A Brief Summary of the Tax Provisions in the new Budget Reconciliation Bill Making its Way through Congress

Overview

Senate democrats have passed a new bill to address rising inflation as well as some of their big-ticket concerns including climate, energy and healthcare. In its current form, the tax impact of the larger provisions of the bill will provide increased IRS funding, tax policy changes and several tax incentives and credits geared toward clean and renewable energy, both for homeowners and businesses. The bill also includes funding for healthcare subsidies and extensions to the ACA (Affordable Care Act).

While the stated purpose of the bill is to reduce inflation, it is unclear if these provisions will have a direct impact. Nonetheless, the bill is also directed towards deficit reduction, and to be sure, some of the tax provisions included in the bill will be revenue producers to accomplish this purpose.

In the initial stages of proposal, this bill also included modifications to the tax on carried interest, but Senate Democrats have since revised and scaled back these provisions and replaced them with a new 1% excise tax on certain corporate stock buybacks.

The bill still needs to go to the House for approval before wending its way to the President’s desk to be signed into law. The House will have their chance to tweak this bill over the course of the week before final approval this Friday.

Corporate AMT

The current corporate tax rate is 21%. Certain large corporations with financial statement income in excess of $1 billion will be subjected to a 15% minimum tax. This provision appears to be aimed at large corporations that have reduced tax rates due to significant capital improvement write-offs or other tax loophole provisions that allow for reduced tax rates.

1% Excise Tax on Qualifying Stock Repurchases

The Bill imposes a new 1% tax on the market value on any stock repurchased by a qualifying corporation unless corporate stock is then reissued to corporate employees during the taxable year. Qualifying corporations are companies that have stock that is traded on an established securities market.

Extension of Section 461 Excess Business Loss (EBL) Limitation

The 2017 Tax Act included a new loss limitation on of $250K ($500K for joint filers), indexed annually for inflation, through Jan. 1, 2026, and extended one year to Jan. 1, 2027 under the American Rescue Plan Act of 2021. This excess business loss limitation (EBL) restricts the amount of business losses that can offset business income (after applying any at-risk or passive activity limitations). Any excess loss is carried forward to the subsequent tax year. Excess business losses are typically generated from sources such as sole proprietorships, ownership interests in passthrough entities (partnerships and S corporations), and rental operations.

The Inflation Reduction Act bill extends the EBL limitation another two years through the end of 2028.

IRS Enforcement

The Bill allocates $80 billion to the Internal Revenue Service. $33 billion of this funding is meant to support taxpayers’ services as well as upgrade and modernize business systems and operational support. The remaining $46 billion is being allocated to stepping up compliance enforcement. According to the Congressional Budget Office, this spending is expected to result in $204 billion of additional tax collections over the next ten years, and you know what this means… we can expect to see more IRS audits!

Energy Credits

The Act has numerous new and modified tax provisions designed to offer $369 billion of clean energy tax credits for solar, wind, EVs, hydrogen, nuclear, and carbon capture among others.

The bill provisions include an assortment of credits ranging from consumer home energy rebate programs to consumer tax credits for making homes energy efficient to manufacturing incentives to on-shore clean energy initiatives. In addition, the bill encourages taxpayers to purchase energy efficient vehicles with the “clean vehicle credit” of up to $7,500 for new vehicles and $4,000 for used clean energy vehicles (EV and hybrid). Some notable changes to the vehicle credits as compared previously existing EV credits are:

• These proposed vehicle credits are now limited by certain AGI thresholds
• The credits for new vehicles are obtainable at the dealership, as opposed to waiting to claim the credit on a tax return; final eligibility will be determined upon filing the year-end tax return to test if the AGI thresholds are met and may result in a repayment of any credit advanced at purchase
• Credit is now available for used vehicles
• Credit is only available to vehicles that meet specific MSRP thresholds

See here for a summary of some of the energy provisions of the bill.

Healthcare

The proposal includes an extension of the ACA subsidies for marketplace insurance premiums and subsidies for prescription drugs.