General overview of the tax provisions in the Inflation Reduction Act of 2022
The primary tax reforms are a corporate minimum tax, increased spending on IRS enforcement, a new excise tax on stock buybacks, and numerous green energy credits.
Corporate alternative minimum tax
The 2022 IRA extends the alternative minimum tax to corporations who meet an annualized financial statement income test. Generally, to meet the test, the corporation’s average annual adjusted financial statement income must exceed $1 billion over a three-year period.
However, there are exceptions, such as for corporations with a foreign-owned parent, which only need to meet a $100 million test for the same period. S corporations, regulated investment companies, and real estate investment trusts are excluded without regard to income.
The 2022 IRA provides for calculating this income and allows the Treasury Secretary to promulgate necessary regulations.
If a corporation is subject to the alternative minimum tax, the tax is 15% of the adjusted financial statement income less the corporation’s alternative minimum foreign tax credit.
Excise Tax on Stock Buybacks
The 2022 IRA creates a 1% excise tax on the fair market value of stock repurchased by a covered corporation. A covered corporation is one whose stock is traded on an established securities market. The 2022 IRA defines repurchase by reference to Internal Revenue Code Section 317(b), which defines redemption as when a corporation acquires its stock from a shareholder in exchange for property. The amount subject to tax is reduced by stock issued by the covered corporation during the year.
There are special rules for affiliated corporations and foreign corporations. The 2022 IRA provides exceptions for repurchases that are part of a reorganization where no gain or loss is recognized by the shareholder; repurchases where the corporation contributes its stock or stock of equal value to an employee retirement or stock ownership plan; repurchases when the total amount repurchased during the year is less than $1 million; repurchases in the ordinary course of business; repurchases by regulated investment companies or real estate investment trusts; or to the extent the repurchase is treated as a dividend.
The Treasury Secretary is authorized to promulgate regulations to prevent the abuse of the exceptions, to address special classes of stock, and to provide rules for the treatment of foreign corporations.
Increased funding for the Internal Revenue Service
The 2022 IRA provides nearly $3.2 billion for taxpayer services; over $45 billion for enforcement; over $25 billion for operations; and nearly $4.8 billion to modernize technology. It also provides funds to create a task force to prepare a report on the cost and feasibility of creating a free e-file system. It also appropriates funds for TIGTA, the Office of Tax Policy, the Tax Court, and the Department of Treasury.
Extension of Affordable Care Act subsidies
The 2022 IRA extends the Affordable Care Act credits through 2025.
Green energy credits
The 2022 IRA provides numerous credits aimed at reducing emissions or encouraging the adoption of green energy.
Clean electricity and reducing carbon emissions
To encourage the production of clean energy, the 2022 IRA extends the period to build or place in service new wind, closed- or open-loop biomass, geothermal, solar, and other energy facilities to 2025; however, it reduces the base credit amount too. The 2022 IRA also extends the credit for property related to the production of such energy to 2025; provides a credit for solar and wind facilities used in connection with low-income housing; extends the credits for carbon oxide sequestration; and creates a new credit for zero-emissions nuclear power.
The 2022 IRA extends the credits for biodiesel fuels and creates new credits for sustainable aviation fuel and the production of clean hydrogen.
Clean energy and efficiency incentives for individuals
The 2022 IRA extends and modifies credits for individuals to install heat pumps and energy efficient windows and doors, or to build energy efficient homes. It also extends the residential clean energy credit to 2032 and increases the energy efficient commercial building deduction.
The 2022 IRA increases and modifies the credit amounts related to plug-in electric drive motor vehicles and creates a new credit for purchasing pre-owned clean vehicles and for placing in service certain commercial clean vehicles. It also extends the credit for installing charging equipment.
The 2022 IRA modifies or creates credits related to investment in clean energy manufacturing and energy security; superfund sites; and clean electricity and transportation.
Other notable provisions
The 2022 IRA increases the existing $250,000 research credit applied to small businesses’ payroll tax liability by an additional $250,000. The first $250,000 will still be applied to the payroll tax, and the additional $250,000 will be applied to the business’s Medicare tax.
The 2022 IRA also extended the limitation on excess business losses under section 461(l) through 2028.
The 2022 IRA still needs to make it through the House. Several House Democrats have previously indicated that they would not vote for a bill that does not contain changes to the current limitations on the state and local tax deduction. However, they are now indicating that they will support this legislation even though it does not increase the cap on the state and local tax deduction, making passage more likely.
Please contact your Mazars professional for additional information.