The Inflation Reduction Act was signed into law on August 22, 2022. The bill implemented several clean energy tax breaks for businesses investing in solar, wind, biofuels, and carbon capture projects. It also put in place tax breaks for individuals who purchase eligible electric vehicles or upgrade their homes to reduce their energy use, as well as a temporary extension of the expanded premium tax credit for health insurance plan costs.

To offset the cost of those incentives and reduce federal deficits, the law established a new corporate minimum tax based on the financial accounting “book” income reported by large corporations, and it imposed a new 1 percent excise tax on stock buybacks. The law also provided the IRS with $80 billion in new funding over the next decade. The Congressional Budget Office and other estimators projected that the funding would be a net gain for the federal government, though the revenue estimates differ widely.

Corporate Minimum Tax

The new alternative corporate minimum tax applies to the adjusted financial statement (book) income of US corporations with three-year average adjusted book income above $1 billion, as well as foreign corporations with average US income above $100 million.

About 470 US companies met that threshold as of 2022, although many would not be affected because they already pay more in taxes than the minimum amount. The Joint Committee on Taxation (JCT) reported that about 150 companies will be subject to the minimum tax. The new minimum tax is estimated to raise about $222 billion over 10 years.

A major difference between the income corporations report on tax returns versus financial accounting statements is from the use of accelerated and bonus depreciation, which gives businesses more generous tax deductions in the year they make a new investment than financial accounting rules would specify. As a result, there were concerns that earlier versions of the minimum tax would have inadvertently discouraged business investments by firms subject to the tax. Before passage, Senate lawmakers amended the proposal to allows corporation to use bonus and accelerated depreciation in their minimum tax calculation. The final bill also removed from the minimum tax private equity subsidiaries controlling multiple corporations with total earnings above the $1 billion threshold. Companies can also use green credits and the research and experimentation credit against the minimum tax.

Remaining major differences between book and taxable income would still apply, such as the treatment of equity-based compensation and tax-exempt interest income.

Excise Tax on Stock Buybacks

The Inflation Reduction Act requires publicly traded companies to pay a 1 percent excise tax on stock buybacks, which have grown in popularity in recent years. The JCT estimated that the provision would raise $74 billion over a decade. Supporters of the proposal note that the tax could help equalize the tax treatment between stock buybacks and dividends. Both return profits to investors, but stock buybacks allow foreign investors to avoid US taxation that would apply to dividends and have other tax advantages.

Clean Energy Tax Breaks

Original JCT estimates found that the Inflation Reduction Act made available about $260 billion in environmental tax credits over 10 years. Subsequent estimates from JCT and others have found the federal revenue cost will be roughly two-thirds greater due to higher than anticipated demand, among other factors.

The largest are the renewable energy production tax credit (PTC) and investment tax credit (ITC). The PTC provides a subsidy of up to 2.6 cents per kilowatt hour of renewable energy produced for a project’s first 10 years, and the ITC provides an investment tax credit of 10 to 30 percent of a renewable energy project’s capital cost. In the absence of federal carbon pricing, these two credits form the core of the US energy transition policy.

The new law retroactively extended the PTC, which expired at the end of 2021, through December 31, 2025. It also extended the ITC, which was set to phase out by the end of 2024, through the end of 2025. The new clean electricity production and investment credits also allow firms to choose either the ITC or the PTC (though not both).

Other clean energy and energy efficiency tax breaks put in place include the following:

• Up to $7,500 for eligible electric vehicles that meet domestic sourcing requirements
• Various credits and deductions for home and business property improvements that increase a structure’s energy efficiency
• Credits for zero-emission nuclear energy projects, carbon dioxide sequestration, and investments in biofuels such as ethanol

Raising Revenue through Improved IRS Tax Enforcement

The federal government loses out on billions of dollars each year through the tax gap—the difference between the proper amount of tax owed and what the government collects in taxes. The latest IRS estimates (for tax years 2014–16) find the average annual tax gap for that three-year period exceeded $400 billion. Declining IRS funding over the past decade has exacerbated the problem, resulting in a sharp decline in audits of high-income taxpayers and corporations. The funds will help reverse the decline in audits and also help improve IRS customer service for taxpayers and practitioners.

Throughout his campaign and since taking office, President Biden has maintained that he will not approve any tax increases for taxpayers earning less than $400,000 per year. The administration has since extended that pledge to include new audits made possible by the $80 billion in additional funding for the IRS. It is currently unclear how that could play out in practice, though Biden and the IRS have noted that audit rates for taxpayers with reported incomes under that threshold will not increase beyond “historical” levels.

Less than a year after the Inflation Reduction Act was enacted, a debt ceiling deal between President Biden and then-House Speaker Kevin McCarthy (R-CA) authorized reducing the new tranche of IRS funds by up to $21.4 billion in the next three years. Depending on the details of upcoming budget legislation, reduced IRS resources could impact the IRS’s long-term spending plans.

Updated January 2024