On Wednesday, July 27, Senate Majority Leader Schumer and Senator Manchin released an outline of a significant package of tax, climate, energy, and healthcare measures. Total revenues expected from the package would be about $739 billion, of which $300 billion would go toward deficit reduction. The rest would go toward climate and healthcare initiatives. The draft legislation (725 pages) with further detail was also released.

The bill would still need to get approval from all 50 Democrats in the Senate and could face opposition in the House. Here are some of the highlights of the package, titled the “Inflation Reduction Act of 2022”:

15% Corporate Minimum Tax on Book Earnings
This would apply to large corporations that report large profits but pay little or no tax.  Companies could generally still use net operating losses and credits against the tax, so may still pay less than 15%. The corporate income tax rate of 21% would not be changed, and the bill does not include a separate 15% minimum tax on U.S. companies’ foreign profits, meaning that it does not align with the Organization of Economic Cooperation and Development’s framework for a global minimum tax.

Prescription Drug Pricing Reform
The bill would allow Medicare to negotiate for prescription drug prices.

IRS Tax Enforcement
The IRS would get an additional $80 billion, which would go towards improving enforcement – mainly on corporations and high-income individuals – as well as customer service.  This is expected to generate $124 billion in additional revenue.

Closing the Carried Interest Loophole
The required holding period to avoid the carried interest rules would be extended from 3 years to 5 years, and would significantly expand the scope of income subject to recharacterization under those rules. This would primarily affect private equity and hedge fund managers who would otherwise get capital gains rates on this income.

Electric Car Credits 
A $7,500 credit would apply to new vehicles and a $4,000 credit for used vehicles.  The manufacturer limitation on electric vehicles sold, currently applying only to Tesla and GM, would go away. There will be an MSRP limitation of $80,000 for SUVs, pickups, and vans and $55,000 for other vehicles. No additional credit will be provided for automobiles manufactured in union shops, which was in earlier proposed legislation, but there is a US assembly requirement. An adjusted gross income limit of $300,000 for married filing jointly, $225,000 for head of household, and $150,000 for other taxpayers would apply with no phase-out.  

Clean Energy Incentives
Incentives would be provided under the bill to invest in clean energy production and the use of many types of fuel, including hydrogen, nuclear, renewables, and, importantly, fossil fuels.  This would include, for example, biodiesel and other alternative fuels. 

Energy Credits
The bill would provide tax credits to homeowners for renewable energy improvements, including solar roof systems, energy-efficient heat pumps, and other energy-saving expenses, plus incentives for solar and wind farms.

Affordable Care Act premiums
Under the deal, the subsidies under the ACA set to expire at the end of this year would be extended through 2025.  

What’s Not in the Bill
There are a few things that are not in the proposed package that were in earlier bills. including the state and local tax (SALT) deduction limitation of $10,000, which was left unchanged.  Another is the additional Net Investment Income (NII) Tax of 3.8% on all income from passthrough entities, regardless of whether a passive or active investment.  Also left out is a surtax on individuals with more than $10 million in income.  

What’s Next 
The bill will still have to go through the budget reconciliation process, under which a bill can be passed by simple majority rather than the 60 votes normally required in the Senate. However, such legislation is subject to special rules and restrictions.

If you have questions about the implications of this bill, contact us to speak with a tax advisor.

The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.