On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the “IRA”) into law. This Client Alert summarizes the key business tax provisions of the IRA.
Unless otherwise specified, the provisions are effective for taxable years beginning after December 31, 2022.
Corporate Profits Alternative Minimum Tax:
- A 15% corporate alternative minimum tax is imposed on the adjusted financial statement income of any “applicable corporation.” An applicable corporation generally is a corporation with average annual adjusted financial statement income for a 3-taxable-year period ending after December 31, 2021 that exceeds $1 billion. A corporation’s adjusted financial statement income for a tax year generally equals the net income or loss set forth on the corporation’s applicable financial statement for the year, subject to certain adjustments. Importantly, a corporation’s adjusted financial statement income will be reduced to account for certain accelerated depreciation deductions allowed under the Internal Revenue Code (to the extent of the amount allowed as a deduction in computing taxable income for the taxable year) instead of the depreciation expense that is taken into account on the taxpayer’s applicable financial statement.
- The amount of corporate alternative minimum tax payable by an applicable corporation equals the amount by which the corporation’s tentative minimum tax liability exceeds the sum of the corporation’s regular income tax liability for the taxable year and any additional tax owed pursuant to the Base Erosion and Anti-Abuse tax. The applicable corporation’s tentative minimum tax liability equals the excess of 15% of its adjusted financial statement income for the taxable year over its alternative minimum tax foreign tax credit for such tax year. After the calculation of a corporation’s average annual adjusted financial statement income, an applicable corporation generally is eligible to use financial statement net operating loss carryovers to reduce up to 80% of its adjusted financial statement income for a tax year. However, only losses generated in tax years ending after December 31, 2019 are eligible for use. Additionally, tax credits may be used to offset an applicable corporation’s alternative minimum tax liability. In future tax years, applicable corporations are eligible to claim the amount of alternative minimum tax paid in previous years as a tax credit against their regular tax, to the extent the applicable corporation’s regular tax liability in any tax year exceeds 15% of the corporation’s adjusted financial statement income.
- Regulated investment companies (“RIC”), S corporations and real estate investment trusts (“REIT”) are not subject to the tax.
- Corporations controlled by private equity firms are not subject to the corporate minimum tax if they make less than $1 billion of adjusted financial statement income, even if that private equity firm's combined portfolio of corporations exceeds the threshold.
Corporate Stock Buyback Excise Tax:
- The IRA imposes a nondeductible 1% excise tax on a publicly traded domestic corporation, other than a RIC or a REIT, that buys stock back from its shareholders. The tax applies to the fair market value of the stock that is repurchased by the corporation during a taxable year.
- Repurchases subject to the tax include stock redemptions and certain economically similar transactions. The amount of repurchases subject to the tax is reduced by the value of any stock issued by the corporation during the tax year, including stock issued to the employees of a direct or indirect subsidiary, whether or not such stock is issued in response to the exercise of a stock option.
- The tax also applies to the purchase of the stock of a publicly traded corporation by its “specified affiliate,” which is defined to include another corporation or a partnership that is more than 50% owned by the publicly traded corporation. In addition, certain direct and indirect subsidiaries of a public corporation are subject to the tax if the subsidiary executes the buyback, including purchases by a US subsidiary of a foreign-parented corporation. It also applies to foreign corporations inverted after September 20, 2021, or surrogate foreign corporations that merged to create a foreign parent in which former US shareholders own more than 60% of shares.
- The tax does not apply to certain transactions, including (i) repurchases where the aggregate value of the repurchased stock does not exceed $1 million, (ii) repurchases treated as dividends for tax purposes, and (iii) tax-free buybacks that are part of a tax-free reorganization (as long as no gain or loss is recognized by the exchanging shareholder).
- The excise tax applies to repurchases occurring in tax years beginning after December 31, 2022, regardless of whether the repurchases were authorized or approved in a prior tax year.
Excess Business Loss Rules:
- The IRA extends by two years the limitation on deducting pass-through business losses against non-business income. The limitation was set to expire for tax years beginning after December 31, 2026. The limitation is now set to expire for tax years beginning after December 31, 2028.
- The limitation prevents non-corporate taxpayers from deducting a business loss in excess of $250,000 ($500,000 for joint filers) against non-business income. Disallowed losses may be carried forward to subsequent taxable years and the carryforward is treated as a net operating loss carryforward in those subsequent years (subject to the net operating loss limitations).
Additionally, the IRA extends and expands the availability of certain existing tax credits relating to the production of clean electricity and the reduction of carbon emissions as well as introduces new green tax credits and incentives.
If you have any questions about the implementation of the IRA, please contact one of the authors of this alert.