In a surprise move last week Senator Schumer and Senator Manchin announced a deal on healthcare, energy, and taxation. This deal came as a surprise to many as it was much more extensive than the reconciliation package Senator Manchin had agreed to just a few weeks earlier. While this bill has Manchin’s support, it is far from certain that it will pass the Senate. This bill is far less expansive than the original $1.75B Build Back Better Bill that passed the House late in 2021, but still has many provisions that CPAs and their clients need to be aware of if it moves forward.
The first thing that businesses need to be aware of is the revenue provisions. The bill has two significant areas of tax increases, a 15% minimum tax on “Applicable Corporations”, and a closure of the carried interest loophole. The 15% minimum would be applied on applicable corporations defined as businesses with a 3-year average financial statement income of over $1 billion. This provision is expected to increase taxes by approximately $313 billion dollars. Additionally, the bill closes the so-called carried interest loophole. Carried interest is the percentage of an investment’s gain that a private equity or hedge fund manger takes as compensation. Under current law this is taxed at a capital gains rate of 20%, this bill would increase that to the top individual bracket of 37%. It is expected that this would raise an additional $13 billion.
In addition to the tax increases mentioned above another potential revenue generator in the bill relates to IRS funding. Under this bill the IRS would receive an additional $80 billion in funding for taxpayer services, enforcement, operations support, and modernization. Of this $80 billion more than $45 billion is for enforcement over the next nine years. This is expected to increase revenues by $124 billion over ten years.
The above referenced increased revenue provisions will help offset some of the many energy provisions included in this bill. These include extending the Investment Tax Credits and Production tax Credits for alternative energy projects, new and expanded credits for electric vehicle purchases, incentives for biofuels and other renewables, among other provisions.
One area that will see significant change under this bill is the 45L tax credit and 179D Energy Efficient Building Deduction. The 45L Tax credit is extended until 2032 with an increase to the amount eligible in certain situations. For single family homes the credit increases to $2,500 with the potential for a $5,000 per home credit, and for multifamily the base credit decreases to $500 to $1,000 with the potential of a $5,000 credit if certain prevailing wage requirements are met. The 179D tax deduction has a similar change with the base deduction dropping to $1/sf but can increase to $5/sf if prevailing wage requirements are met. Additionally, a provision is added to allow for the 179D deduction to be transferred from certain Tax-Exempt entities.
Finally, it is important to note what was not included in this legislation. While the legislation did include an increase in the amount of the Research Tax Credit that can be claimed against payroll taxes by $250,000, it does not include a fix to the amortization requirement put in the TCJA. Additionally, the bill does not adjust the GILTI rate from the current 10.5%.
These are just some of the highlights of this expansive legislation. Over the coming weeks McGuire Sponsel will monitor this pending legislation and provide detailed updates on relevant sections.
For a comprehensive discussion on each of these legislative updates, watch our webinar where Dave McGuire shares:
• An overview of the CHIPS+ and Inflation Reduction Act of 2022
• A detailed summary of the tax provisions in both bills
• An update on provisions that were excluded from these bills
David McGuire is a leading expert on cost segregation, fixed assets and depreciation law and a co-founder of McGuire Sponsel.
McGuire is an expert on for how tax law affects depreciation. His knowledge in determining asset costs and classifications has held up against IRS scrutiny and has built the firm into a trusted industry partner.