What is The Inflation Reduction Act?
The Inflation Reduction Act was signed into law on August 16, 2022. While the act is titled the Inflation Reduction Act, it is not considered by all experts to be effective in reducing inflation. There are several areas of the economy that this act seeks to make changes to including keeping health insurance affordable, helping to make prescription drugs more affordable, creating incentives for producing and using cleaner energy, and creating a minimum tax for billion-dollar corporations.
To the average self-employed truck driver, this act in many ways will have little to no effect on the way you conduct your business currently. However, it does provide new opportunities for tax savings and things to watch out for over the next 10 years such as increased funding to the IRS for enforcement and collection efforts.
According to Senate Democrats, the goals of the Inflation Reduction Act will be achieved by:
Expanding Medicare benefits
Creating energy credits for electric vehicles and residential improvements
Making historic climate investment
Lowering health care costs
Extending the Affordable Care Act through 2025
Creating manufacturing jobs
Closing tax loopholes used by billion-dollar C-Corporations
Here at ATBS, we want to summarize how this new legislation could affect owner-operator truck drivers. Below you’ll find our key takeaways from the complex 730-page bill.
IRS Tax Enforcement
We believe the biggest provision self-employed truck drivers should be aware of is the $80 billion investment in the IRS over the next 10 years with a goal of collecting $124 billion in tax revenue. With this investment, the IRS plans on hiring 87,000 more IRS agents. Tax professionals are hopeful that taxpayers will receive better customer service from the IRS and these funds should allow the IRS to make up ground with the backlog of unprocessed tax returns. However, an increase in the number of IRS agents means an increase in the importance of filing and paying your taxes correctly and on time. This is because the IRS plans on spending more than half of the $80 billion in funding on enforcement activities such as collections, IRS legal support, criminal investigations, and technology enhancement.
Over the past few years, the tax audit rate decreased from 1% of tax returns to 0.2% of tax returns. The goal with these new agents is to increase the IRS’s number of audits. According to Treasury Secretary Yellen, the IRS plans on achieving this goal by targeting those who earn $400,000 or more and are typically out of compliance. In IRS terms, out-of-compliance typically means that tax returns have not been filed at all or have been filed without following specific tax regulations.
The Inflation Reduction Act has no language that prevents the IRS from increasing enforcement on taxpayers earning below $400,000. Additionally, based on the number of people who are currently making $400,000 or more, there will be one IRS agent for every 11 people in this group. This means the IRS will likely have to audit taxpayers below this income in order to achieve their goals to increase tax revenue collection and increase audit rates to historic norms. It is likely that non-compliant taxpayers and those not filing taxes at all, regardless of income level, will soon become targets of IRS enforcement. Experts anticipate that IRS computer-generated tax notices will increase significantly and be one of the first implementations for the IRS.
What does this mean for you? It means it will be as important as ever to ensure you are up-to-date on filing your taxes, paying your taxes, and staying compliant year after year. It appears there will be increased pressure on those who don’t file or pay their taxes due to a higher probability of IRS enforcement.
Are you a self-employed truck driver that needs help with your taxes? Click here!
Climate-Related Tax Credits
The Inflation Reduction Act provides roughly $369 billion in incentives for energy and climate-related programs. Many of the incentives will be seen in the form of tax credits. A few of the new tax credits we believe could affect owner-operator truckers are:
Tax Credit for NEW Electric Vehicles
30% of the cost of the electric vehicle (up to $7,500)
Can’t have Adjusted Gross Income over $300,000 Married Filing Jointly ($150,000 Single)
The cost of the vehicle must be less than $80,000 for Van, SUV, or Truck ($55,000 for any other vehicle)
Tax Credit for USED Electric Vehicles
30% of the cost of the electric vehicle (up to $4,000)
Must be purchased from a dealership
Can’t have Adjusted Gross Income over $150,000 Married Filing Jointly ($75,000 Single)
The cost of the vehicle must be less than $25,000
The model year must be 2 years earlier than the date of purchase
Three-year waiting period to receive the credit again
Tax Credit for Residential Energy
30% of the cost (Limited to $150 - $1,200 annually)
Several items qualify such as solar panels, windows, doors, energy-efficient appliances, etc.
Need an ID number (Product Identification Number) to claim the credit
Energy Tax Credits for Electric Tractor Trailers
Credits available for up to $40,000
The upfront costs for electric tractors are currently estimated at $300,000 (roughly twice the price of a Class 8 diesel vehicle)
If a trucker or fleet has been on the fence about purchasing electric vehicles, this credit could push them to do so. However, does this mean you should go out and purchase an electric vehicle solely for the tax credit? Not necessarily. The difference in cost between an electric truck and an internal combustion engine can be hundreds of thousands of dollars. This means a credit of $40,000 maximum is not enough to cover the difference. Additionally, it is yet to be seen whether or not the number of charging stations will keep up with the number of electric vehicles. This could make the already difficult parking situation that truck drivers face even more difficult.
If you are considering a purchase of an electric tractor be sure to get all the facts first. Considerations could include:
Speaking with the original equipment manufacturer (OEM)
Checking for, planning, and reserving charging stations along your route
Planning for the time it takes to charge the battery for the next trip
Checking with qualified mechanics in the area that can make repairs to electric vehicles.
Health Insurance and Care
The Inflation Reduction Act will extend some of the subsidies brought on by the Affordable Care Act. Specifically, it extends the subsidies for health insurance premiums. These subsidies had been set to expire in 2023 but the Inflation Reduction Act will extend these subsidies through the end of 2025.
It can be difficult sometimes for owner-operators to find affordable health insurance as employer coverage, as an employee, often provide cheaper health insurance options. With this extension, those who are self-employed have a shot at affordable care for a longer period of time. Owner-operators should search the Federal Marketplace to see if they qualify for a subsidy. Be careful when applying for a subsidy to make sure your income levels qualify. If a subsidy is granted and it turns out the income level is over the qualified amount, then a portion or even the entire subsidy is payable back to the IRS as a penalty.
Additionally, a goal of the Inflation Reduction Act is to lower some health care costs overall. Out-of-pocket drugs will be capped at $4,000 by 2024 and $2,000 by 2025. Specifically, insulin will be capped at $35 per month and vaccines will continue to be free. If prices of drugs increase at a faster rate than inflation, the drug companies will be required to provide rebates to those who are affected. All of this is good news for owner-operators.
Key Takeaways/What Should You Do Next?
1. IRS's funding has increased and the funding is to be spent over the next 10 years. It is likely that IRS enforcement will increase as a result. Make sure you’re staying compliant so you aren’t caught by surprise. Use a professional service, ask questions, and file and pay timely.
2. Tax credits can be a large motivator for taxpayers to make a new purchase or upgrade their home, tractor, or personal vehicle. However, don’t rush into purchasing decisions without first considering the impact on your finances. Tax credits will reduce your tax liability, but keep in mind you’ll want to confirm that a product qualifies for the tax credit before you purchase it. Additionally, analyze your energy-efficient purchase and understand that you will be paying out of pocket for it. You won’t be receiving a tax credit for the full amount of the purchase.
3. Owner-operators may want to look into the Federal Marketplace health insurance options for affordable plans. Make sure that you qualify for a subsidy for health insurance premiums before accepting a new plan. If someone applies for the subsidy and it turns out they make too much, they will owe the entire subsidy back to the IRS as a penalty.
If you have any questions, feel free to give us a call or send us an email and we will assist you as best we can. As more information comes out, we will continue to make updates to this article.