The Inflation Reduction Act (IRA) has just passed both houses of Congress and is expected to receive the president’s signature this weekend without issue. The act includes provisions that will have both long- and short-term tax impacts on taxpayers. In this blog post, we break down the six items in the IRA that every tax preparer needs to be aware of.
The IRA provides short-term benefits to taxpayers, including a new credit and the extension of two existing credits.
- New for the 2023 tax season (to be applied on 2022 returns) is an updated energy credit for both new and used electric vehicles. Taxpayers can receive up to a $7,500 credit for new vehicles through 2032. Additionally, a $4,000 credit is available for the purchase of used electric vehicles. Price caps will apply to the new vehicle credit and both credits are subject to income and other limitations.
- Extension of American Rescue Plan Act (ARPA) provisions for health insurance purchased through the Health Insurance Marketplace. For tax years 2021 and 2022, the ARPA removed the 400% federal poverty line limitation for premium assistance and replaced it with a standard that Marketplace-purchased insurance costs should not exceed 8.5% of household income. The IRA extends the 8.5% limitation through 2025.
- Extension of credits for homeowners who install solar-powered projects and other energy-saving products. There are also several other provisions in the legislation that benefit the clean-energy industry.
- Excess business loss (EBL) provisions which were extended through 2025 by ARPA are extended for an additional year by the IRA.
- A corporate 15% minimum tax on “book income” publicly reported on financial statements to shareholders (think Form 1120, Page 3, balance sheet, Schedule M-1, Line 1) for businesses with greater than $1 billion in revenue.
The IRA provides for a large allocation of money to increase the IRS’s funding over the next 10 years.
- The act designates $80 billion to update technology and outdated systems and hire additional agents to decrease the backlog. $15 million of the $80 billion will also provide funding for the IRS to conduct a study on the feasibility of expanding access to the IRS Free File system, with taxpayer’s being given access to data already on file with the IRS, such as the W-2 series, 1099s, etc.
For tax preparers, this increased funding could mean an increase in IRS audits and information requests. Preparers should start advising their clients on the need to retain supporting documentation to prepare for the increased IRS scrutiny. Preparation could also include earning a designation which will give preparers additional rights to respond to IRS correspondence and represent their client before the IRS.
For a complete discussion on the tax implications of the IRA, watch a replay of NATP’s Facebook Live chat with NATP Director of Tax Content and Government Relations Tom O’Saben, EA.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.