On 16 August 2022, President Joe Biden signed the Inflation Reduction Act of 2022 into law. The roughly $437 billion bill includes several provisions relating to federal taxation, clean energy, and healthcare. Absent from the final bill, which passed along narrow party lines, are certain provisions relating to paid family and medical leave, an extension of the child tax credit, and the taxation of private equity carried interests. This note provides a very brief overview of some of the key provisions of the Act.
The Act appropriates around $80 billion to the U.S. Internal Revenue Service to add auditors, improve customer service, and modernize technology. In a memorandum sent the day after the bill passed, Secretary of the Treasury Janet Yellen set a six-month timeframe for Commissioner of Internal Revenue Charles Rettig to develop a plan for how the IRS will use the $80 billion. Secretary Yellen informed Commissioner Rettig that the Service will need to overhaul its outdated information-technology system, clear a backlog of tax returns, and boost services for taxpayers. She also stated that the funding should be used to train IRS employees to identify the most complex evasion schemes by “those at the top.” Secretary Yellen made clear, however, that none of the money should be used to increase enforcement activity tied to those earning less than $400,000 per year.
Also in the domain of federal taxation, the Act introduces a 15% corporate alternative minimum tax for C corporations with an annual income of over $1 billion. It further imposes a 1% excise tax on stock buybacks conducted by publicly traded corporations. The Act’s language leaves open several substantial questions regarding these corporate taxes, which are scheduled to take effect beginning in 2023. Practitioners are eagerly awaiting further guidance from the Treasury as to how the law applies.
With regard to clean energy, the Act introduces, extends, reinstates, or modifies a multitude of tax credits intended to encourage the production, storage, and use of renewable sources of power. Such credits relate to: the production and sale of alternative fuels and renewable energy; the construction and improvement of energy-efficient buildings for both residential and commercial use; and the purchase and use of electric vehicles for both personal and commercial use.
Finally, in respect to healthcare, the Act includes certain provisions intended to prevent an increase in health insurance premiums and reduce the cost of certain pharmaceuticals. The Act extends the federal subsidy of medical insurance premiums under the Affordable Care Act, which was scheduled to expire at the end of this year. Additionally, the Act enables Medicare to negotiate the price of certain prescription drugs. Medicare recipients will have a $2,000 cap on annual out-of-pocket prescription drug costs, starting in 2025.