On August 7, 2022, the Senate Democrats passed the Inflation Reduction Act of 2022 via the reconciliation process as a replacement to the Build Back Better Act. The Build Back Better Act was passed by the House of Representatives on November 19, 2021, and sent to the Senate.
Since the Build Back Better negotiations fell apart at the end of 2021, Senate Majority Leader Chuck Schumer and Sen. Joe Manchin have continued to negotiate a reconciliation package. Initially, due to rising inflation numbers, Schumer and Manchin agreed to only two major provisions: allowing Medicare to negotiate prescription drug pricing and extending health insurance premium subsidies under the Affordable Care Act. However, the version of the reconciliation legislation advanced by the Senate added tax and climate provisions.
15% Corporate Minimum Tax
The Inflation Reduction Act of 2022 proposes a new 15% corporate alternative minimum tax (CAMT) on adjusted financial statement income, i.e., book income, for corporations with profits in excess of $1 billion. This is similar to the proposal included in previous versions of the Build Back Better Act.
To determine if a corporation is subject to the CAMT, the proposed legislation provides an “average annual adjusted financial statement income test,” which is met if a corporation’s average annual adjusted financial statement income for a three-year period ending with the year being tested exceeds $1 billion (or since the corporation was formed, if less than three years). For global companies with book earnings exceeding $1 billion, to meet the average annual adjusted financial statement income test, the companies must also generate at least $100 million in U.S. revenue.
In determining the $1 billion threshold, most portfolio companies may be counted separately from their owners, so that smaller companies are not inadvertently subject to the CAMT if their income was otherwise combined with unrelated businesses owned by an umbrella investment fund or partnership.
Aggregation rules are provided for U.S. corporations owned by a foreign parent and worldwide reporting groups. In addition, companies may reduce book income for the Base Erosion and Anti-Abuse Tax (BEAT), and there are certain rules for accounting for foreign income under Section 951.
In calculating a corporation’s book income there are also special rules for adjusting for defined benefit pension plans, adding back federal taxes, investing in partnerships, and excluding income from tax-exempt entities included in consolidated financials that is not unrelated trade or business income. In addition, for property to which Section 168 applies, adjusted financial statement income can be reduced by Section 167 depreciation deductions, which is intended to benefit manufacturers subject to the CAMT.
The proposed bill also establishes a new concept of a financial statement net operating loss, which is limited to 80% utilization and defined as the amount of net loss on the corporation’s applicable financial statement for taxable years ending after December 31, 2019. As such, if enacted, companies subject to the CAMT likely will need to calculate separate computations to determine book income for CAMT purposes.
The U.S. Department of the Treasury (Treasury) is directed to further flesh out exceptions to the CAMT when there is a change in ownership, or the corporation does not meet the three-year average threshold test for a specified number of consecutive years.
The CAMT would be effective for taxable years beginning after December 31, 2022.
Stock Buyback Tax
Effective January 1, 2023, the Inflation Reduction Act of 2022 imposes a 1% tax on the fair market value of any stock of a corporation which is repurchased by the corporation. This applies to any corporation whose stock is traded on an established securities market, but there are exceptions for:
- Reorganizations where no gain or loss is recognized on the stock buyback;
- Repurchased stock contributed to an employer-sponsored retirement plan or employee stock ownership plan;
- When the total value of the repurchased stock during the tax year does not exceed $1 million;
- Security dealers in their ordinary course of business;
- Repurchases by regulated investment companies or real estate investment trusts; and
- Stock buybacks treated as dividends.
Special rules are provided for purchases by affiliates and related corporations.
Excess Business Losses
The Inflation Reduction Act of 2022 also extends for two years the limitation on excess business losses for noncorporate businesses. Currently, such taxpayers can’t deduct losses for tax years through 2026, but this bill would extend the period through 2028.
Climate & Energy Tax Incentives
The proposed legislation has numerous energy and climate provisions, including:
- Tax credits for clean energy and carbon
- Extending and modifying the credit for electricity produced by a taxpayer using qualified energy resources that include wind, closed-loop biomass, open-loop biomass, geothermal and solar energy, municipal solid waste, hydropower energy, and marine and hydrokinetic renewable energy at qualified facilities.
- Extending and modifying the energy credit related to qualified energy property placed in service during the tax year. Qualified energy property historically included—and continues to include—certain fuel cell, small wind energy, waste energy recovery, solar energy, geothermal, heat, and power system property. Additions to the list of qualified energy property include energy storage technology, biogas property, and microgrid controllers.
- Increasing the credit for solar and wind facilities put into service in connection with low-income communities.
- Extending and modifying the credit related to the sequestration of carbon oxide.
- Creating a credit to produce zero-emission nuclear power.
- Tax credits for clean fuels
- Extending credits related to biodiesel, renewable diesel, and alternative fuels.
- Extending the credit for second generation biofuel.
- Creating a credit for aviation fuel, which qualifies as sustainable.
- Creating a credit to produce clean hydrogen.
- Tax credits for clean energy and efficiency (individual taxpayers)
- Extending, increasing, and modifying the credit for nonbusiness energy property, which would be renamed to the energy efficiency home improvement credit. The overall lifetime limitation would be removed in favor of an annual limitation that would generally be $1,200, various caps on the credit on certain types of qualified property would be increased, new caps on certain types of qualified property would be added, and definitions modified, among other changes.
- Extending and increasing the credit related to residential clean energy and renaming it to the residential clean energy credit.
- Increasing the maximum deduction allowed for energy-efficient commercial buildings property and potentially makes it easier to qualify for at least a portion of the deduction.
- Extending, increasing, and modifying the credit for new energy efficient homes.
- Clean vehicles
- Increasing and modifying the new qualified plug-in electric drive motor vehicle credit which would be renamed to the clean vehicle credit. The phaseout of the credit once a manufacturer has sold at least 200,000 for use in the U.S. would be removed. In its place, are proposed new requirements related to the mineral and battery components of the vehicle that impact the amount of the credit, limitations on who can qualify for the credit based upon modified adjusted gross income thresholds, and manufacturer’s suggested retail price limitations whereby vehicles over certain dollar amounts would not be eligible for the credit. In addition, the final assembly of the vehicle must occur within North America.
- Creating a credit for qualified buyers of previously owned clean vehicles. The credit will not be available to individuals over certain modified adjusted gross income thresholds and must be purchased for $25,000 or less.
- Creating a credit for the purchase and placing in service of qualified commercial clean energy vehicles.
- Extending and modifying the credit for alternative fuel refueling property.
- Clean energy manufacturing and energy security
- Extending and modifying the advanced energy project credit.
- Creating a credit for advanced manufacturing production.
- Clean electricity and clean transportation
- Creating a credit for clean energy production and clean electricity investment.
- Creating a credit for clean fuel production.
Many of these credits would also have new requirements that must be met to qualify for the full credit amount rather than the lower base amount. These new requirements include such things as meeting wage requirements by paying wages to contractors or subcontractors on projects at or above certain levels, and apprenticeship requirements that would be met by having a certain number of labor hours performed by qualified apprentices. Certain credits also have domestic content rules that either must be met to qualify for the credit or would lead to an increased amount of the credit if met.
IRS Funding
The bill also includes $80 billion for the IRS to fund
- Taxpayer services, including pre-filing assistance and education, filling and account services, and taxpayer advocacy services.
- Tax enforcement activities, including tax collection, legal and litigation support, criminal investigations, digital asset monitoring and compliance activities, and financial and tax crimes enforcement.
- Business systems modernization, including developing callback technology and other technology to provide a more personalized customer service experience.
In addition, the IRS is directed to establish a task force to design an IRS-run, free, mobile-friendly “direct-file” tax return system, and to provide an initial report to Congress within nine months.
What are the Chances it Becomes Law?
Since the Senate passed this bill before they left for their August recess, the House is expected to return to D.C. and pass the Inflation Reduction Act of 2022 this week. The reconciliation instructions for the current fiscal year expire on September 30, 2022, so Democrats have until then to pass a bill through the reconciliation process, which only requires 50 votes in the Senate.
Contact a professional at Forvis Mazars or use the Contact Us form below to get more information on how the proposed legislation could affect you and your business.