On Sunday, August 7, 2022, the U.S. Senate passed the Inflation Reduction Act of 2022. This bill is now back with the House of Representatives, who could still make changes that the Senate would have to approve before going to President Biden for signature.
I’m not claiming to have read all 755 pages of the bill (plus 2 amendments). My intent is to give you a little more information about what you only hear snippets of in the news and other media sources. This is meant to be general at best, this is not law yet. It does have more momentum than BBB ever did, and I suspect it mostly goes through as is. This bill truly does not have immediate additional tax costs most small business clients. It was designed to NOT increase taxes on small businesses and families making $400,000 or less, although the devil is always in the details. Even without direct increases to individual tax rates, it is impossible to raise taxes on corporations (Amazon) and not expect indirect costs to its consumers (me and you).
The headliner for me, someone who works with individuals and private companies that would likely identify as a small business, is the increased funding allocated to the IRS. $80 Billion will be allocated to the IRS to increase enforcement, customer service, and modernize their systems. There’s a lot of big talk now about how the big bad IRS is going to get even bigger. It’s easy to react to this with fear and distrust – no one likes paying taxes; but for anyone who has tried to communicate with the IRS since the pandemic began in March 2020 (i.e. respond to correspondence from the IRS, file an amended return to claim a refund, make a phone call to discuss their account, or send faxes because they haven’t adopted email yet in 2022) this change should be at least tepidly welcomed. Sure, no one wants the IRS breathing down their neck, but as someone who represents you with the IRS from time to time, I long for the days of 1–2-month turnarounds on routine issues. Today, I’m lucky if things are handled correctly within a year. While I do welcome systems modernization and increased customer service, I have concerns about what increased enforcement will mean based on how the IRS has operated in the past. The reason lower income people are more likely to be audited today than someone making $500,000 is that it is easier to audit the low-income taxpayers. They are simply an easier target and while low-income taxpayers paying little or no tax, they do receive tax credits through their income tax filing. This is the money the IRS is getting back in those audits. A small business making $500,000 per year requires more labor from the IRS to audit. It seems like a cost benefit analysis. That same cost benefit analysis would apply to middle to high income taxpayers (500k-$5M) now versus ultra-high-income taxpayers ($5M+). It has been proven time and again that the bulk of the tax gap exists with the ultra-high-income and net worth taxpayers. They’re still a lot more work to audit. Will this increased enforcement target the big, difficult targets or the smaller, easier ones??
It will be interesting to see how well the IRS does at hiring people. Will they do any better at hiring than most businesses lately? Staffing is a huge challenge all over the map, but highly so in skilled, or even unskilled, accountants. I don’t get the sense they are the kind of employer you bounce to for a raise higher than inflation.
There are many incentives in the bill for production and purchase of electric vehicles (EVs) designed to get lower and middle income taxpayers into EVs. The current $7,500 credit for new electric vehicles is extended with changes. A $4,000 credit has been established for used EV purchases, but the law states that only one credit can ever be taken on that vehicle. This could lead to some problems down the road. Many cars that would be sold used today would have a credit attached to it from the original buyer, but some would not have due to varying reasons. How will that get resolved? Is this going to be an issue with Craigslist car sales now? Yikes! Also, the car cannot exceed an MSRP of $55,000 (sorry Tesla); trucks and vans $80,000. More importantly, income limits will be imposed. For married couples, $300,000 of adjusted gross income will prevent you from taking the credit. ($150k for singles, $225k for heads of household). For manufacturers’ vehicles to make the qualified list of EVs eligible for the credit, they need to increase US production steadily over time.
There are new energy credits and rebates for homeowners for adding energy efficiency to their homes. I will provide more information on the energy efficiency incentives once the law is finalized.
The bill also has some major reforms to Medicare prescription drug coverage to lower costs, a 1% nondeductible excise tax on corporate stock buybacks (where a company buys its own stock back, thus improving its earnings per share numbers), and a 15% minimum tax on companies making $1 Billion or more per year on their financial statement income. Regarding the 15% tax, this is in response to the perception that big companies pay no tax (which always very conveniently ignores real and personal property, payroll, value added, excise, sales, gross receipts taxes). The US tax code is riddled with incentive for investment and big companies utilize the law to achieve higher return to shareholders. That said, this law is intended to make sure these companies pay their “fair share”. We’ll see how that shakes out. I’m all for other people’s money paying off the deficit, but what does that do to my 401k or my cost of a Prime Membership? Companies are pretty good at passing these costs to consumers.
The carried interest rules survived another piece of legislation. This comes up a lot lately and keeps going nowhere. In case you ever wondered what this is, I found this on napkinfinance.com and it explains it about as well as most people need to know it. It results in company profits being taxed as capital gains rather than ordinary income, which nowadays could only be 5.8% difference due to the benefit of 199A and the marginal rates on capital gains and net investment income tax. At best, it could be a 17% spread, but much more likely to be closer to 6-9% savings. It would amount to a lot of tax overall though amongst the private equity industry, but money talks, and private equity is still walking tall with preferential capital gains rates on their primary source of income.
If you have any questions on this bill and what it means to you or your business, please reach out and let me know.