On July 27, Senator Joe Manchin, in an apparent intraparty compromise, announced a tentative deal with Majority Leader Chuck Schumer on important energy, climate and tax provisions the Biden administration has been trying to push forward for the past 18 months―many of which were included in the Build Back Better Act under consideration this time last year. The reconciliation bill, dubbed the Inflation Reduction Act of 2022, signals a willingness of moderate Democrats to compromise with other members of the party and put forth significant legislation prior to an uncertain midterm election this fall.
- Creation of a 15 percent corporate minimum tax based on book income;
- $80 billion of funding to the IRS to increase enforcement;
- Ending the carried interest rule, which allows private equity and hedge fund managers to classify some of their compensation as capital gains rather than ordinary income;
- Changes to the electric vehicle tax credits, including a $4,000 credit for used vehicles, eliminating the new vehicle cap based on the number of vehicles sold by the manufacturer and limiting the credit for new purchases to vehicles made in the U.S. under a certain MSRP and for taxpayers with incomes under $300,000;
- Extending and enhancing premium tax credit assistance under the Affordable Care Act;
- Extending and enhancing certain existing energy tax credits, including:
- Renewable electricity production credit;
- Biodiesel and renewable diesel credit;
- Alternative fuel credit;
- Nonbusiness energy property credit, which expired in 2021;
- Residential energy efficient property credit; and
- Creation of new energy credits, including:
- Credit for production of clean hydrogen;
- Nuclear power production credit;
- Clean electricity production credit;
- Qualified commercial clean vehicles credit;
- Clean electricity investment credit; and
- Clean fuel production credit.
However, the bulk of the bill is actually nontax-related provisions, with a large focus on prescription drug pricing reform, as well as funding for climate change and environmental projects, such as:
- $710 million to the National Oceanic and Atmospheric Administration;
- $300 million to develop alternative and low-emission aviation fuel;
- $4.3 billion for a home energy rebate program administered by the states;
- $1 billion for Zero Building Energy Code adoption;
- $2.76 billion toward electricity transmission lines and facilities;
- $5.8 billion for advanced industrial facilities;
- Nearly $2 billion for National Laboratory infrastructure;
- $250 million for National Parks and public lands conservation and restoration;
- $500 million to hire park service employees;
- $1 billion to develop zero emission heavy duty vehicles;
- $3 billion to reduce air pollution at ports; and
- $27 billion for a Greenhouse Gas Reduction Fund.
In addition, the bill authorizes the Department of Energy to extend $40 billion in loans to reduce greenhouse gases and $250 billion in loans for investments in energy infrastructure.
Many of the most highly debated and publicized tax provisions are excluded in this draft of the bill, including:
- Changes to the $10,000 state and local tax (SALT) itemized deduction limitation;
- Changes to the estate and gift tax;
- Changes to capital gains taxes; and
- Changes to individual ordinary income tax rates.
While this is the most progress Democrats have made in advancing tax legislation in months, there is still a long way to go until this bill becomes law. Importantly, Democrats cannot afford to lose a single vote from their party in the Senate, and just a few votes in the House. Senator Manchin’s fellow moderate, Senator Kyrsten Sinema of Arizona, opposes several of the components of this deal, including the taxing of carried interest, and her vote is crucial to ensuring passage of the bill in the Senate. It is likely we will see additional changes to the bill in the coming months as senators try to flex their influence. As major legislative developments and opportunities emerge, we are always available to discuss the impact of new or pending tax law on your personal or business situation.