This article, originally published on August 9, 2022, has been revised after President Biden signed the act into law.
As of August 16, 2022, the Inflation Reduction Act of 2022 (the “Act”) has been signed into law. The Act represents a slimmed-down version of the tax changes originally proposed in the President’s budget recommendations to Congress.
Below are highlights of the Act’s key tax components that may impact you. Most of the Act’s tax changes go into effect on January 1, 2023, and should be considered in planning for 2023 and beyond.
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15% Minimum Corporate Book Tax
The Act includes a 15% minimum “book tax” on C corporations with annual profits in excess of $1 billion in pre-tax income (with some adjustments). This marks a reversal of the Tax Cuts and Jobs Act of 2017 that had previously eliminated the corporate alternative minimum tax, and may impact large enterprises’ thinking on the advantages of incorporation.
Under the Act, C corporations with at least $1 billion in income would be subject to the greater of:
- the current historically low 21% tax on a C corporation’s adjusted gross income, or
- a 15% tax on a C corporation’s “adjusted financial statement income,” which generally consists of a C corporation’s “book income,” tracking generally accepted accounting principles or “GAAP” accounting with some adjustments.
Renewable Energy Credits
The Act provides for several new and expanded renewable energy tax credits including:
- an amended section 45Q carbon capture credit for certain projects that begin construction before January 1, 2033;
- an extended section 48 energy investment tax credit for certain biogas, energy storage technology, microgrid controllers, thermal energy storage property, solar, and wind projects;
- a new section 45Y clean electricity production credit; and
- a new section 45X advanced manufacturing production credit aimed at increasing domestic production and sale of integrated components used in solar, wind, storage projects, and critical minerals.
Notably, most of the credits are fully transferrable and allow for a 3-year carryback period, which could open up new investment and tax planning opportunities.
Increased Funding for the IRS
The Act provides for nearly $80 billion in appropriations to the IRS budget to employ more auditors, improve customer service, and modernize technology. With increased enforcement measures, we expect to see an expansion in audit activity, as the IRS could collect billions more in additional tax revenue.
Excise Tax on Stock Buy Backs
The Act includes a 1% excise tax on corporate stock buybacks. The excise tax applies to the fair market value of any stock of a “covered corporation,” which is repurchased by such corporation during the taxable year. Covered corporations only include publicly-traded domestic corporations.
What Didn’t Make the Act?
Notably, the Act does not include any changes to how carried interests are taxed under current law. Originally, the draft bill included a proposal to increase fund managers’ three year holding period requirement to five years in order to be entitled to long-term capital gain tax rates (with a top rate of 20%) on exit. If the extended holding period was not met, then short term capital gain tax rates (with the top rate of 37%) would result.
As taxpayers begin to plan for 2023, these tax changes merit close attention now.
This alert is not intended to provide legal advice, and no legal or business decision should be based on its contents. Please consult with your legal counsel for guidance. For assistance related to the Inflation Reduction Act of 2022, please contact Ashley Withers at firstname.lastname@example.org or any member of the Tax practice.
Ashley P. Withers advises clients on a wide variety of tax matters. She has a broad-based tax practice that includes representing businesses, family offices, tax-exempt organizations, and individuals on tax strategies, compliance, and tax-efficient organizational structuring. Ashley’s practice also includes representing businesses and individuals in tax controversy matters. In her controversy practice, she has successfully defended clients in IRS audits and appeals and secured favorable private letter rulings.