The Tax Implications of the Inflation Reduction Act
On August 17th, 2022, President Biden signed the Inflation Reduction Act (the “Act”) into law. The Act affects taxes, the climate and healthcare. This brief overview is meant to provide a summary of the tax related changes that may be applicable to the clients of Greensfelder, Hemker, & Gale, P.C.
The Act is expected to raise over $700 billion in revenue resulting from a 15% corporate alternative minimum tax, a 1% excise tax on certain corporate stock repurchases, tax credits that are intended to boost U.S. green energy initiatives, and increased IRS funding. The Act was a major piece of legislation, but did not contain the sweeping tax changes that President Biden and his administration proposed in the most recent version of US Department of the Treasury's "General Explanation of the Administration's Fiscal Year 2023 Revenue Proposals,” more commonly known as the “Green Book”. There were no changes to individual or corporate tax rates, carried interest provisions, or estate and gift tax rules.
Corporate Alternative Minimum Tax
In tax years beginning after December 31, 2022, the Act introduces a 15% corporate minimum tax (“AMT”) on the “adjusted financial statement income” (sometimes referred to as “book” income) of certain large corporations. This newly enacted AMT will apply to any corporation, other than an S corporation, regulated investment company, or real estate investment trust with average annual adjusted financial stated income that exceeds $1 billion dollars for any three‑year period ending with a year prior to the current taxable year and after December 31, 2021.
The Act will also have an effect on the current bonus depreciated regime under Code Section 179. While the Act does not directly change Code Section 179, the Act does target accelerated depreciation deductions of large corporations. The Act penalizes companies that have a large book-tax income disparity. These disparities often arise from stock based compensation or from depreciation deductions. Now, large companies that otherwise would owe limited annual taxable income due to bonus depreciation, will be subject to a 15% minimum tax regardless of the amount of depreciation deduction available per year.
The application of a minimum tax for large corporations is not a new introduction into the tax Code. The corporate alternative minimum tax was previously introduced in the Tax Reform Act of 1986. The theory behind a minimum tax is to close tax breaks for large corporations that may give rise to a little to no tax liability. In 2017, the Tax Cut and Jobs Act repealed a prior version of a minimum tax on corporations.
Excise Tax on Stock Buybacks
The Act imposes a new 1% excise tax on repurchases of stock by certain publicly traded corporations. Specifically, the excise tax would apply to repurchases of stock by domestic corporations with stock traded on an established securities market. This excise tax applies to redemptions, and to certain acquisitions and repurchases of publicly traded foreign corporation stock. The Act does make an exception of the implementation of this excise tax on tax-free reorganizations under Code Section 368.
Additional IRS Funding
The Act appropriates $78.9 billion dollars to the IRS over the next 10 years. The Act allocates significant resources to the IRS for the purposes of tax enforcement, taxpayer service and enforcement programs, and business systems modernization. The IRS predicts that the additional funding will result in increased revenues of $203.7 billion. It is important to note that the new Act does not require the IRS Commissioner to submit an operational plan to Congress detailing how the increased IRS funding would be spent.
Losses on Non-corporate Taxpayers
Generally, Section 461(l) of the Code is a mechanism that restricts the extent to which business deductions of a non-corporate taxpayer may be used to offset non-business income of a taxpayer. This limitation is calculated by taking the total aggregate deductions of the business over the gross income attributable to the business, plus a threshold amount. Any excess business deduction will be moved to the taxpayer’s tax return as a net operating loss carryover.
This limitation was set to expire; however, the Act extends the limitation through January 1, 2029.
Missouri’s SALT Parity Act
In conjunction with changes to Code Section 461(l), the Tax Cuts and Jobs Act limited the total state and local tax deduction to $10,000 per taxpayer. Included within this limitation were income taxes, sales taxes, property taxes, and real estate taxes. Because of this deduction cap, taxpayers who had significant amount of deductions would only be able to use those deductions to offset income up to the $10,000 cap, resulting in higher amounts of taxable income. Missouri, along with many other states, have enacted state level workarounds of this deduction cap. On June 30th, 2022, Missouri enacted the SALT Parity Act. The SALT Parity Act allows for flow-through businesses to elect to pay income tax, and take deductions, at the entity level. Thus, the owners of the flow-through entity will have a smaller amount of taxable income than what they have had under the old regime. In addition, the SALT Parity Act allows flow-through businesses to receive a credit against Missouri tax on their personal returns for taxes paid to other states under a SALT Limit workaround.
Silence on Carried Interest changes
Generally, carried interests (profit interests), contained in Code Section 1061, are interests in a partnership that share in a partnership’s net profit. Subject to certain limitations, a carried interest in a partnership can give rise to a preferential capital gains tax rate. The initial version of the bill amended Section 1061 to expand the scope of short-term gain by increasing the holding period requirement from three years to five years. The version of the bill that President Biden signed into law did not contain any changes to Section 1061, or carried interest. As highlighted by the administrations most recent Green Book, it is likely that the administration will continue to seek changes to the current carried interest regime contained in Section 1061.
Climate Related Tax Changes
The Act provides various incentives and tax breaks for clean and renewable energy. The Act provides for over $370 billion of new energy-related tax credits over the next 10 years. Specifically, the Act provides incentives for the following clean energy initiatives:
- The creation and expansion of tax credits for the sweeping adoption of electronic vehicles.
- Extension of tax credits for nuclear energy and other lower-carbon technologies.
- Extended and expanded provisions to support investments in building energy efficiency by both commercial real estate owners and homeowners.