes mainly from the following sources discussed below.
Excise tax on stock buybacks
The IRA implements a stock-buyback provision, which imposes a nondeductible 1% excise tax on the repurchase or redemption of stock by covered corporations during taxable years after December 31, 2022, unless an exception applies.
A stock buyback is when a corporation buys back its own common stock from its current shareholders as a means to increase the value of the outstanding stock. A buyback also has a tax advantage of increasing the stock value instead of making a direct cash payment in the case of a dividend.
The reasoning for this provision is twofold:
- It is meant to encourage companies to spend on innovation, rather than spending it on stock buybacks;
- It is meant to mitigate the fact that the tax code favors buybacks relative to direct cash payments to shareholders (dividends).
Fortunately, most taxpayers will not have to worry about this provision as the excise tax on buybacks only applies to public company stock.
Increased IRS enforcement
If you have heard nothing else on the IRA, you have heard mention of the provisions that provide funding to increase IRS enforcement efforts. What stands out for most people is the news that the IRS is receiving funding to hire 87,000 IRS agents to improve enforcement efforts. News of the increased hiring has sparked fear and memes from many people who fear the IRS plans on using the increased manpower to come after the average worker. Fortunately, most people will be able to rest easy, as U.S. Treasury Secretary Janet Yellen has stated that the new IRS funding for the IRA of 2022 will not be used to increase audit rates for Americans making under $400,000. Further, many experts point to the fact that the increased funding is in response to a shortage of personnel which has caused a downward trend in the rate of audits for wealthy individuals and large businesses as support that the increase in funding will be not as impactful as people imagine. To paint a clearer picture, over the past decade, corporations with $20 billion or more in assets, and individuals with income of over $1 million dollars have seen their audit rates drastically decline. Further, anyone who has recently filed a return or tried to correspond with the IRS is aware of the massive backlog that the IRS simply does not have the resources to handle. Certainly, people would like their tax refunds to be processed in a reasonable time; the allocation of funding to hire new IRS personnel will surely help with that.
Extension on limitation of business losses
The Excess Business Loss (“EBL”) limitation went into effect in tax year 2021 and served to limit the amount of trade or business deductions that noncorporate taxpayers can offset nonbusiness income by to $250,000 for taxpayers filing separately, or $500,000 for those filing joint returns, both indexed for inflation.
An Excess Business Loss is the excess, if any, of
- the taxpayer’s aggregate deductions for the tax year from the taxpayer’s trades or businesses, determined without regard to whether or not such deductions are disallowed for such tax year under the EBL; over
- the sum of:
- the taxpayer’s aggregate gross income or gain for the tax year from such trades or businesses, plus
- $250,000, adjusted annually for inflation in tax years after 2018. For 2021, the amount is $262,000 ($524,000 for joint returns). For 2022, the amount is $270,000 ($540,000 for joint returns).
When originally passed, this provision was scheduled to expire in 2025. However, the American Rescue Plan Act extended it through 2026.The IRA extends the provision further through tax year 2028.
Corporate Minimum Tax
The IRA imposes a 15% alternative tax based on the adjusted financial statement income (AFSI) of an applicable corporation. An “applicable corporation,” in this context is one which (1) is not an S corporation, regulated investment company, or REIT, and (2) meets the test of having an average annual AFSI in the 3 prior tax years of over $1 billion.
The tax is effective staring in tax years beginning after December 31, 2022. To determine if a corporation is subject to the minimum tax in 2023, one would use the average annual AFSI for 2020, 2021, and 2022.
If this is all overwhelming, you are not alone. If you happen to find yourself under audit, or fall into general noncompliance with your taxes, please feel free to contact us at The Wilson Firm.
 See Natalie Choy, Yellen: New IRS Funds Won’t Boost Audits for Those Under $400k, (Sep. 27,