Background on Build Back Better
The Build Back Better Act (BBBA) proposed in 2021 was a $1.7 trillion legislative package containing President Joseph Biden’s ambitious plan for targeting social issues and climate change. The revenue needed to support the spending in this plan was to come primarily from new or increased taxes on businesses and on wealthy individuals, their trusts and their estates.
While the BBBA passed the House in the fall of 2021, it was stymied in the Senate, primarily by Senator Joe Manchin who felt that the high cost of the bill would be economically damaging to the country.
Updated Legislation Announced
So, it was a surprise to many when Senator Manchin and Senator Chuck Schumer announced at the end of July their renamed, updated version of the BBBA, now titled as the Inflation Reduction Act of 2022 (IRA). Like they did with the BBBA, Congress worked to pass the $485 billion IRA spending package through the budget reconciliation process. This process allowed the bill to pass with a simple majority vote. As expected, the voting was split along party lines.
What Is in the Inflation Reduction Act?
Among other items, this updated bill includes provisions for improving prescription drug prices and cost sharing for Medicare recipients, an extension and expansion of the Affordable Care Act tax credits, a significant amount of extended and new renewable energy tax credits (including some for clean energy vehicles) and funding for coastal communities, their habitats and weather forecasting needs.
Items in the IRA that may affect our clients more directly include:
- An alternative minimum tax of 15% of a domestic corporation’s average annual adjusted financial statement income that exceeds $1 billion over a specified three-year period. This does not include S corporations, real estate investment trusts and regulated investment companies. This will be effective for tax years after December 31, 2022.
- Increased IRS funding, part of which is earmarked for significantly increasing the number of audits.
- Imposition of an excise tax of 1% on the fair market value of stock repurchased by a domestic corporation after 2022 (with a few exceptions).
- Doubling to $500,000 the research tax credit that certain small businesses can claim against their payroll taxes.
- Extension through 2028 of the current Limitation on Excess Business Losses law which disallows owners of pass-through entities (PTEs), such as S corporations and partnerships, to use PTE losses above $250,000 (for single taxpayers) to offset their nonbusiness income. This $250,000 cap is indexed to inflation, so it will change each year through 2028. In 2022, the cap is $270,000.
What Isn’t in the Inflation Reduction Act?
Many of the original BBBA’s revenue raising proposals would have had significant impact for high net worth individuals. Most of those proposals have been stripped out of the IRA, which no longer includes:
- Estate and gift tax changes.
- Small business stock gain exclusion.
- Carried interest tax changes.
- Surcharges on wealthy individuals.
- Tax rate changes.
- Changes in tax treatment of trusts.
- Retirement fund tax changes.
Another item missing from the IRA is a lifting of the current federal deduction limit of $10,000 for state and local taxes (SALT). This low limit has been a big point of contention for legislators since its inclusion in the Tax Cuts and Jobs Act of 2017, but it appears that many in Congress have decided to let this argument go since the $10,000 limit is already scheduled to sunset at the end of 2026.
Remaining Tax Change Risks for 2022
The IRA could have a big impact on some businesses and increases your likelihood of being audited in the future, but it does not create a current threat to the estate planning techniques you have used. While there is always a chance that a proposal from the original BBBA could be reintroduced into Congress in its own bill, the chances of such a bill being enacted by the end of the year are slim, both because it is already mid-August and because it is an election year. However, we were surprised by this legislative action, so we cannot completely discount the possibility of further action affecting wealthy individuals this year.
We have only hit the highlights of the 728-page IRA in this post, so reach out to your Warner attorney or to Sean Cook at email@example.com or 313-546-6058 for additional information about how the provisions of the IRA will affect you or your business.
See the full text of H.R. 5376: Inflation Reduction Act of 2022 here.