What’s in the Inflation Reduction Act?

The $430 billion Act aims to combat climate change, reduce health-care costs, raise corporate taxes, and reduce the federal deficit.  The package would authorize the largest climate related spend in US history which aims to tackle global warming and reduce greenhouse gas emissions by 40% by 2030.  Another notable component of the Act is to reduce prescription drug costs for Medicare participants.  While the price tag is record-setting, by tweaking federal tax laws on certain large corporations, the Act is expected to raise enough money to cover the spend while also generating an additional $300 billion over the next decade to assist in reducing the budget deficits.

1. Prescription Drugs and Insurance

• The provisions addressing prescription drug pricing aims to reduce costs for seniors enrolled in Medicare by capping their out-of-pocket costs at $2,000 per year.
• Also included in the Act is the ability for the US government to negotiate the price of a small list of medications beginning in 2026 and a $64 billion allocation to stave off health insurance premium increases for nearly 13 million Americans who buy coverage under the Affordable Care Act - extending subsidies until 2025.

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2. Climate Change

• Tax credits to incentivize renewable energy sources, to help people purchase new or used electric vehicles and to install energy-efficient heating and cooling systems in their homes.
• Bill ends the per-manufacturer limits for the $7,500 tax credit for EV purchases and eliminates the phaseout for manufacturers who sell greater than 200,000 EVs.  
• Manufacturers will have to ensure their vehicles are built in North America and that they end their reliance on China for the EV battery supply chain to qualify for the EV credit.
• Splits the $7,500 credit into two components:

1.    $3,750 tax credit if the vehicle meets a “critical materials” requirement. The critical materials requirement outlines that a specified portion of the materials contained in the battery must be extracted or processed in a county with which the US has a free trade agreement or that they be recycled in North America.
2.    $3,750 tax credit if the vehicle meets a “battery component” requirement.  The battery component requires that a portion of the components must be manufactured or assembled in North America.  Introduces caps on the cost of the vehicle and the taxpayer income.

• Introduces caps on the cost of the vehicle and the taxpayer income per the chart below:

• Alternative Fuel Refueling Property Credit provides a tax credit of 30% of the property’s cost with a limit of $100,000 per item of property.
• Provides a new business tax credit of up to 15% of the cost of certain commercial clean vehicles or up to 30% if the vehicle is not powered by a gasoline or diesel internal combustion engine with a per vehicle limit of $7,500 for a vehicle weighing less than 14,000 pounds and $40,000 for commercial clean vehicles over 14,000 pounds, like the Tesla Semi.
• Provides a tax credit for individuals of $4,000 or 30% of the sale price for a pre-owned electric vehicle two years old or newer.  The tax credit is available to taxpayers with gross income of $150,000 or less (for joint filers), $112,500 (for heads of household) and $75,000 (for others).
• Creates a $1.5 billion program to reward companies that cut emissions and penalties for companies who do not.
• Provides funding for research and state programs to reduce pollution and preserve forests and coastal habitats.
• Includes new oil and gas leasing in the Gulf of Mexico and off the coast of Alaska to boost fossil fuels

3. Corporate Tax

• New tax on a set of large companies that currently have a very low effective tax rate – new 15% minimum tax on corporations with an income of at least $1 billion.
• Would require these companies to calculate their annual tax liability in one of two ways, whichever is higher: 1. Using longstanding tax accounting methods, which is 21% of profits less deductions and credits; or 2. Applying the 15% rate to the earning they report to shareholders on their financial statements.
• 1% tax on companies that buy back their own stock.
• Estimated to generate $313 billion of revenue and $80 billion allocation to the IRS for increased enforcement efforts.

As we continue to monitor the bill, we will keep you informed.   Please contact us at CPC Advisors if you have any questions along the way.

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