The Inflation Reduction Act (IRA) promises to reduce greenhouse gas emissions in the United States by 40 percent over the next ten years. The legislation invests $385 billion in clean energy opportunities for individuals and businesses. Funding for the bill comes from three main sources: a new corporate tax, a new excise tax targeting corporate stock buybacks, and sharply increased IRS enforcement activities. There are also a number of changes to existing incentives and credits, including Section 179d and Section 45L. Here is a short recap of the provisions.
The IRA imposes a new tax on corporate book income taking effect in 2023. The new 15 percent alternative minimum tax (AMT) applies to a small number of corporations with an average annual adjusted financial statement income of at least $1 billion for the last three years. Some foreign corporations with $100 million in annual revenue in the past three years are also subject to the alternative minimum tax.
REITs and S-corporations are exempt, and there are exceptions for corporations that use accelerated depreciation and private equity-owned corporations.
Specific to insurance companies, NAIC guidance was issued in INT 22-02 and INT 22-03 to provide limited-scope, limited-time exceptions to SSAP No. 9—Subsequent Events and SSAP No. 101—Income Taxes. This is in response to the IRA for 2022 3rd quarter and year-end reporting, as well as interim reporting for 2023.
Pursuant to the adopted INTs, if it is identified that reasonable estimates could not be determinable, the reporting entities shall not recognize impacts related to the AMT for the third quarter and year-end 2022 financial statements, as well as interim reporting for 2023. The adopted INTs also provided exceptions to subsequent event reporting and required disclosures based on whether the reporting entity (or the controlled group of corporations of which a reporting entity is a member) has determined if it is expected to be liable for the AMT in 2023.
INT 22-02 was automatically nullified on December 1, 2022, as it only addressed third quarter reporting for 2022. Due to the short-term nature of the SSAP No. 9 exception, and as the other issues only reference existing accounting and reporting guidance, INT 22-03 will be automatically nullified on December 1, 2023. However, further discussion of this matter is currently planned.
An excise tax on stock buybacks will impact more businesses as the annual revenue threshold is lower and will take effect in 2023. Buybacks of both common and preferred stock with an annual total value of more than $1M will be taxed at one percent. There are some exemptions to the excise tax. Some liquidations and reorganizations that fall outside the scope of this new rule, including buybacks related to SPACs, ESOPs, retirement plans, and cash distributions to dissenting shareholders.
IRA extends healthcare subsidies originally granted by American Rescue Plan Act through 2025. Additionally, tax credits are now available to households’ making 400 percent of the federal poverty line.
One of the biggest changes to Medicare is that the federal government will begin negotiating the prices of the top ten most expensive prescription drugs starting in 2026. Only medicines on the market for at least nine years will be eligible for negotiations, or 13 years for certain biologic drugs.
Medicare Part D beneficiaries will benefit from a maximum annual cost of $2,000 for out-of-pocket prescriptions. The $2,000 cap will be phased in over the next few years and fully in place in 2025.
Residential Energy Credits, Rebates, and Tax Incentives
Homeowners can also benefit from an extended residential energy property tax credit. The 30 percent credit applies to rooftop solar panels, heat pumps, and small wind energy systems purchases. Additional rebates may be available for low-income homeowners. Purchasing electric vehicles and energy-efficient home appliances may also result in other tax incentives.
Child Tax Credit and SALT Cap
Extending the Child Tax Credit didn’t end up making the final cut. Further, the contentious $10,000 SALT cap remained in effect, though most states now have workarounds for pass-through entities.
The IRA allocates $80 billion over the next ten years to the IRS. The agency will spend most funds on collecting taxes, bringing criminal tax evaders to justice, and improving overall tax compliance. In addition to enforcement, the IRS will also get more funding to upgrade and modernize its systems, improve taxpayer services, and bolster operations.