US Inflation Reduction Act: Exploring benefits and implications for your clients

With numerous bills, such as Waxman-Markey and the Build Back Better act previously failing to pass the Senate, the legislation’s success appeared almost suddenly, passing by a margin of 51 to 50 votes. 

From a climate perspective, the IRA marks commendable progress. Through investment in renewable energy infrastructure and incentivization, forest protection, and carbon capture development, the US will be on track to lower greenhouse gas emissions by approximately 40% below 2005 levels in 2030. 

In addition to the climate, the IRA addresses a number of other key topics, including prescription drug costs, special interests, healthcare, and taxes. Let’s take a look at the IRA from an accounting perspective, focusing on several aspects that can impact you, your firm, and your clients.

Business implications of the IRA

In order to fund the initiatives set out in the IRA, several new tax measures have been introduced, including a 15% corporate minimum tax on profits, frequently referred to as the ‘minimum book tax’. This measure acts as an alternative minimum tax (AMT), specifically on book income. 

Organizations will be expected to calculate their regular tax liability, followed by their new liability under the AMT, ultimately paying whichever is higher. But it’s estimated that a relatively low number of companies will be liable for such payments, because:

• For US-based operations, the AMT applies only to those with more than $1 billion in annual net book income

• For foreign multinationals with US subsidiaries, while the threshold starts at $100 million, only those with greater than $1 billion in annual profits will qualify 

According to the Joint Committee on Taxation, roughly 150 companies will be liable to pay this new tax, but it is estimated that many more will need to perform the same tax calculations to be sure of potential implications. 

The minimum book tax provides an interesting case study on the increasing overlap between accounting and tax rules as well. It’s seeking to address the contradiction of major organizations reporting strong accounting profits to shareholders on the one hand, and paying little to no US taxes on the other. 

As Adam Schrom of Bloomberg Tax puts it, “The Financial Accounting Standards Board… will have a rather large influence over the amount of tax that our largest companies pay in a given year”, resulting from a combination of recently issued revenue recognition rules and the implications of the minimum book tax. 

For smaller businesses, the corporate minimum tax poses little concern. In fact, from a broader perspective, the IRA is being welcomed as an opportunity for small business, doubling the refundable research and development tax credit from $250,000 to $500,000—a highly lucrative option for many. 

Household incentives of the IRA

US-based climate initiatives have received significant support and future investment, from $10 billion for clean tech manufacturing to $60 billion for projects that reduce climate impacts in under-served communities. But infrastructure and business aren’t the only recipients of the IRA’s impact. Much of it will drive environmental impact through household-oriented incentives. 

At the consumer level, individuals may qualify for more than $10,000 in financial incentives, through tax benefits and rebates surrounding electric vehicles and home efficiency. 

Electric vehicle purchases

For new electric vehicle purchases, tax credits up to $7,500 are available, while used vehicles qualify for up to $4,000. The provision of these credits through the IRA comes as an addition to previous law, and a number of factors, such as vehicle materials, manufacturing location, and year purchased will impact the eventual tax outcome.

Home efficiency

For home efficiency, the IRA includes two credits, and two rebate programs, boasting incentives such as:

• 30% tax credits for improved insulation and solar panel installation

• Up to $14,000 in rebates when home owners buy energy efficient appliances, such as heat pumps for heating and cooling 

Broadly speaking, these incentives will not be available immediately. But when they’re properly implemented, they provide an opportunity to help your clients drive environmental impact, while simultaneously increasing returns.

A step in the right direction

The IRA represents a significant shift, both in the fight against climate change, and the rules, parameters, and opportunities US-based accounting firms operate within.

Nonetheless, from an environmental perspective, the IRA is seen as a step in the right direction. Ultimately, it will take initiative across individuals, governments, and perhaps most importantly, businesses, to create the change necessary for a truly sustainable and livable future for all.