What Is HR 5376, The Inflation Reduction Act?

On August 16, 2022, President Biden signed H.R. 5376, the Inflation Reduction Act of 2022, into law. The act’s objectives are to lower the national deficit, reduce prescription drug costs for consumers, and make investments in domestic energy production and climate initiatives. It represents the largest federal legislative effort to address climate change in U.S. history. The law contains provisions that reform corporate taxation, extend clean energy tax credits to individuals, overhaul healthcare cost structures, and allocate new funding to the Internal Revenue Service.

Corporate Tax Reforms

The Inflation Reduction Act introduced a 15% Corporate Alternative Minimum Tax (CAMT). This tax targets corporations with an average annual adjusted financial statement income exceeding $1 billion over a three-year period. The tax addresses situations where large companies report substantial earnings to shareholders but pay a much lower effective tax rate, a discrepancy that arises from different accounting methods for financial reporting versus tax liability.

The calculation for the CAMT begins with a corporation’s “book income,” which is the net income reported on its financial statements. This figure is then adjusted for items like depreciation and foreign taxes. If 15% of this adjusted income is greater than the corporation’s regular tax liability, the company must pay the difference.

The act also instituted a 1% excise tax on the fair market value of stock repurchased by publicly traded corporations. A stock repurchase, or buyback, occurs when a company buys its own shares from the marketplace. The tax is applied to the value of the repurchased stock, minus the value of any new stock issued during the same taxable year, including stock issued to employees. This non-deductible tax is intended to encourage corporations to reinvest in their business operations and workforce instead of using profits for stock buybacks.

Clean Energy Credits for Individuals

The Inflation Reduction Act expanded and modified tax incentives for individuals to adopt cleaner energy technologies for vehicles and home improvements. These credits are designed to make electric vehicles and energy-efficient home upgrades more financially accessible, though they have complex eligibility requirements.

Clean Vehicle Credits

The act provides a tax credit of up to $7,500 for qualifying new clean vehicles, with limitations based on the buyer’s income, the vehicle’s price, and its manufacturing origins. To claim the full credit, a taxpayer’s modified adjusted gross income cannot exceed $300,000 for joint filers, $225,000 for heads of household, or $150,000 for single filers. The manufacturer’s suggested retail price (MSRP) is also capped at $80,000 for vans, sport utility vehicles, and pickup trucks, and $55,000 for all other vehicles.

The credit is divided into two $3,750 components, each with its own sourcing requirement for the vehicle’s battery. One half is contingent on a percentage of the battery’s critical minerals being extracted or processed in the United States or a country with which the U.S. has a free trade agreement. The other half depends on a percentage of the battery’s components being manufactured or assembled in North America. The law also introduced a credit of up to $4,000 for previously-owned clean vehicles.

Home Energy Credits

Homeowners are offered incentives to improve their property’s energy efficiency. The Energy Efficient Home Improvement Credit allows for a tax credit of 30% of the cost of qualifying improvements, with an annual cap of $1,200. This credit can be applied to expenses for:

• Exterior doors
• Windows
• Insulation
• Energy audits

Specific project types have their own limits within this overall cap, such as a $600 limit for energy-efficient windows and a $500 limit for exterior doors.

A separate Residential Clean Energy Credit provides a 30% credit for the cost of new, qualifying clean energy property for the home. This includes equipment like solar panels, solar water heaters, wind turbines, and battery storage technology with a capacity of at least 3 kilowatt-hours. Unlike the home improvement credit, this incentive has no annual or lifetime dollar limit, except for fuel cell property.

Healthcare Affordability and Cost Provisions

The Inflation Reduction Act is dedicated to addressing healthcare costs, particularly for Medicare beneficiaries and those with marketplace insurance plans. The legislation introduces provisions aimed at controlling prescription drug prices and reducing out-of-pocket expenses.

One feature is the empowerment of Medicare to negotiate the prices of certain prescription drugs directly with manufacturers. This authority is being phased in over several years, with the first round of new prices for ten Medicare Part D drugs taking effect in 2026. A second round for an additional 15 Part D drugs will become effective in 2027. The number of drugs subject to negotiation will continue to expand, including drugs covered under Medicare Part B starting in 2028.

The act also provides more immediate financial relief for Medicare recipients. Out-of-pocket costs for insulin products covered under Medicare were capped at $35 per month per prescription. Furthermore, the law establishes a cap on out-of-pocket spending for prescription drugs under Medicare Part D. Starting in 2025, beneficiaries’ annual out-of-pocket costs for drugs will be capped at $2,000.

To assist a broader population, the legislation extends the enhanced premium tax credits for individuals and families purchasing health insurance through the Affordable Care Act (ACA) Marketplace. These subsidies, originally expanded under the American Rescue Plan Act, are now extended through 2025. The enhanced credits ensure that no one pays more than 8.5% of their household income for a benchmark plan and allows individuals with incomes above 400% of the federal poverty level to remain eligible for assistance.

Internal Revenue Service Funding

The Inflation Reduction Act initially allocated approximately $80 billion in supplemental funding to the Internal Revenue Service (IRS) over a ten-year period, though subsequent legislation has reduced this amount by nearly $22 billion. This funding is intended to address long-standing issues within the agency and is directed toward four main categories to improve its effectiveness.

A significant portion of the funds is designated for enforcement activities. The Treasury Department has directed the IRS to focus these enhanced enforcement capabilities on the complex tax filings of large corporations, partnerships, and high-wealth individuals. The goal is to close the “tax gap,” which is the difference between taxes owed and taxes paid.

Another area of investment is business systems modernization, aimed at overhauling the IRS’s technology infrastructure. This funding is for developing new digital tools to streamline tax processing and improve data security. The remaining funds are split between taxpayer services and operations support. Taxpayer services funding is meant to improve direct public assistance, while operations support covers the day-to-day costs of running the agency. The Treasury Department has stated that the new funding is not intended to increase the audit rates for small businesses or households earning less than $400,000 per year.