At a Glance
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the Act) (H.R. 5376). The Act addresses climate change, health care, inflation, and taxes. This bill is a slimmed-down version of the original Build Back Better Act that was ultimately stalled in the Senate.
Read more to learn about the key tax provisions outlined in the Act.
Corporate Alternative Minimum Tax Changes
The Act imposes a 15% alternative minimum tax (AMT) on corporations with average annual adjusted financial statement income (AFSI or book income) that exceeds $1 billion over any consecutive three-taxable year period. However, this new corporate AMT will not apply to companies that reach the $1 billion threshold when their income is combined with unrelated businesses under the shared ownership of an investment fund or partnership.
Business tax credits and energy tax credits are creditable against the AMT liability. Additionally, the AMT will not apply to S corporations, regulated investment companies (RICs), and land investment trusts (REITs). Finally, for companies that have been in existence for less than three taxable years, the income threshold is based on the period during which the corporation was in existence.
The Act contains multiple rules that apply to multinational groups. For instance, a U.S. corporate subsidiary of a foreign-parented group is subject to the AMT if the whole group meets the $1 billion income threshold and the subsidiary has an AFSI of $100 million or more.
The provision is effective for tax years beginning after December 31, 2022.
Stock Buyback Excise Tax
The Act will impose an excise on domestic publicly traded corporations that repurchase their stock directly (or through a more than 50% owned subsidiary corporation or partnership). The tax will equal 1% of the fair market value of the repurchased stock and will not be deductible. The tax also applies to repurchases of stock of certain foreign corporations.
Notably, the Act also provides various exceptions. For instance, the tax does not apply to the extent that:
- The repurchase is part of a reorganization where the shareholder recognizes no gain or loss.
- The repurchased stock (or an amount of stock equal to the value of the stock repurchased) is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan.
- The stock value repurchased during the taxable year does not exceed $1 million.
- Under regulations to be issued, the repurchase is by a dealer in securities within the ordinary course of business.
- The repurchase is made by a RIC or a REIT.
- The repurchase is treated as a dividend.
The provision is effective for repurchases that occur after December 31, 2022.
Small Business Research Tax Credits
The Act increases the research tax credit that a qualified small business can apply for under IRC Sec. 41(h). In tax years beginning after December 31, 2022, the credit that can be applied against payroll taxes for small businesses is increased from $250,000 to $500,000. The first $250,000 of the credit limit will be applied against the employer’s FICA payroll tax liability, and the second $250,000 will be applied against the employer’s Medicare payroll tax liability.
Deductibility Limit for Excess Business Losses
Under IRC Sec. 461(I), the Act extends the limitation on the deductibility of excess business losses by non-corporate taxpayers for another two years to pay for late changes to the corporate AMT.
Tax Credits for Clean Energy
The Act makes a significant commitment to clean energy use in the U.S. by extending and expanding existing energy-related tax credits. It will increase the domestic production and the sale of wind, solar, fuel cell, hydropower, and waste energy components. It also creates individual clean energy incentives like energy rebates and consumer tax credits for energy-efficient homes and vehicles.
The Act adds additional tax credits for clean vehicles, manufacturing, electricity, and fuel. These energy tax credits are expected to increase U.S. climate and energy spending by approximately $374 billion. In addition, it is being touted as a new historical record for U.S. clean energy investment.
Additional IRS Funding
The Act provides $80 billion in funding to the IRS over 10 years for the following:
- Taxpayer services: includes filing and account services, taxpayer education, and taxpayer advocacy services
- Enforcement Support: legal and litigation support, conducting criminal investigations, digital asset monitoring, compliance, and financial crimes
- Internal Operations: office rent, facilities costs and vehicles, information technology development, maintenance, and security
- Business systems improvements: callback technology and other customer service enhancing technology
More than half of the additional funds will be allocated to enforcement efforts.
Funds will even be allocated to an e-file task force, which must produce a report on the way to create and operate a direct, free e-file system.
Under its mission to not raise taxes on low-to-middle-income taxpayers, the Act states that no IRS appropriations are intended to raise taxes on taxpayers with taxable income below $400,000.
Contact Windes at 844.494.6337 or firstname.lastname@example.org to learn how these changes may impact your tax situation.