On Aug. 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (IRA), a $437 million spending bill to address inflation, healthcare, certain tax matters and climate change. This bill includes the enactment of a 15-percent corporate minimum tax and a 1-percent excise tax on the repurchase of corporate stock, as well as expanded tax credits for renewable energy.
Here is a look at the IRA and how it may affect taxpayers.
CORPORATE MINIMUM TAX
IRA section 10101 amends IRC section 55(b) to impose a 15-percent corporate alternative minimum tax (AMT) on a corporation’s financial statement income if the corporation has adjusted financial statement income exceeding $1 billion. It also applies to U.S. corporations that are members of an international reporting group if the group’s financial statement income exceeds $1 billion and the U.S. corporation’s own financial statement income exceeds $100 million. The measurement period for the adjusted financial statement income is over a three-year period ending with the applicable tax year.
GHJ Observation: The tax base of the corporate minimum tax is extremely narrow. Even though there are more than 1.5 million active corporations in the U.S., the Joint Committee on Taxation (JCT) estimates that “only approximately 150 taxpayers annually may be subject to the corporate book minimum tax” according to the National Taxpayers Union Foundation.
EXCISE TAX ON REPURCHASE OF CORPORATE STOCK
IRA section 10201 amends IRC section 4501 of Subtitle D by adding Chapter 37 to impose a 1-percent excise tax on each covered corporation equal to 1 percent of the fair market value of any corporate stock that is repurchased by such corporation during the taxable year. A covered corporation is defined as any domestic corporation whose stock is traded on an established securities market.
GHJ Observation: Affected corporate taxpayers will need to consider the impacts of the 1-percent excise tax on stock repurchases. The impact on the stock market is likely greater than the tax implications of this new excise tax.
ENERGY TAX CREDITS
IRA Title I, Subtitle D extends and expands the production tax credit (PTC) under IRC section 45 (including the renewal of the PTC for solar, which had previously expired), the energy investment tax credit (ITC) under IRC section 48 and the section 45Q carbon capture credit.
The IRA also introduced new credits such as the Advanced Manufacturing Production Credit (AMPC), a PTC for clean hydrogen fuel production, a tax credit for zero-emissions nuclear power production and a tax credit for transportation fuels with lower emission rates.
The IRA resurrects the long-expired Hazardous Substance Superfund excise tax on oil and petroleum product, effective as of January 1, 2023. The tax rate is 16.4 center per barrel of crude oil and petroleum product imports.
Credits extended, expanded or added by the IRA include:
- Production Tax Credit (PTC)
- Investment Tax Credit (ITC)
- Clean Electricity Production Tax Credit (CEPTC)
- Clean Hydrogen Production Credit (CHPTC)
- Clean Hydrogen Investment Tax Credit (CHITC)
- Advanced Manufacturing Production Credit (AMPC)
- Carbon Capture Credit
- Residential Clean Energy Credit (RCEC)
- Residential Energy Property Credit (REPC)
- Energy Efficient Home Credit
- Electric vehicle tax credits
GHJ Observation: Clean energy is huge directive of the IRA, which materialized in the many credits extended, expanded or added to incentivize clean energy investment. The Hazardous Substance Superfund excise tax on oil and petroleum product imports extends far beyond the energy industry and taxpayers will need to plan on how to address increased costs. While the IRA undoubtedly expanded tax credits related to various clean energy items, they are not necessarily more beneficial than before as there are limitations based on income and types of cars and trucks that qualify for it.
RESEARCH CREDIT EXPANSION
IRA section 13901 amends IRC section 41(h)(4)(B) to allow qualified small businesses to apply an additional $250,000 of so-called R and D credits against certain payroll taxes. Notably, this provision does not go into effect until tax years that begin after December 31, 2022.
GHJ Observation: Qualified small businesses may now apply up to $500,000 of R and D credits against applicable payroll taxes. Further, the credit may now be used to offset the Medicare portion of taxes that was previously ineligible. Any unused credits may still be carried forward into subsequent tax years.
SECTION 461(l) LOSS LIMITATION
IRA section 13903 amends IRC section 461(l) to extend the limitation on excess business losses of non-corporate taxpayers by two years. Prior to the IRA, IRC section 461(l) limitation was set to sunset after 2025.
GHJ Observation: Taxpayers will have to track and consider any excess business losses for a couple more years. Any taxpayers that experienced losses in 2021 and 2022 may have to carry forward a larger portion of those losses into future years.
The IRA appropriates approximately $80 billion over the next 10 years for IRS enforcement activities including the hiring and training of new auditors, IT systems modernization and taxpayer services.
GHJ Observation: The IRS has long sounded alarm bells about being underfunded and unable to perform its duties. A main objective of the IRS is to hire more auditors so it is more critical than ever for taxpayers to engage qualified, trusted advisors.
STATE AND LOCAL TAX DEDUCTION
Despite continued efforts, the $10,000 state and local tax deduction limitation for individuals was not part of the final bill heading to President Biden’s desk.
The Inflation Reduction Act of 2022 is complex and nuanced. If you have any questions about the IRA, the proposed changes or their impact on you or your business, please contact GHJ’s Tax Services Team.