On August 16, 2022, President Biden signed the Inflation Reduction Act (“IRA” or “Act”) of 2022 into law after it was passed along party lines through the reconciliation process in the Senate. The Act includes approximately $437b in spending and is expected to raise $737b in revenue over the next ten years.
The key revenue-raising provisions are as follows:
- A 15% alternative minimum tax (“AMT”) on corporations with financial accounting profits of over $1b;
- A 1% excise tax on a publicly traded US corporation for the value of any repurchased stock by said corporation during a given tax year;
- $80b increase into IRS enforcement; and
- A two-year extension of the excess business loss rules under section 461(l); a provision adopted under the 2017 Tax Cuts and Jobs Act (“TCJA”), which limits the amount of trade or business deductions that can offset nonbusiness income (for taxpayers other than corporations).
The AMT applies to corporations with an average annual adjusted financial statement income (“AFSI”) over a three-year period in excess of $1b. The provision would impose a minimum tax equal to the excess of the 15% of a corporation’s AFSI over any AMT foreign tax credits. The AMT foreign tax credits are the only deductions allowed against the 15% AMT. The provision will be effective for tax periods after December 31, 2022.
This provision only closes a loophole for corporations where the AMT would exceed any regular tax (plus any base erosion and anti-abuse tax).
AMT Foreign Tax Credit
The IRA adds a new foreign tax credit (the “AMT FTC”). The AMT FTC is typically sum of
- The corporation’s share of income, war profits, and excess profits taxes imposed by foreign countries; and
- for a domestic corporation, the amount of income, war profits, and excess profits taxes imposed by a foreign country (to the extent that such taxes are taken into account and would otherwise be paid under this new regime for US federal income tax purposes)
Future treasury guidance to further explain the rules behind the new AMT regime is authorized by the IRA.
1% Excise Tax on Stock Repurchases
The IRA imposes a nondeductible 1% excise tax on publicly traded US corporations for the value of any stock repurchased.
A “repurchase” is defined as a redemption (within the meaning of section 317(b)) of the stock of the corporation, and any other similar transaction as determined by Treasury. A “specified affiliate” of a publicly traded US corporation that performs the buyback of the stock of the publicly traded US corporation also is subject to the excise tax. A specified affiliate is one that is owned 50%, directly or indirectly, by the corporation.
The amount of repurchases subject to the tax is reduced by the value of any stock issued by the corporation during the tax year, including stock issued or provided to the employees of the corporation or a specified affiliate of the corporation during the tax year, whether or not such stock is issued or provided in response to the exercise of an option to purchase such stock.
The provision does not apply to:
- repurchases that are part of tax-deferred reorganization under section 368(a) (so long as no gain or loss is recognized on the repurchase);
- if the repurchased stock is contributed to an employer-sponsored retirement plan;
- if the total value of stock repurchased does not exceed $1m;
- if the repurchase is by a dealer in securities in the ordinary course of business;
- to repurchases by a regulated investment company or REIT; or
- to the extent the repurchase is treated as a dividend.
This provision is basically unchanged from the House-passed “Build Back Better” bill of 2021.
Planning tips: Corporations considering stock buy-backs will have to be more careful in their approach to minimize any potential excise taxes, and utilize exceptions accordingly, including only authorizing buy-backs (of more than $1m) only when stock is issued through employment incentive plans; staggering buy-backs through-out the tax years; and making sure that tax-deferred section 368(a) reorganizations do not contain non-dividend boot (in the amount that could otherwise not be offset).
The IRA increases IRS funding over 10 years as follows:
- $45,637,400,000 for enforcement,
- $25,326,400,000 for operations support,
- $4,750,700,000 for business systems modernization, and
- $3,181,500,000 for taxpayer services
The Act states that these funds are not intended to increase taxes on any taxpayer with a TI of less than $400,000.
Clean Energy Provisions
The Act provides numerous energy-related tax credits over the next 10 years by reinstating and expanding current incentives by providing an estimated $370b of new credits. This is one of the largest efforts to date in the United States to attempt to reduce greenhouse gas emissions.
The energy credits include the following:
- Production and Investment tax credits – renewable energy and “technology-neutral” clean electricity generation;
- The Act extends the current system of investment tax credits (“ITCs”) and production tax credits (“PTCs”) for renewable energy through 2024, replacing the current phase out. These tax credits decrease the costs associated with construction of renewable electricity generation projects such as solar panels and wind turbines.
- After 2024, the Act calls for a supplement via an expanded clean electricity production credit (“CEPTC”) and an expanded clean electricity investment credit (“CEITC”). Emission-free electricity generation from wind, solar, hydro, and geothermal along with nuclear generation, hydrogen produced with renewable energy, and energy storage would all qualify.
- Both the CEPTC and CEITC are available for qualified facilities with zero greenhouse gas emissions.
- Credits for wider adoption of electric vehicles, for both passenger and commercial use;
- A $4,000 tax credit for purchasing a used electric vehicle, which is at least two years old and sold prior to December 31, 2032, or a $7,500 tax credit for purchasing a new EV placed in service after December 31, 2022. These credits are limited based on vehicle cost and production materials.
- Manufacturing tax credit for eligible equipment’
- This includes PV cells, solar modules, wind energy components, and battery cells produced in the US.
- Building energy efficiency for both commercial real-estate and homeowners;
- $9b for rebate programs targeting more efficient or green home appliances.
- The residential energy property credit extends credit to residential homeowners who install appliances that make energy efficiency improvements to their homes after December 31, 2022.
- The energy efficient home credit is extended through December 31, 2032.
- EV chargers placed in service prior to December 31, 2032, are eligible for a 6% alternative fuel refueling property credit, capped at $100,000, and 20% credit on amounts in excess of $100,000.
- Carbon capture;
- The IRA extends the existing carbon capture tax credit through 2033 and lowers the requirements for capture to allow additional facilities to qualify.
- A direct air capture qualified facility must capture no less than 1,000 metric tons of qualified carbon oxide during the taxable year.
- Credit monetization;
- This may be the most dramatic change, as it allows taxpayers to elect to be treated as having made a tax payment in the amount of a given green credit, and also transfer applicable credits to other taxpayers.
- Starting in 2023, taxpayers may elect to transfer the ITC, PTC, CEPTC, CEITC or any of a number of other green credits under the Act to an unrelated party.
- Any proceeds are not part of the taxable income of the transferring party, and is not deductible by the transferee. The transferee is also restricted from transferring credits it receives.
- Methane fees;
- The Act does include a plan to expand offshore oil and gas leasing. However, at the same time, the Act imposes certain fees for the release of methane in excess of 25,000 metric tons of CO2 per year, which will apply to offshore and onshore oil and gas production, onshore gas processing and LNG storage.
- Alternative fuel incentives.
- Clean hydrogen production and investment credits are available for facilities producing or investing in clean hydrogen after 2022.
Prescription Drug Pricing Provisions
The IRA seeks to reduce costs for Medicare recipients by:
- Enabling Medicare to negotiate the prices of certain drugs,
- Instituting new inflationary rebates under Medicare,
- Cap Medicare Part D costs at $2,000 a year, and
- Imposing a non-deductible excise tax on manufacturers, producers, or importers that fail to enter into negotiated drug pricing agreements.
CBO and the staff of the Joint Committee on Taxation expect that any pharmaceutical company would rather negotiate than pay the excise tax. As a result, no direct revenue gain is estimated to be raised from the excise tax provision.
Extension of ACA Subsidies
The Act contains a three-year extension of enhanced subsidies for people buying their own health coverage on the Affordable Care Act Marketplaces. These temporary subsidies were originally slated to last two years (2021 and 2022) and were passed as part of the American Rescue Plan Act (“ARPA”). Under ARPA, those whose income exceeds 400% of the federal poverty rate (a prior cut-off under the ACA) are eligible for tax credits if the cost of premiums exceeds 8.5% of their household income.
The Act does not include many House-backed Build Back Better provisions including other revenue raising provisions, extension of the 3.8% net investment income tax, increasing the deduction cap for state and local taxes, and increasing the US corporate tax rate or the top marginal income tax rate.
About the Author
Yuri Mitchell concentrates his practice in the representation of businesses and individuals in a variety of tax and corporate matters. His clients rely on him for his understanding of the legal and financial landscape in the areas of entity choice and formation, mergers and acquisitions, restructurings, and the associated tax impact of a particular transaction. Learn more.