The Senate voted in support of the amended bill, known as the Inflation Reduction Act, at the time of writing. Next, the House of Representatives will vote on the amended bill. This is expected to take place in mid-August. On November 19, 2021, the House voted 220-213 in favor of Build back Better. It is likely to be passed quickly and Biden will sign the law. What information do we need for income tax purposes
The original Build Back Better Bill cost $3.5 trillion. It was then negotiated to 2.2 trillion and then to 1.75 trillion. The Inflation Reduction Act now amounts to $739 billion. Politicians are attempting to address the issues that we face such as inflation and climate change, prescription drug costs, tax revenue, and reducing federal deficit.
Biden repeatedly stated that taxes would not rise for people who make less than $400,000 (small business owners, middle-class families). This appears to be true in the current bill. This aspect should be monitored to see if it changes in the final bill. Corporations will fund a substantial portion of the bill through a minimum 15% tax. Companies with more than $1 billion in annual profits will be required to pay 15% as minimum tax. GAAP (Generally Accepted accounting Principles) is used to calculate book income. This method is different from taxable income. The difference between taxable income and book income can be reduced by making adjustments like accelerated depreciation, which can significantly reduce the income base on which companies pay income taxes.
The Affordable Care Act will continue to provide subsidies for taxpayers who have health insurance. This provision is extended through 2025. The income of these taxpayers shall not exceed 401% below the federal poverty level. During the Covid-19 pandemic, eligibility for the ACA premium credit tax credit was temporarily extended. The expansion would allow individuals to continue the program up until 2025 for those who qualify.
A 10-year extension will be granted to the tax credit for homeowners who have solar production systems installed. The credit is now extended to include heat pumps and energy-efficient water heaters. Solar production systems were previously eligible for a 30% tax credit. This credit has been reduced to 26% in 2022. It was to be reduced to 22% by 2023, and then eliminated entirely in 2024, unless intervention is taken. The bill proposes a restoration or the 30 percent tax credit. This also applies to solar-powered home storage batteries. Heat pumps may be eligible for tax credits of up to $8,000 and heat pump water heaters for credit up to $1,750. A maximum of $14000 can be claimed by households with incomes up to 150% above their local median income through 2031.
The EV tax credit is another popular tax credit that encourages electric vehicle adoption. These “clean vehicles” have a new name, which also includes hydrogen fuel cell cars. Individuals who want to claim these credits would have to meet income limits. High-priced luxury electric cars are unlikely to be eligible. Clean vehicle buyers will be able to tax the tax credit at the time of care purchase instead of waiting for the individual income tax return filing. It will be interesting to see if this final bill will remove the manufacturer’s limit of 200,000 vehicles per model. This would have a direct impact on Tesla’s sales.
The act provides IRS funding for $80 billion over ten year. This could prove to be a win-win situation for tax professionals and taxpayers, depending on how they allocate the money. The IRS has had to comply with additional ACA regulations in recent years. This was exacerbated by changes made by Congress during the pandemic (think payment protection loans and employee retention credits) and crypto tax compliance.
Technology at the IRS needs to be overhauled. Agents are retiring as they get older and more skilled. Histories show that audit rates are low. Bottom line, the IRS needs more money to improve its services to taxpayers and tax professionals. They also need to pay more staff. Legislators claim that the increased staff will result in more tax revenue due to improved compliance (think more audits). They are rumored to want to use the funds for the hiring of 80,000 more agents and auditors.
The tax code can be described as a form social engineering. Popular responses to rising energy prices, especially gasoline, include switching to electric vehicles and gas. It will make it easier for people who are already thinking about these expenses. This is true for homeowners who are looking to install solar panels, energy efficient appliances, or energy systems. But, will these behavioral changes and higher tax revenues reduce inflation? This is a topic that economists disagree on. Only time will tell.
Donovan Thiessen, CPA, is the founder of The Accountant, LLC. The Accountant, LLC was founded by Donovan Thiessen, CPA. We help business owners make better financial decisions through timely and accurate tax and financial analysis. You may reach Donovan at [email protected], www.theaccountantcpa.com, and 702.389.2727.
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