The Inflation Reduction Act recently signed into law by President Biden contains a number of provisions across areas such as corporate taxes, energy and climate change as well as healthcare.
Major areas of focus in the legislation
There are several areas of focus within the legislation as passed.
Taxes
There are several tax provisions in the legislation, including:
- A 15% alternative minimum tax is included for U.S. based corporations with at least $1 billion in revenue and non-U.S. domiciled corporations with at least $100 million in revenue.
- An excise tax on stock buybacks by public companies.
- Additional funding for enforcement by the IRS.
Healthcare
There were several healthcare related provisions in the legislation but the most notable was the provision that allows Medicare to negotiate maximum prices on a number of prescription medications. Pharmacy costs for Medicare Part D recipients will be capped at $2,000 per year. Additionally, insulin costs for Medicare recipients will be capped as well.
Energy
There are a number of energy and climate-related programs. Among these is a tax credit for electric vehicles. There is a $7,500 tax credit for new EVs and $4,000 for used EVs. There is also an extension and expansion of the carbon tax credit. There are credits to reduce carbon emissions and credits to promote expanded manufacturing capability for wind turbines, solar panels and batteries.
Energy and Climate Change
The EV tax credit could be a major boost for electric vehicles sales. Beside the $7,500 tax credit for the purchase of new EVs and the $4,000 tax credit for the purchase of used EVs, there is also a 30% tax credit for the purchase of clean commercial electric vehicles. Additionally, there are $1 billion in grants towards the purchase of heavy duty EVs such as buses.
These credits and incentives could be a boon to vehicle manufacturers that hop on the bandwagon. On the other hand, those who don’t could see their market share eroded if these credits and incentives spur EV sales in the way the administration hopes.
Besides the EV credits, the legislation offers direct consumer rebates for buying heat pumps and other energy efficient home appliances. Additionally, there are tax credits for installing rooftop solar panels. Both of these incentives could be a boon to companies in the clean energy space and industries related to this.
Lowering of prescription drug costs
The White House estimates that 5-7 million Medicare beneficiaries could see their prescription drug costs go down due to a provision in the legislation that allows Medicare to negotiate prescription drug costs with drug makers. Additionally, they estimate that 3.3 million Medicare beneficiaries will see their cost for insulin capped at $35 for a month’s supply. Additionally, there is a provision that mandates that drug manufacturers who increase their prices more than the rate of inflation rebate the amount that exceeds the level of inflation for Medicare beneficiaries.
To the extent that these and other initiatives in the legislation result in lower revenues for the drug companies, this could reduce revenues and profits for some drug makers, potentially impacting their stock price. While the provisions mostly pertain to prices for Medicare beneficiaries, these initiatives could reduce drug manufacturer’s bottom line.
Taxes
There are several provisions of the legislation related to taxes. One places a 1% excise tax on the fair market value of stock repurchased by publicly traded companies in stock buybacks. There are a number of rules determining situations in which a buyback would or would not be subject to this tax. Each company contemplating a repurchase of their stock would need to assess the financial impact of this tax to determine if the transaction still makes sense for their shareholders.
The 15% minimum tax the legislation imposes on corporations with at least $1 billion in revenue could reduce profits for some companies. Whether this will have a material impact on their bottom line remains to be seen.
The legislation also increased funding for the IRS to help increase tax compliance, conceivably among the wealthiest U.S. taxpayers. To the extent that people are already in compliance with their tax obligations, this shouldn’t have an impact on them. One area that could help many taxpayers is that some of the money could be earmarked to help improve IRS systems that could help speed up the processing of tax refunds for taxpayers entitled to one.
There are some aspects of the Inflation Reduction Act that could benefit certain industries. Talk with your Wedbush Financial Advisor to discuss these potential opportunities to determine if they are a good fit for your portfolio.
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Disclosure
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.