The Inflation Reduction Act's Impact on Your Client's Bottom Line

Proposed Corporate Tax Hikes

The act contains a provision that would add a new 15% corporate alternative minimum tax to ensure that corporations with at least $1 billion in profits would be subject to a minimum 15% income tax rate (remember that the traditional corporate alternative minimum tax was eliminated in the 2017 tax reform package). 

The 15% rate would be applied to the company’s “book income” rather than adjusted gross income as reported to the IRS, in an effort to prevent corporations from using loopholes to escape taxation.

If enacted in its current form, the new law would require corporations to determine their tax liability in two ways. First, the corporation would calculate taxes using the existing 21% rate structure, using currently available deductions and credits.

Second, they would calculate tax liability by applying the 15% rate to their book income as reported to shareholders and investors on financial statements. The corporation would then owe whichever rate is higher.

In the end, the new system would mean that many corporations wouldn’t be able to take advantage of existing tax deductions and credits.

Energy-Related Tax Credits

The act also proposes significant changes that could affect clients’ financial decisions surrounding adopting cleaner energy initiatives. For example, the act would provide a 10-year extension of current tax credits for individual homeowners for clean energy home projects, such as rooftop solar panels and energy-efficient HVAC systems.

The law would also extend the existing electric vehicle tax credits for 10 years. The law would also, however, contain limits on the vehicle’s manufacturer’s retail sales price and income restrictions. That means that some of the wealthiest taxpayers would be unable to take advantage of electric vehicle tax credits, and luxury vehicles would not qualify.

The law also proposes to allow taxpayers to claim the electric vehicle tax credit at the time the vehicle is purchased, so that average Americans would not have to wait until they file their taxes to take advantage of the credit.

Conclusion

It now seems highly likely that the Inflation Reduction Act will be signed into law this month. Taxpayers should pay close attention to the details going forward, as some of the green energy initiatives could create tax savings going forward.

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