On August 16, 2022, the H.R. 5376 or Inflation Reduction Act of 2022 was recently signed and passed into law by US President Joe Biden. Calling the Act as “one of the most significant laws in our history”, it covers numerous provisions to address energy security and climate change programs, deficit reduction, prescription drug pricing, and healthcare premiums.
This Act is a significant piece of legislation that fulfills some initiatives that have been embroiled in congressional debates for decades and is said to be the largest congressional action and investment in fighting climate change in US history, as of date. The Act also has a provision that raises taxes on wealthy corporations and makes prescription drugs and healthcare more accessible and affordable.
What’s in the Inflation Reduction Act?
If you are already familiar with the Build Back Better bill, the Inflation Reduction Act is a ‘slimmed-down’ version of such, in which is aimed to make significant investments in the US’ “social safety net” (programs that will benefit the low-income or vulnerable individuals and communities) as part of the budget reconciliation process.
The Act is meant to aid inflation by reducing the US national debt, healthcare, and energy costs over the years.
Below is the summary of the Act’s salient provisions:
Numerous investments in climate protection, including tax credits and rebates aimed at reducing carbon emissions and offsetting energy costs for households; investments in clean energy production such as research, loans, grants, and also tax credits to increase domestic manufacturing capacity for solar panels, wind turbines, batteries, and other integral components of clean energy production and storage; programs to decrease the environmental impact of agriculture; and more.
With the new law comes the extensions of green energy tax credits ranging from 2024-2032. In addition, Green Energy Credits was added to promote sustainable growth.
Aside from the credits, the US Government also made investments to address climate issues and encourage the citizens to switch to renewable energy. It is believed that this change will reduce climate pollution by up to 40% until 2030.
This provision will cause a significant shift in customer demands which can affect traditional companies’ profitability, particularly those in the energy and automotive industry, in which products are based and reliant on fossil fuels and products with excessive carbon footprints. Unless companies adapt to these demand changes, inventories can be rendered obsolete, assets rather impaired, and businesses going under. Consideration should also be taken on how Green Energy Credits should be accounted for.
Extends the temporary expansion of Premium Tax Credits for additional two years through 2025. Under the current law, the expansion offers eligibility to households with incomes between 100% to 400% of the federal poverty level.
Under ACA, medical insurance premiums are currently subsidized by the US federal government to lower premiums. But these are scheduled to expire at the end of 2022, if not extended, which could cause millions of Americans to lose their health insurance, according to the U.S. Department of Health and Human Services.
This will continue to affect the cash flows for certain companies, especially those mandated by the ACA to provide affordable healthcare to their full-time employees since noncompliance could result in hefty annual fines.
Investment of approximately $80 billion over the next 10 years for IRS enforcement activities, including IT Systems modernization, taxpayer services, and the hiring and training of new auditors.
Stringent enforcement of IRS audit and filing is expected. Thus, companies should be more vigilant in compliance with rules and regulations and be audit-ready to avoid assessments, penalties, or even litigation. In addition, companies must carefully account for uncertain tax positions and follow the guidance of ASC 740.
Creates a 15% corporate alternative minimum tax rate for corporations with average annual earnings that exceed $1 billion over three taxable years. While tax rates on individuals and households will remain the same.
CAMT-exempt are companies with combined income with unrelated businesses of shared ownership of an investment fund/partnership even if it exceeds the threshold and corporate subsidiaries of private equity firms.
Affected companies should consider the impact of increased tax liability on their cash flows, forecasts, and investment/growth strategies.
Imposes a 1% excise tax on domestic publicly-traded corporations when it buys back its own shares directly or through a more than 50% owned subsidiary corporation or partnership.
This can impact companies as to their corporate buyback transactions, including those with outstanding shares subject to repurchase rights, stock issued in the initial public offerings of special purpose acquisition companies, and redeemable preferred stocks.
Allows Medicare to negotiate the price of certain prescription drugs to bring down the price beneficiaries will pay for their medications and limits the price growth of certain drugs due to inflation by having a $2,000 cap on the annual out-of-pocket prescription drug costs for Medicare recipients starting in 2025.
It also repeals the implementation of the “rebate rule,” which is scheduled to increase drug-related Medicare costs beginning in 2027, and redesigns the Medicare Part D benefit formula.
This can impact the bottom line and cash flow projections of various healthcare, pharmaceutical, and other life sciences and drug related companies. This can also affect pricing schemes and inventory valuation to Net Realizable Values.
Research Tax Credit – Beginning after December 31, 2022, the Research & Development (R&D) tax credit limit of $250,000 for qualified small businesses can now be applied against payroll tax liability up to $500,000.
Passthrough Loss Limitations – IRA included a two-year extension of the deductibility of the excess business losses limitation to pay for the late changes to the CAMT of partnerships and S corporations until 2028.
You may refer to this link for the full legislative text of the Inflation Reduction Act of 2022. We’d love to help.
This summarizes the significant provisions in the Act. To ensure that all factors are considered in the pursuit of reliable financial reporting, effective and efficient operations, and compliance with law and regulations, our services can be scaled to accommodate your business needs.