The Inflation Reduction Act was signed into law after months of negotiations. The massive bill has left many wondering what it can actually do to slow consumer prices that are climbing at the fastest pace in 40 years and how it will affect individuals and businesses. While the sweeping package is designed to lower energy and healthcare costs and combat climate change, it also includes provisions to provide funding to the IRS, raise taxes on some large companies and reduce the federal deficit. Here are the key provisions impacting taxpayers:  

Higher Corporate Taxes

The Inflation Reduction Act imposes a 15% minimum tax on corporate book income for corporations with profits over $1 billion, effective for tax years beginning after December 31, 2022. It is forecasted that this provision will raise $313 billion in new revenue.

Stock Buyback Tax

A relatively new revenue-raising idea, the Inflation Reduction Act creates a 1% excise tax on the fair market value of certain stock that is “repurchased” during the taxable year by a publicly traded U.S. corporation. Effective for repurchases occurring after December 31, 2022, the stock buyback tax is projected to raise over $70 billion over the next decade, according to congressional estimates, and is key to funding some of the initiatives within the bill.

Individual Income Taxes

The limitation on pass-through businesses losses enacted in the 2017 Tax Cuts and Jobs Act (TCJA) has been extended for two years through 2028. The expanded health insurance Premium Tax Credits provided in the American Rescue Plan Act (ARPA) has also been extended. This allows higher-income households to qualify for credits and provides increased subsidy for lower-income households through the end of 2025.

IRS Budget Funding

The Internal Revenue Service (IRS) will receive nearly $80 billion in funding over the next 10 years with more than half of this amount being allocated for enforcement. It is estimated that there is a $1 trillion gap between what Americans owe in taxes and what the government collects. The new funding is aimed at improving collections from large corporations and high net worth taxpayers by cracking down on corporate and high-income tax evaders. According to the US Treasury, families making less than $400,000 and small businesses are not the target of increased audit scrutiny.

The more robust enhancement program, including better technology and the hiring of thousands of IRS staff, is expected to generate over $200 billion over the next nine years and has caused a level of anxiety for some taxpayers. The U.S. Treasury Department has indicated that their hiring efforts cover a wide range of positions, not just IRS agents, including information technology professionals and support staff. Additionally, more than half of the agency’s current employees are eligible for retirement and expected to leave the agency within the next five years. Therefore, some of the funding has been earmarked for the hiring of IRS staff is to off-set the anticipated attrition.

The remainder of the funding will go to IRS operations and taxpayer services.



Reduction of Federal Deficit

With all of the expected revenue forecasted in the Inflation Reduction Act, there is little debate that the act will reduce the federal deficit but there is some variation in the amount of the reduction. Estimates range from the Penn Wharton Budget Model estimate of $248 billion to the Congressional Budget Office score of $305 billion. Most other estimates are $300 billion or more. 

Summary

Experts generally agree that despite its name, the Inflation Reduction Act will not help curb inflation dramatically nor right away with some estimating it will take a few years to see a significant impact. However, while we may not see a rapid curb to inflation immediately, the goal is to stop inflation from increasing.

From a tax perspective, it is unlikely that a vast majority of individuals will see a direct impact on their taxes. Instead, the tax increases will largely fall on large corporations and some higher net worth individuals, particularly those with stock ownership. At the end of a decade, the bill aims to reduce the federal deficit, lower inflation, invest in energy production and reduce healthcare costs.

We will continue to monitor the Inflation Reduction Act and communicate any additional information impacting taxpayers as it becomes available. In the meantime, your Laufer team is here to answer any additional questions you may have. Please call the office at (631) 226-9600 to speak with us about your individual situation. And, be sure to follow us on LinkedIn and Facebook to stay up-to-date on new information as it becomes available.