Inflation Reduction Act –Here’s What It Means for Taxes
August 15, 2022
This article was updated on August 18, 2022 to reflect continuing developments.
By Richard Shapiro and Meghan Andersson
On Tuesday, August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 ("the Act"), which adresses climate change, health care, inflation and taxes.
The Act is a significantly slimmed-down version of the Build Back Better Act, which was passed by the House last November but stalled in the Senate.
The following highlights some of the key tax provisions.
New Corporate Alternative Minimum Tax
The Act imposes a 15% alternative minimum tax (“AMT”) on corporations with average annual adjusted financial statement income (“AFSI” or “book income”) that exceeds $1 billion over any consecutive three taxable year period. A corporation’s AFSI is its financial statement income, subject to certain adjustments.
Tax (instead of book) depreciation deductions will reduce AFSI, which is intended to help businesses that invest in equipment and facilities (such as manufacturers).
The AMT does not apply to companies that reach the $1 billion threshold when their income is combined with unrelated businesses under the shared ownership of an investment fund or partnership.
Business tax credits and energy tax credits are creditable against AMT liability. Additionally, the AMT does not apply to S corporations, regulated investment companies (“RICs”), and real estate investment trusts (“REITs”). For corporations that have been in existence for less than three taxable years, the income threshold is based on the period during which the corporation was in existence.
The Act contains multiple rules that will apply to multinational groups. For example, a U.S. corporate subsidiary of a foreign-parented group will be subject to the AMT if the entire group meets the $1 billion income threshold, and the subsidiary has an AFSI of $100 million or more.
The provision is effective for tax years beginning after December 31, 2022.
Carried Interest Rules
As originally drafted, the Act would have revised IRC Sec. 1061 to extend, from more than three to more than five years, the holding period required for carried interest income to be taxed at favorable long-term capital gains rates. The longer holding period would have applied to taxpayers with an adjusted gross income (“AGI”) of $400,000 or more.
However, the carried interest provision was removed at the insistence of Senator Kyrsten Sinema (D-AZ), whose vote was needed to pass the Act in the Senate.
Excise Tax on Stock Buybacks
The Act imposes an excise tax on domestic publicly traded corporations that repurchase their stock directly (or through a more than 50% owned subsidiary corporation or partnership). The tax is equal to 1% of the fair market value of the repurchased stock and is not deductible. The tax applies to repurchases of stock of certain foreign corporations.
Notably, the Act also provides various exceptions. For example, the tax does not apply to the extent that: (1) the repurchase is part of a reorganization where no gain or loss is recognized by the shareholder; (2) the repurchased stock (or an amount of stock equal to the value of the stock repurchased) is contributed to an employer-sponsored retirement plan, employee stock ownership plan or similar plan; (3) the total value of stock repurchased during the taxable year does not exceed $1 million; (4) under regulations to be issued, the repurchase is by a dealer in securities in the ordinary course of business; (5) the repurchase is made by a RIC or a REIT, or (6) the repurchase is treated as a dividend.
The provision is effective for repurchases that occur after December 31, 2022.
Research Tax Credit Applied Against Payroll Tax for Small Businesses
The Act increases the amount of research tax credit that can be applied by a qualified small business under IRC Sec. 41(h) against payroll tax liability from $250,000 to $500,000 for tax years beginning after December 31, 2022. The first $250,000 of the credit limitation is applied against the employer portion of the FICA payroll tax liability and the second $250,000 is applied against the employer portion of the Medicare payroll tax liability.
Limit on Deductibility of Excess Business Losses
To pay for late changes to the corporate AMT, the Act extends the limitation on the deductibility of excess business losses by non-corporate taxpayers under IRC Sec. 461(l) for another two years.
Clean Energy Tax Credits
In a major commitment to clean energy in the U.S., the Act extends and expands existing energy-related tax credits and adds several new tax credits related to clean electricity, manufacturing, fuel, and vehicles. Through these enhanced energy tax credits, approximately $374 billion will be spent on climate and energy spending in what is being referred to as the largest investment in clean energy in U.S. history.
The Act extends and expands existing tax credits to increase domestic production and the sale of components used in wind, solar, fuel cell, hydropower, waste energy, and other clean energy projects (including storage), as well as individual clean energy incentives (including energy rebates and consumer tax credits for energy-efficient homes and vehicles).
IRS Appropriations and Enforcement
The Act provides approximately $80 billion of additional IRS funding over the next nine years for the following:
- Taxpayer service (filing and account services, taxpayer education, and taxpayer advocacy services)
- Enforcement (legal and litigation support, conducting criminal investigations, digital asset monitoring and compliance and financial crimes)
- Operations support (rent payments, facilities costs and vehicles, information technology development, maintenance, and security)
- Business systems modernization (development of callback technology and other technology to enhance customer service)
More than half of the additional funds will be allocated to enforcement efforts.
Funds will also be allocated to an e-file task force, which must produce a report on how to create and operate a direct, free, e-file system.
In accordance with its mission to not raise taxes on low-to-middle-income taxpayers, the Act states that none of the IRS appropriations are intended to increase taxes on any taxpayer with a taxable income below $400,000.
EisnerAmper will continue to keep you informed as developments warrant.