The Inflation Reduction Act of 2022 (IRA), successor to the House-passed Build Back Better Act of late 2021, was passed in August 2022. It contains $433 billion in gross new spending and targeted tax credits (mainly for alternative energy).
Unchanged is the state and local income tax (SALT) deduction cap. The $10,000 limit of the amount of state and local taxes that are deductible from federal income is still current law, sunsetting in 2025. In response, numerous states are enacting optional pass-through entity taxes as a workaround to the cap. The elective tax is generally deductible at the entity level for federal tax purposes while providing a credit or income exclusion for the entity owners for state income tax purposes. Learn more about this opportunity here and reach out to a professional at FORVIS to see if this opportunity is right for you.
The IRA does not have many direct changes to SALT concerns. However, states that conform to the Internal Revenue Code (IRC) on a rolling basis will have changes that taxpayers must be aware of.
The IRA extends Section 461(l), which limits an individual taxpayer’s deduction of business losses generated in a tax year. The excess business loss limitation delays a deduction for losses that exceed business income plus certain threshold amounts. This loss limited in the current year is carried forward to succeeding years following rules for net operating losses and is now extended to the end of 2028.
There also is a 1% tax on stock share repurchases by publicly traded companies, which includes state and local pension plans. This tax does not apply if the repurchases are treated as a dividend or if they are by regulated investment companies (RIC) or real estate investment trusts (REIT). Further, it would not apply to repurchases that are treated as dividends or to purchases by a dealer in securities in the ordinary course of business. The excise tax would apply to purchases of corporation stock by a subsidiary of the corporation (a corporation or partnership that is more than 50% owned). The tax also would apply to purchases by a U.S. subsidiary of a foreign-parented firm. It would apply to newly inverted (after September 20, 2021) or surrogate firms (firms that merged to create a foreign parent with the former U.S. shareholders owning more than 60% of shares). The tax would not be deductible. It would apply to repurchases after December 31, 2022.
The IRA also has many energy-related tax credits that may benefit some taxpayers. If states have a corresponding energy tax credit, they may adjust some of the state regulations and laws to mirror the federal credits. The White House has released a webpage dedicated to helping taxpayers determine which energy credits may be available to them and when.
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See more 2022 Year-End Tax Planning articles.