President Biden signed into law the $369 billion Inflation Reduction Act of 2022 (IRA), which proponents say will lower the deficit, invest in renewable energy, and lower health care costs. This sweeping legislation also addresses issues that will specifically interest tax professionals: increased funding for the Internal Revenue Service, new corporate taxes, and adjustments to tax credits.  

Why is the IRS budget increasing?

Section 10301 of the IRA provides the IRS $78.9 billion in funding through September 30, 2031. This money will be split between taxpayer services ($3.1 billion), enforcement ($45.6 billion), operations support ($25.3 billion), and business systems modernization ($4.7 billion). This additional money aims to rectify shortfalls that have contributed to reduced audits of wealthy taxpayers, service delays, and a backlog of 21.3 million unprocessed paper returns.

Concerning enforcement-related funding, Treasury Secretary Yellen has said this additional funding would not be used to increase audits of businesses and households making less than $400,000—in other words, they will not be targeting middle-class taxpayers. However, tax professionals serving clients whose annual income is above that threshold might consider Protection Plus audit assistance services. (Learn more about using Protection Plus with Drake Tax.)

The law also includes operational funding for the following:

• Treasury Inspector General for Tax Administration ($403 million)
• Office of Tax Policy ($104 million)
• United States Tax Court ($153 million)
• Treasury Departmental Offices ($50 million)

What does the IRA change about corporate taxes?

The IRA includes two corporate tax changes that take effect for tax years beginning after December 31, 2022: a new 15% alternative minimum tax (AMT) for corporations making more than $1 billion over a three-year period and a 1% excise tax on the repurchase of corporate stock. While the new AMT targets large corporations that have previously paid less than 15% in corporate income tax, there are exceptions to this new rule: S corporations, regulated investment companies, and real estate investment trusts are exempt.

The act also extends the section 199A qualified business income deduction through 2027. (Read more about QBI on Taxing Subjects.)

What does the IRA change about tax credits?

The IRA makes a number of changes to clean-energy and electric-vehicle tax credits that affect individuals and businesses:

• Nonbusiness energy property credit is increased to 30%, has an annual cap of $1,200, and is extended until 2032
• Residential clean energy property credit is extended until 2034, with the credit remaining 30% through 2032 when it begins to phase out (26% in 2033 and 22% in 2034)
• Energy efficient commercial buildings deduction is increased and now has a three-year cap
• Energy efficient home credit is extended through 2032
• $7,500 credit for the purchase of a new electric vehicle (Clean Vehicle Credit)
• $4,000 credit for the purchase of a used electric vehicle (Clean Vehicle Credit)

Unfortunately, there is already confusion surrounding the Clean Vehicle Credit due to two manufacturing requirements for qualifying vehicles. First, 40% of the battery minerals must come from the US, a free-trade nation, or be recycled in North America before January 1, 2024. This required percentage will increase by 10% every year for vehicles placed into service during that year:

• 50% for vehicles placed in service during calendar year 2024
• 60% for vehicles placed in service during calendar year 2025
• 70% for vehicles placed in service during calendar year 2026
• 80% for vehicles placed in service after December 31, 2026

Second, 50% of battery components must be manufactured or assembled in the US before January 1, 2024. Just like the battery mineral requirement, this percentage will increase over time:

• 60% for vehicles placed in service during calendar years 2024 and 2025
• 70% for vehicles placed in service during calendar year 2026
• 80% for vehicles placed in service during calendar year 2027
• 90% for vehicles placed in service during calendar year 2028
• 100% for vehicles placed in service after December 31, 2028

Further, the credit is only available for models at or below specific price points:

• Vans, sport utility vehicles, and pickup trucks: $80,000
• Other vehicles: $55,000

Finally, the Clean Vehicle Credit is only available to taxpayers with modified adjusted gross income below the following thresholds:

• Married filing jointly/surviving spouse: $300,000
• Head of household: $225,000
• Other filers: $150,000

To help taxpayers determine which manufacturers qualify, the US Department of Energy has dedicated a web page to the Inflation Reduction Act. However, the IRS notes that some vehicles on this list may fail to meet the final assembly requirement due to being built in multiple locations.

Where can I learn more about the Inflation Reduction Act?

Be sure to regularly visit Taxing Subjects for tax-related updates.

Sources: HR5376 – Inflation Reduction Act of 2022; How companies like Amazon, Nike, and FedEx avoid paying federal taxes; The IRS says new funding won’t mean more audits for middle-income Americans; Summary: The Inflation Reduction Act of 2022; Senate passes Democrats’ climate, tax, and health care package