On August 16th, 2022, President Biden signed the Inflation Reduction Act (IRA) of 2022 into law. The Act is a slimmed down version of the Biden Administration's proposed Build Back Better legislation and addresses several key areas including:
Increasing Internal Revenue Service (IRS) budget
Implementing a corporate tax minimum
Instituting and increasing tax credits focused on investing in green technologies
Notable items that were not addressed in the IRA include removing the $10,000 SALT cap and mandatory capitalization of research and development (R&D) expenses, both provisions of the Tax Cuts and Jobs Act of 2017.
The bill is over 300 pages in length with a number of wide-ranging components. In the following summary we'll provide the key points that will be affecting taxpayers in the coming years.
Additional funding to the IRS for tax enforcement
One of the most talked-about provisions involves increased funding for the IRS.
Key details:
Approximately $80 billion in funding over the next 10 years for tax services, operations support, business system modernization, and enforcement
Enforcement - $46 billion
Operations support - $25 billion
Business systems modernization - $5 billion
Taxpayer services - $3 billion
An estimated $124 to $200 billion will be generated from enforcement and compliance efforts
Enforcement is focused on taxpayers – both corporate and non-corporate – with income greater than $400,000
Extension of the business loss limitation of noncorporate taxpayers
The IRA extends the excess business loss limitation for noncorporate taxpayers.
Key details:
Two year extension on IRC Sec. 461(l) until December 31, 2028
IRC Sec. 461(l) limits noncorporate taxpayers from deducting business losses above thresholds that are annually indexed for inflation
These limits are $540,000 for married filing jointly and $270,000 for single and married filing single for the 2022 tax year
Suspended amounts are converted to net operating losses and may be able to be used in subsequent years
Excise tax on repurchases of corporate stock
The IRA includes a 1% excise tax on stock repurchases by domestic public companies listed on an established securities market. The tax applies to repurchases executed after December 31st, 2022.
Key details:
1% excise tax on the full market value (FMV) of stock repurchased by publicly traded US corporations
Will impact redemptions and certain acquisitions and repurchases of publicly traded foreign corporation stock
Not an income tax for purposes of ASC 740
Includes special rules for “applicable foreign corporations” and “surrogate foreign corporations”
Notable exceptions:
Stock is contributed to employer sponsored retirement plan
Stock repurchase is part of a corporate reorganization
Total value of stock repurchased during the taxable year does not exceed $1 million
Repurchase by securities dealer in ordinary course of business
If the repurchase qualifies as a dividend
If the repurchase is by a regulated investment company (RIC) or a real estate investment trust (REIT)
15% corporate alternative minimum tax
The IRA reinstates the corporate alternative minimum tax (AMT) for large corporations, which had been previously eliminated by the Trump Administration's Tax Cuts and Jobs Act.
Two key elements to note is that this revised AMT only impacts corporations with annual profits exceeding $1 billion, and includes carve-outs for certain manufacturers and subsidiaries of private equity firms.
Key details:
15% tax on adjusted financial statement income (i.e., this would be a book minimum tax)
Affects tax years beginning after December 31, 2022
Applies to corporations with profits over $1 billion based off adjusted financial income
For US corporations with foreign parents, it would apply to income earned in the US of $100 million or more of average annual earnings in three prior years and where the overall international financial reporting group has income of $1 billion or more
Treatment of split offs remains uncertain. Even though these are tax-free reorganizations for tax purposes, gain is recorded for financial accounting purposes
Joint Committee on Taxation expects that this new tax would apply to only about 150 corporate taxpayers, approximately equal to 30% of the Fortune 500
Tax credit additions and modifications
A significant number of provisions add or enhance credits and incentives that pertain to domestic research and green energy initiatives. Noteworthy changes include:
Increased small business payroll tax credits for research activities:
Qualified payroll tax credit for increasing research activities raised from $250,000 to $500,000
First $250,000 will be applied against the FICA payroll tax liability. Second $250,000 will be applied against the employer portion of Medicare payroll tax.
Applies for taxable years beginning after December 31, 2022
Limited to tax imposed for calendar quarter with unused amounts being carried forward
Qualifying small businesses are required to have less than $5 million in gross receipts in current year and no gross receipts prior to the 5 year period ending with the current year
Green initiative tax credits and incentives:
Credits for purchasing new and previously-owned clean vehicles
Extension of IRC Sec. 45L – New Energy Efficient Home Credit – extended to qualified new energy efficient homes acquired before January 1, 2033. Increase value of available credit for single-family homes to $2,500 and modified the credit available for multi-family homes.
Extension, increase, and modifications to IRC Sec. 25C nonbusiness energy property credit
Extension and modification of IRC Sec. 25D residential clean energy credit
IRC Sec. 48 energy credit for businesses and investors
Expansion of qualifying property, extension of credit including phasedown and phaseout rules, and introduction of incentives
Credit for producing energy from renewable sources (IRC Sec. 45)
Retroactive for facilities placed in service after December 31, 2021
Extends beginning of construction deadline to projects beginning construction before January 1, 2025 including solar energy facilities
Increased energy credit for solar and wind facilities in certain low-income communities
New credit for clean hydrogen production
New credit for zero-emission nuclear power
Extension of incentives for biodiesel, renewal diesel, and alternative fuels
Extension of biofuel producer credit
New income and excise tax credits allowed for sustainable aviation fuel
Modification of IRC Sec. 179D – Energy Efficient Commercial Buildings Deductions
Modification of building qualifications
Deduction increased from $1.88 per square foot to up to $5 per qualified square foot
Changes in depreciation for certain green energy properties
Final thoughts
The Inflation Reduction Act should have wide-ranging impacts on taxpayers, especially large corporations and high-net-worth individuals. In the coming weeks our tax leaders will dive into the specifics of the legislation, outline immediate and long-term impacts, and provide tax-planning strategies and considerations.
