Key Tax Changes Impacting Businesses in the New Inflation Reduction Act
One of the major headline-grabbing provisions of the Act is a 15 percent minimum tax on the “adjusted financial statement income” of certain corporations (the “Corporate AMT”), less a foreign tax credit. The Corporate AMT does not apply to a corporation if its regular income tax exceeds the 15 percent minimum tax.
The corporations subject to the Corporate AMT include any corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) the average annual adjusted financial statement income of which over a three-year period exceeds $1 billion. The Corporate AMT also extends to corporations with a three-year average annual adjusted financial statement income of $100 million or more, if they are part of a foreign-parented multinational group with an average adjusted financial statement income exceeding $1 billion. There are special rules relating to corporations that experience changes in ownership. There also are rules pursuant to which the adjusted financial statement income of entities under common control may be aggregated. Due to a last-minute modification to the Act, however, portfolio companies owned by private equity firms generally would not become subject to the Corporate AMT by reason of their potential aggregation with their sister companies.
A corporation’s adjusted financial statement income is its net income or loss as set forth on its “applicable financial statement,” with certain adjustments, such as a reduction for depreciation tax deductions (while disregarding the amount of depreciation expense with respect to such property). An “applicable financial statement” generally is a financial statement certified as being prepared in accordance with GAAP and which is the corporation’s 10-K filed with the US Securities and Exchange Commission, or, if none, its audited financial statement, or, if none, then its financial statement filed with any other US federal tax agency. In certain circumstances, a financial statement made on the basis of international financial reporting standards or a financial statement filed with certain regulatory or governmental bodies will be a corporation’s “applicable financial statement.” For a tax-exempt organization, “adjusted financial statement income” takes into account only the income of an unrelated trade or business of the organization or income derived from debt-financed property to the extent treated as unrelated business taxable income.
Adjusted financial statement income is reduced by the lesser of (A) the aggregate amount of financial statement net operating loss carryovers, or (B) 80 percent of adjusted financial statement income computed without regard to such a deduction.
The Corporate AMT is to take effect with respect to taxable years beginning after December 31, 2022. The Act authorizes the US Department of the Treasury to promulgate regulations to carry out the purposes of the Corporate AMT, and such regulations will be necessary to provide more clarity on what is likely to be a complex new regime that deviates in important respects from the traditional conception of corporate taxable income.
Excise Tax on Repurchases of Corporate Stock
The other major revenue-raising provision of the Act is a new 1 percent excise tax on the fair market value of the stock repurchased by a “covered corporation,” defined as a US corporation, the stock of which is traded on an established securities market. Also included within the scope of the tax are acquisitions of the stock of a covered corporation by a “specified affiliate” of such a corporation, which is a corporation or partnership more than 50 percent of which is owned, directly or indirectly, by the covered corporation. The taxable amount is reduced by the fair market value of stock issued by the covered corporation during the taxable year, including stock issued or provided to employees of the covered corporation or certain affiliates of such a corporation. The excise tax is not deductible.
The excise tax also applies to the acquisition of the stock of a foreign corporation, the stock of which is traded on an established securities market, by US domestic specified affiliates of that foreign corporation, with the specified affiliate being treated as a covered corporation for purposes of the tax. In addition, the excise tax applies to repurchases of stock by certain corporations (and their specified affiliates) that inverted from US to foreign status after September 20, 2021.
Some exceptions to the tax apply, including in the case of (A) tax-free reorganizations, (B) contributions of repurchased stock (or stock of an equivalent value) to an employer-sponsored retirement plan or employee stock ownership plan, (C) aggregate stock repurchases during a year of no more than $1 million, (D) repurchases by dealers in securities in the ordinary course of business, under regulations prescribed by the US Department of the Treasury, (E) repurchases by regulated investment companies and real estate investment trusts, and (F) repurchases treated as dividends.
The tax applies to repurchases occurring after December 31, 2022. The US Treasury Department is delegated extensive rulemaking authority to issue regulations under this new excise tax, including anti-abuse regulations and guidance on special classes of stock and preferred stock.
Clean Energy Tax Credits
The Act also makes a number of changes to various tax credits pertaining to clean and renewable energy, including:
- Extending and modifying the production tax credit, the energy tax credit, and the carbon oxide sequestration credit
- Increasing the energy tax credit for solar and wind facilities placed in service in connection with low-income communities
- Establishing a new credit for nuclear power production, a new credit for sustainable aviation fuel, and a new credit for the production of clean hydrogen
- Extending incentives for second generation biofuel, biodiesel, renewable diesel, and alternative fuels
- Extending and modifying the nonbusiness energy property credit, the residential clean energy credit, the new energy efficient home credit, and the alternative fuel vehicle refueling property credit
- Modifying the energy efficient commercial buildings deduction
- Establishing a new credit for qualified commercial clean vehicles
- Extending the advanced energy project credit
- Establishing a new credit for advanced manufacturing production, a new credit for clean electricity production, a new credit for clean electricity investment, a new credit for clean fuel production
In addition to the above changes, the Act substantially modifies the credit for new qualified plug-in electric drive motor vehicles, which will become the clean vehicle credit, and establishes a new credit for previously owned clean vehicles. The clean vehicle credit, which extends to both plug-in electric vehicles with a battery capacity of at least 7 kilowatt hours and to fuel cell vehicles, eliminates the phase-out of the current credit that is triggered once a vehicle manufacturer has sold 200,000 qualifying vehicles. However, the clean vehicle credit comes with multiple new restrictions on its availability, including component sourcing requirements (relating to the use of critical minerals and battery components within the vehicle) and a requirement that final assembly occur within North America.
The Act limits the availability of the clean vehicle credit to a single vehicle per year, and only then to individuals whose current-year and preceding-year modified adjusted gross income is no more than $300,000 (for married taxpayers), $225,000 (for head of household filers), or $150,000 (for other filers). Furthermore, credits will be allowed only for vehicles with a manufacturer’s suggested retail price of no more than $80,000 for vans, SUVs, or pickup trucks, and $55,000 for other vehicles such as sedans.
Starting in 2024, purchasers can elect to transfer the tax credit to the dealer from which they are buying an eligible vehicle, as long as the dealer satisfies certain registration, disclosure, and other requirements. Although most of the provisions of the clean vehicle credit begin applying in 2023, the requirement that the final assembly of a vehicle occur within North America takes effect immediately upon the enactment of the Act, and the component sourcing requirements take effect upon the promulgation of proposed guidance by the US Department of the Treasury (which, per the Act, must occur no later than December 31, 2022). There is, however, a safe harbor rule, by which a taxpayer may elect to use the provisions of the existing qualified plug-in electric drive motor vehicle credit if that person purchased or entered into a written binding contract to purchase a qualified plug-in electric vehicle between January 1, 2022, and the date of the Act’s enactment, but the vehicle was placed in service after the enactment of the Act. The clean vehicle credit will not apply to vehicles acquired after December 31, 2032.
Furthermore, in a significant development, the Act allows certain taxpayers (including specified categories of tax-exempt entities) to elect to receive certain clean energy credits in excess of tax liability as “direct pay” credits. The Act also allows non-tax-exempt taxpayers a one-time transfer of certain clean energy credits to other taxpayers.
Additionally, the Act increases the amount of the research credit that qualified small businesses can elect to treat as a credit against payroll tax by allowing an additional credit of up to $250,000 against the Medicare hospital insurance tax for years beginning after December 31, 2022.
Additional Tax Provisions
The Act reinstates the Superfund excise tax on crude oil received at a US refinery and petroleum products entered into the United States for consumption, use, or warehousing. The excise tax rate will be 16.4 cents per barrel (adjusted annually for inflation), up from the rate of 9.7 cents per barrel that was in effect before the previous iteration of the tax expired at the end of 1995.
The Act also extends the limitation on excess business losses of non-corporate taxpayers by two years, disallowing them through 2028.
Additional Funding for the IRS
The Act appropriates nearly $80 billion over the next decade to fund the operations of the Internal Revenue Service. This amount includes approximately $3 billion for taxpayer services, approximately $45 billion for tax enforcement activities, approximately $25 billion for operations support, and nearly $5 billion for the modernization of the IRS’s business systems.
If you have any questions about the Act and how its tax provisions might impact you or your business, please reach out to the ArentFox Schiff Tax group.
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