In short: The U S Inflation Reduction Act of 2022 was passed by the House on August 12, 2022; it introduces new tax provisions including tax increases for corporations and green energy credits.
On August 12th, 2022, the House of Representatives passed the Inflation Reduction Act of 2022 (“IRA”), five days after the bill was approved by the Senate in a 51-50 party-line vote. The sweeping legislation will spend roughly $369 billion on clean energy and climate investments while also reducing the federal deficit by over $300 billion in the next ten years. The revenue-raising provisions included in the bill are a 15% minimum tax on large corporations, reforms to prescription drugs’ pricing, new spending for IRS enforcement activities, a 1% stock buyback fee on corporations and an extension of the loss limitation for flow-through businesses. Many of these proposals were previously incorporated in the Build Back Better Act, which stalled on the Senate floor after being passed by the House of Representatives in November 2021. Key tax provisions for individuals and businesses are highlighted below.
15% Corporate Minimum Tax
The largest revenue raiser introduced in the Inflation Reduction Act is a proposed 15% minimum tax that would apply to the domestic profits of large corporations with average adjusted financial statement income greater than $1 billion over the previous three years. Corporations that are part of a controlled group would be required to aggregate the adjusted financial statement income of all members of the group in applying the $1 billion test, although an exception was added to the legislation for private equity firms that own various subsidiaries. The income threshold would be lowered to $100 million for foreign-parented corporations that are members of an international financial reporting group with average financial statement income in excess of $1 billion over the applicable three-year period.
Adjusted financial statement income is defined as the net income or loss reported on the taxpayer’s applicable financial statement for the tax year, with adjustments for consolidated returns, income from flow-through entities, income taxes, depreciation, and certain foreign items. While critics of the bill warn that the minimum tax provision could result in earnings manipulation, many companies will likely be hesitant to disappoint investors by artificially reducing earnings reported in their financial statements for tax saving purposes.
Corporations subject to the tax would be eligible to claim net operating losses and tax credits to offset the minimum tax increase. In addition, a tax credit would be allowed for minimum tax paid in prior years if in a later year the corporation’s regular tax liability exceeds 15% of adjusted financial statement income. The minimum tax provision would be effective for tax years beginning after December 31, 2022.
As part of its goal to combat climate change, the IRA provides for roughly $260 billion in clean-energy tax credits that will be available to both businesses and individual taxpayers. This includes the extension of existing tax credits as well as the implementation of new credits for activities that were not subsidized under prior law. A few highlights of the energy tax incentives created by the IRA are listed below:
- Extension of the Section 45 production tax credit (“PTC”) and the Section 48 investment tax credit (“ITC”) for eligible projects, including wind and solar energy.
- A new two-tier credit structure for the PTC and ITC generally consisting of a base rate of 20% of the current credit amounts and full credit eligibility if prevailing wage and apprenticeship requirements are met.
- Additional “bonus” tax credits for PTC and ITC projects that satisfy domestic content requirements or are located in low-income communities and former fossil fuel employment centers.
- New credits for energy storage, clean energy production, clean hydrogen production, renewable energy production and advanced manufacturing of components and materials necessary for clean energy production.
- Extension of the $7,500 tax credit for purchase of a new electric vehicle and creation of a new $4,000 credit for the purchase of a used EV, while eliminating the cap on number of vehicles sold per manufacturer. Eligibility for EV tax credits would be limited to single taxpayers with income below $150,000 and joint filers with income below $300,000 ($75,000 and $150,000, respectively, for the used EV credit).
- Authorization for the sale of certain clean energy tax credits between unrelated parties, which would allow taxpayers with little or no tax liability to benefit from the generation of new tax credits.
Several changes were made to the IRA at the eleventh hour as part of final negotiations to secure the votes of key Senate Democrats. Removed from the bill was a proposal to close the so-called carried interest loophole for investment managers of hedge funds, private equity funds and real estate funds. As discussed above, a special carve-out was also added to exempt private-equity firm portfolio companies from the 15% corporate minimum tax. To replace these provisions, the following two revenue raisers were added to the bill:
- Excise tax on stock buybacks: The legislation would impose a 1% excise tax on the fair market value of stock repurchases by publicly traded corporations or their subsidiaries. The tax would apply to stock buybacks occurring after December 31, 2022. Because companies can repurchase stock for the remainder of 2022 without triggering the tax, there could be a flurry of buyback activity before the end of the year.
- Extension of passthrough loss limitation: The limitation on excess business losses from flow-through businesses including partnerships, S corporations, and sole proprietorships would be extended through 2028 (it is currently set to expire on December 31, 2026). This provision was originally created by the Tax Cuts and Jobs Act of 2017, although it was suspended for tax years 2018, 2019, and 2020 under the Coronavirus Aid, Relief, and Economic Security Act of 2020. A more detailed discussion of the excess business loss limitation can be found here.
What’s Next for the Inflation Reduction Act?
Having been passed by both chambers of Congress, the Inflation Reduction Act will now be sent to President Biden for approval. The President has publicly supported the IRA throughout the legislative process and is expected to sign the bill into law in the coming days
If you have questions regarding the provisions included in the Inflation Reduction Act of 2022 and how they might affect your individual tax situation, please contact your Bennett Thrasher tax advisor by emailing email@example.com.