Inflation Reduction Act of 2022 Overview

Take-Away: The limits on wealthy retirement accounts that were discussed at length over this spring and summer  under the Build Back Better proposed legislation are not part of the final Inflation Reduction Act of 2022.

Background: A lot of time was spent earlier this year summarizing the provisions of the President’s proposed Build Back Better (BBB) legislation. We now have after last week its alternate passed by Congress, the Inflation Reduction Act of 2022. Some of the differences between the two legislative proposals are summarized below.

Retirement Plan Provisions “Missing:” While the Build Back Better (BBB) legislation sought to impose limits on higher income individuals with large retirement account balances, the Inflation Reduction Act (the Act) does not contain any of those provisions. Instead, the Act targets corporate taxes.  You will recall the earlier BBB proposal was to eliminate ‘back-door’ Roth conversions with after-tax contributions to either qualified plans or IRAs, and also a proposal to eliminate Roth conversions in general for both IRAs and qualified plans for high-income individuals. Neither were  included in the Inflation Reduction Act of 2022  as revenue-raisers to offset the cost of the broader Act. In addition, earlier iterations of the BBB legislation had included proposals to impose contribution limits for individual retirement plans of high-income individuals with large account balances and mandatory required minimum distributions (RMDs) for high-income individuals with large retirement account balances. These provisions, also, were not included in the Act as passed by Congress.

Health Care Premium Tax Credits: The Act amends IRC 36B to extend through 2025 widened eligibility for health care premium tax credits for individuals whose household income exceeds 400% of the poverty line and the calculation of the applicable percentage of the premium assistance amount, both of which were only temporarily provided under the American Rescue Plan Act.

Increased Research Credit: The Act increases the IRC 41 research credit against payroll tax for small businesses.

Tax Increases: To pay for many of the perceived benefits under the Act, a couple of new taxes were created.

• 15% Corporate Minimum Tax: The Act creates a new 15% corporate minimum tax on financial statement, or ‘book’ income. This minimum tax would apply generally to the excess of 15% of C corporation’s adjusted financial statement income over any corporate alternative minimum foreign tax credit for the tax year. It would apply to corporations with average annual adjusted financial statement income for the three consecutive tax years ending with the tax year exceeding $1 billion. A $100 million threshold would apply to certain ‘foreign-parented’ corporations. This provision, which would apply by many estimates to about 200 corporations, would be effective for tax years beginning after 2022. The American Institute of Certified Public Accountants (AICPA) has expressed a concern about basing any tax liability on the nontax criterion of book
• Excise Tax on Stock Buybacks: The Act imposes a 1% nondeductible excise tax on stock buybacks of publicly traded corporations. [New IRC 4501.] This excise tax would be effective for stock buybacks after December 31, 2022. To calculate the tax, the fair market value of the repurchased stock would be reduced by the fair market value of any stock issued by the covered corporation during the tax year, including stock issued or provided to employees of the corporation or specified affiliates. This excise tax is expected to raise $73 billion in revenue.

Carried-Interest Tax Excluded: One of the substitutes for revenue to pay for the Act’s benefits would have been raised by lengthening from 3 to 5 years the holding period for long-term capital gain treatment of partnership interests held in connection with performance of services, common known as carried-interests. The carried-interests provision was dropped from the Act at the behest of Senator Sinema (D-Ariz.)

IRS Enforcement: What has attracted a lot of attention is the Act’s additional funding for IRS enforcement- $45.6 billion over 10 years. Why the amount is somewhat controversial is that the Act allocates only $3.18 billion for ‘taxpayer services.’ This is perceived by many as too much of an imbalance in the allocation of revenues.

Energy Credits: The Act’s energy and climate tax credit list is extensive. Many existing credits are either modified, extended, or both. In addition,  many new tax credits appear. New tax credits include: (i) zero-emission nuclear power production; (ii) sustainable aviation fuel credit; (iii) production of clean hydrogen; (iv) credit for previously owned clean vehicles; (v) credit for qualified commercial clean vehicles; (vi) advanced manufacturing production credit; (vii) clean energy production credit; (viii) clean electricity investment credit; (ix) allow under new IRC 6417 elective payment of applicable credits for energy property and electricity produced from certain renewable resources.

Conclusion: As the details of the inflation Reduction Act of 2022 become clearer, this summary will be periodically  updated.