Tax Provisions of The Inflation Reduction Act of 2022
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the Act). Although significantly smaller than its predecessor the “Build Back Better Act” which stalled in Congress, the Act is expected to raise over $700 billion in revenue through, among other things, several new taxes and increased funding for the IRS. The Act contains several significant tax provisions, which are briefly discussed below.
- Corporate Minimum Tax.
The Act introduces a new 15% corporate alternative minimum tax on the “adjusted financial statement income” (AFSI) of an “applicable corporation.” An “applicable corporation” is any corporation or group of corporations treated as a single employer (other than a REIT, regulated investment company, or S corporation) with average annual AFSI in each of the three consecutive tax years ending prior to the current taxable year and after December 31, 2021, exceeding $1 billion. This amount is reduced to $100 million for corporations that are part of a foreign-parented multinational group with AFSI exceeding $1 billion. Once a corporation qualifies as an applicable corporation, it will remain an applicable corporation for all future years, absent certain limited exceptions.
The AFSI calculation starts with the net income or loss reported in the corporation’s “applicable financial statement,” which is defined by reference to Section 451(b)(3) and would generally include financial statements prepared under GAAP or IFRS, and reported to a governmental agency such as the SEC. The Act includes various provisions that adjust AFSI, including by allowing the use of tax depreciation (rather than financial statement depreciation), financial statement net operating loss carryovers, and foreign tax credits and general business credits (but not foreign taxes paid) to reduce AFSI. The Act also includes special provisions addressing income and losses of foreign subsidiaries (including controlled foreign corporations) and income and losses allocated to the taxpayer by partnerships.
Treasury and the IRS are provided with broad authority to write regulations addressing adjustments to AFSI.
- Excise Tax on Stock Repurchases.
The Act imposes a new excise tax on “covered corporations” repurchasing their shares after December 31, 2022. The tax is equal to 1 percent of the fair market value of the stock repurchased by the covered corporation or through a “specified affiliate.” The tax is not deductible for federal income tax purposes. The covered corporation (not the stockholder or the specified affiliate) pays the tax. A covered corporation is any U.S. corporation publicly traded on an established securities market. A specified affiliate is: (i) any corporation, more than 50 percent of whose stock, as determined by vote or value, is directly or indirectly owned by the covered corporation, or (ii) a partnership, more than 50 percent of whose capital interest or profits interest, is directly or indirectly owned by the covered corporation.
The value of the repurchased stock subject to tax is reduced by the value of any stock issued by the covered corporation in the same taxable year, including stock issued to employees of the covered corporation or to employees of a specified affiliate. The tax does not apply: (i) if the stock buyback is part of a nontaxable corporate reorganization under IRC Section 368(a); (ii) if the repurchased stock, or any amount equal to the repurchased stock, is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan; (iii) if the total value of the repurchased stock in a taxable year does not exceed $1 million; (vi) if the repurchase is by a securities dealer in its ordinary course of business; (v) if the repurchase is by a regulated investment company or a REIT; or (vi) if the repurchase qualifies as a dividend.
- Extension of Section 461(l) Loss Limitation Rule.
The Act extends for two years, through tax year 2028, the limitation on the deduction of pass-through losses by noncorporate taxpayers. Section 461(l) of the Code restricts the extent to which business deductions by a non-corporate taxpayer may be used to offset non-business income of the taxpayer. This limitation is calculated by taking the total aggregate deductions of the business over the gross income attributable to the business, plus a threshold amount. Any excess business deduction will be characterized as a net operating loss carryover. The Act extends the limitation until January 1, 2029.
- An $80 billion Budget Increase for the IRS.
The Act includes an $80 billion annual budget increase for the IRS, paid over 10 years, to enhance enforcement, employment, and operations. This will allow the agency to dedicate more time and resources to auditing large corporations and wealthy taxpayers. The IRS plans to dedicate $45.6 billion to help strengthen its enforcement division by hiring more enforcement agents and upgrading outdated technology, and to improve the monitoring of cryptocurrency transactions. The remainder of the budget will be geared toward improving taxpayer services, operations, and business systems.
- Clean Energy Tax Incentives.
Some of the provisions in the Act addressing clean energy tax incentives are the following:
- Extension of the Investment Tax Credit under IRC Section 48. Applies to solar, qualified fuel cell, qualified microturbine, combined heat and power, waste energy, small wind, energy storage, microgrid controller, and qualified biogas projects that start construction through 2024. Applies to geothermal projects that start construction through 2034.
- Extension of the Production Tax Credit under IRC Section 45, for electricity produced from renewable resources, at the applicable 2021 credit rate, for wind, solar, geothermal, biomass, landfill gas, solid waste, qualified hydropower, and marine and hydrokinetic projects that start construction by the end of 2024.
- Extension of the Credit for Carbon Oxide Sequestration under IRC Section 45Q for projects that start construction before January 1, 2023.
- New Clean Hydrogen Production Tax Credit (IRC Section 45V) for qualified clean hydrogen produced at a qualifying facility that starts construction by the end of 2032 and is placed into service after 2022.
- New Advanced Manufacturing Production Credit (IRC Section 45X) for sales of certain components utilized in the construction of wind and solar facilities, and energy storage technology.
- Extension and expansion of IRC Section 48C credit for investments in Qualified Advanced Energy Projects.
- Earlier Proposals Not Included.
Several earlier proposals, which were much-discussed at the time, but did not make it into the final version of the Act, include the following:
- Modification of the carried interest rules set forth in IRC Section 1061;
- Repeal of the limitations on state and local tax deductions; and
- Increase in the tax rates for corporations and individuals.
For a more detailed analysis of any of the provisions of the Act summarized above, contact the tax lawyers at Boutin Jones.
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