The budget reconciliation bill, commonly referred to as the Inflation Reduction Act, was signed into law in August. The $700 billion-plus legislation represents only a fraction of the social agenda initially sought by the Biden administration but is a considerable climate, health care, and tax package.

The most significant provisions of the bill include:

• The premium tax credits, aimed at lowering the cost of health insurance through marketplace coverage, as initially passed under the Affordable Care Act, were increased and expanded under the American Rescue Plan. Those expansions will continue an additional three years, through 2025.

• For the first time, the U.S. Department of Health and Human Services can directly negotiate Medicare drug pricing with pharmaceutical companies for certain qualifying prescription drugs, saving the federal government significant dollars. The provision includes up to 10 Medicare Part D drugs beginning in 2026, increasing to 20 drugs in Parts D and B in 2029.

• For Medicare beneficiaries, out-of-pocket drug costs are capped at $2,000 per year, monthly insulin co-payments are capped at $35, and cost-sharing for adult vaccines is eliminated.

The most significant tax increases — “deficit reduction” provisions under the bill — are primarily aimed at the largest corporations. To summarize:

• The bill will impose a new minimum tax on corporations with average annual income over $1 billion. The minimum tax applies if 15% of financial statement income (plus or minus the various deductions and addbacks specifically provided) results in a higher tax than the traditional tax imposed on taxable income. Certain tax adjustments (e.g., depreciation deduction for certain industries, some defined credits) are permitted. The new corporate tax is estimated to raise $222 billion.

• 1% excise tax on publicly traded companies on the excess of repurchased corporate stock over any new issues to employees or the public. The tax does not apply if the amount of net buybacks for a corporation is less than $1 million. The new excise tax is estimated to raise $74 billion.

Another major provision aimed at raising revenue is the appropriation of additional funds of nearly $80 billion over a 10-year period for the IRS to enhance enforcement activities, operations support, and business system modernization. (This is a significant increase in funding for the agency with a FY year 2022 budget request of $13.16 billion.) More than half of the new funding (roughly $45.6 billion) must be used to determine and collect owed taxes, provide legal support, conduct criminal investigations, and provide digital asset monitoring and other compliance-related activities.

A tax increase on business owners operating as a sole proprietor or pass-through entity that has not garnered the same media attention as the corporate tax hikes and IRS funding is the limit on excess business losses. The complicated tax rule generally limits a taxpayer’s ability to offset investment or employment income with a business loss, even if the taxpayer is actively involved in the business. This less-well-known provision, which was extended until the end of 2028, is estimated to raise an additional $54 billion in taxes on individuals.

So, what was left out? The vast majority of proposed tax increases on individuals were not included in the final bill. There are no changes to the individual income tax rates or added surcharges on individuals, estates, and trusts with income over certain thresholds. The proposed hike in the capital gains rate did not happen. The estate and gift tax rates, exemption amount, and related tax rules (including “stepped-up basis” upon a taxpayer’s death) are also unchanged — which means estate planning will continue to be a focus for many families and business owners until the favorable provisions passed under the Tax Cuts and Jobs Act (TCJA) sunset at the end of 2025.

The expansion of the Medicare surtax to active business income also did not occur. This is good news for materially participating business owners (including real estate professionals) who would have paid an additional 3.8% tax on a portion of their income.

The fate of a few tax proposals remained uncertain up until the act was signed into law.  However, the taxation of an investment manager’s profits from a private equity, hedge fund, or venture capital investment (referred to as a “carried interest”) was not changed in the final package. The extension of the $10,000 limit on a taxpayer’s deduction for state and local income taxes (the so called “SALT cap”) was similarly left out.

One business-favorable provision that had a chance, but was ultimately dropped, was the ability to immediately deduct research and development costs each year. Due to TCJA, businesses will need to amortize these costs (generally over five years) for 2022, unless retroactively addressed by Congress after the election.

For more information, contact William Moore at william.moore@CLAconnect.com or 781-610-1224. For more information on CliftonLarsonAllen LLP, visit CLAconnect.com.

This article originally appeared on The Patriot Ledger: President Biden signs Inflation Reduction Act into law