The Act also includes considerable tax revisions, however a stiffer international tax framework and a contentious “millionaire’s tax” are conspicuously absent from the final law.
President Biden’s promise that none of the IRS funds will result in tax increases for taxpayers with taxable income below $400,000 is supported by the Act. The new bill, among other things, encourages climate control and domestic manufacturing initiatives, extends health insurance coverage under the Affordable Care Act (ACA), allows Medicare to negotiate drug pricing, and makes progress toward deficit reduction and inflation control. This new proposal is a scaled-down version of the “Build Back Better” initiative championed by the Biden administration over the last year and a half.
It also includes considerable tax revisions, however a stiffer international tax framework and a controversial “millionaire’s tax” are noticeably absent from the final law. The following is a summary of various significant tax measures of the new law.
Corporate minimum tax
Currently, the corporation tax rate is a flat 21%, but dozens of business heavyweights can easily avoid the tax. Beginning in 2023, the Act imposes a 15% “alternative minimum tax” (AMT) on firms with an average annual adjusted financial statement income of over $1 billion for three consecutive tax years. Furthermore, certain foreign-backed firms would be subject to a $100 million cap. For this reason, the Act also sets regulations for calculating “financial statement income.”
Carried interest rules
The Act eliminates a tax loophole that Congress has been trying to close for years. Compensation paid to managers of some investment organizations is taxed at preferential long-term capital gain rates rather than high-taxed ordinary income rates under current “carried interest” laws after a three-year holding period. These managers typically need to maintain a five-year holding period to qualify for long-term capital gain.
A wide range of energy credits for the corporate sector is being expanded and/or extended. Furthermore, consumers are encouraged to “go green” by investing in renewable energy. Buyers of new electric vehicles (EVs) will be entitled to a $7,500 credit for EVs placed in service before 2033, but the manufacturer’s restriction would be eliminated for EVs sold after 2022. In addition, a credit of up to $4,000 will be given on previously owned EV purchases. Finally, the domestic energy property credit is prolonged until 2033, when it will be phased out.
IRS enforcement and administration
For the IRS to offer taxpayers and other services, the Act appropriates $3.18 billion. It also appropriates $45.6 billion for IRS expenses to bridge a projected $441 billion tax deficit. This includes determining and collecting taxes, providing legal support, conducting investigations, offering digital asset monitoring and compliance services, enforcing criminal statutes against any violation of the Internal Revenue Code, purchasing & rent passenger vehicles, and offering other services.
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