Business Tax Implications of the Inflation Reduction Act (IRA)

President Joe Biden signed The Inflation Reduction Act (IRA) into law on Tuesday, August 16. The legislation, which is a pared-down version of the proposed Build Back Better plan, was passed through the budget reconciliation process and is expected to pay for itself and decrease the budget deficit.

Key provisions in the IRA include funding for clean energy tax credits, an infusion of funds to the Internal Revenue Service, changes to Medicare prescription drug policies, and new corporate taxes.

Read on to learn about how these provisions could impact your business.

New corporate taxes

Lawmakers built several new tax provisions into the IRA to fund programs the bill introduces, modifies, or extends. In conjunction with the IRS measures listed below, these taxes are expected to fully fund the program and decrease the budget deficit. The two main taxes are:

• Corporate minimum tax of 15% of book income. While the current corporate tax rate is 21%, many businesses can pay less because of deductions and credits. The new minimum tax is based on the financial statement income for corporations with revenues over $1 billion for tax years beginning after December 31, 2022. The legislation allows for bonus and accelerated depreciation deductions when calculating financial statement income and exceptions for S corporations, real estate investment trusts (REITs), and regulated investment companies such as hedge funds.
• Excise tax on stock buybacks. Stock buybacks often are used to decrease taxes paid for years. The IRA introduces a new 1% excise tax on corporate stock repurchases in tax years beginning after December 31, 2022.

Research credits to payroll taxes

Currently, the research tax credit allows for up to $250,000 to be deducted against qualifying payroll taxes which do not include the Medicare portion of FICA taxes. The IRA expands this credit to a $500,000 limit that also includes Medicare payroll taxes.

This goes into effect for tax years beginning after December 31, 2022, and allows for unused credit amounts to be carried forward in certain circumstances.

Renewable, clean energy tax provisions

Much of the funding for the IRA – about $370 billion – is dedicated to green or renewable energy tax deductions. Of that amount, $60 billion is earmarked for growing the renewable energy infrastructure within manufacturing targeted at solar panels and wind turbines.

The IRA also modifies and extends through 2024 tax credits for producing electricity from qualified renewable resources, investments in qualified energy properties, and using alternative fuels and fuel mixtures (including biodiesel and renewable diesel).

New tax credits will be available in the coming years for the production and/or sale of:

• Zero-emissions nuclear power products,

• clean hydrogen or clean electricity for investment in zero-emissions electricity generation facilities or energy storage technology,

• clean fuel production, and

• qualifying solar and wind energy systems components.

With the modifications, businesses that use energy-efficient commercial buildings may see additional tax deduction opportunities. The IRS introduces a new credit for commercial clean vehicles and modifies the refundable tax credit on plug-in electric vehicle purchases.

The IRA provides funds so the Environmental Protection Agency (EPA) can create a greenhouse gas reduction fund and support existing programs that provide financial incentives to reduce air pollution emissions. These include replacing eligible medium- and heavy-duty vehicles with zero emissions options, identifying and reducing emissions from diesel engines, and monitoring air pollution and greenhouse gases.

Increased tax enforcement, customer service

The IRA provides additional funding for the IRS to hire more customer service representatives, processors, and auditors to decrease the time it takes to process returns for each tax year, lessen the hold times for taxpayers calling in, and increase audits. Audits are expected to target larger businesses and individuals with higher incomes.

The Inflation Reduction Act is expansive and could affect many business tax strategies. We’ll keep you updated as new information comes to light. In the meantime, consider scheduling your annual tax strategy review with one of our tax professionals to discuss how the IRA could impact your business.