Proposed tax law changes in The Inflation Reduction Act of 2022

President Biden’s “Build Back Better” (“BBB”) appeared to be dead months ago.  Perhaps it is dead…but in name only.  The new Inflation Reduction Act of 2022 (“IRA”) pulls some of the key provisions from the BBB bill of old verbatim.  Just because a bill is called something does not mean it will do what’s intended.  Often, the bills do quite the opposite. I am not writing today to opine on the intention of the bill, but I will share with you some details on the proposed tax increases and tax revenue generating items in the proposed legislation.  My goal is for all my clients to hear from me first when tax law changes.  In this case, we are still in the legislation phase, but it is still important to consider how this can impact you.

The Biden Administration believes tax increases and certain investment will slow down inflation. This tax revenue generating legislation will be used for (1) deficit reduction (2) clean energy incentives, and (3) climate change investments.  The proposed tax changes of the bill would generate revenue through three main tax increases/enforcement actions.

1. Corporate AMT (Minimum Tax)

Certain large corporations would be subject to a 15% tax on adjusted financial statement income (so-called book income) if such tax is greater than the amount determined under general tax rules (21% of income computed under Internal Revenue Code rules).  Based on the current language of the bill, certain credits would be allowed to offset the tax, such as general business and foreign tax credits.  Taxable income and book/financial income could differ significantly because of different rules under which taxable income and financial reporting income are computed.

The low hanging fruit example of this is depreciation expense.  Businesses are generally permitted to immediately fully expense equipment and other capital improvements for tax purposes.  On the other hand, financial income reporting requires those costs to be recaptured under a much longer period of time.  Consequently, companies making significant capital investments would likely be paying a lot more tax is this were passed.  The new minimum tax would only apply to some mega C Corps, with average (adjusted) financial statement income of over $1 billion for each of the three prior years.

Please note, this minimum tax is not the same as the 15% global minimum tax that Treasury Secretary Yellen has been trying to implement with more than 120 countries—the global minimum tax would have required U.S. companies to pay a minimum tax of 15% in each country in which they report income. The global minimum tax is no longer listed in the new budget reconciliation bill however. The proposed minimum tax would apply to taxable years beginning after December 31, 2022, and is projected to raise over $300 billion

2. Additional IRS Funding & Enforcement

With the proposed law, the IRS would be allocated an additional $80 billion targeted at a variety of compliance and enforcement measures. According to the Congressional Budget Office, the additional funding should result in $200 billion of additional tax collections over the 10-year budget window

I personally just hope waiting times on the tax practitioner hotline improve and they actually open some mail I sent ages ago

Enforcement measures would be targeted to collection of taxes, legal and litigation support, and specifically to digital asset monitoring and compliance activities. Funds are also specifically designated to study and explore an IRS free “Direct E-File” system. A specific provision of the proposed bill states that the new funding is not intended to increase taxes on any taxpayer with taxable income below $400,000 but that’s not really distinguishable.  IRS enforcement targets anyone that is not in compliance with IRS rules regardless of their income.

3. Carried Interests Revisions

I don’t pay too close attention to this area of tax as I don’t work in private equity or work with hedge funds, but its worth noting that the buzz term “Carried Interest Loophole” is being addressed in this bill.  If certain partnership interests (e.g., hedge funds and private equity carried interests) are held by a taxpayer at any time during the taxable year, then that taxpayer’s net partnership gain for that year shall be treated as short-term capital gain.  In short, this means the gains will be taxable at ordinary income tax rates rather than the preferential long-term capital gain rates that got “Billionaire’s paying less tax than their child’s school teacher.”

Under the proposed legislation, generally a 5-year holding requirement must be met to avoid characterization of a gain from such partnership as short-term. This replaces the 3-years holding period put in place under the 2017 Tax Act

Other Concluding Thoughts

Whether this passes or not, I suspect we will see more tax revenue from the “gig economy” due to IRS rules passed earlier this year.  Starting this year, all third-party payment processors in the United States are required to report payments received for goods and services of more than $600 a year.  In the past, companies were only required to send an IRS Form 1099-K for gross payments exceeding $20,000 and more than 200 transactions within a calendar year. This may impact nanny’s, babysitters, dog walkers, and any folks living in the Venmo transfer world of gig’s and side hustles.