On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA), which is a scaled back version of the Build Back Better Bill in play last fall. The IRA contains a handful of federal revenue raising provisions — to the tune of more than $700 billion — as well as prescription drug pricing reform, more dollars for IRS tax enforcement, and a significant number of new, extended, modified or enhanced energy credits.
The tax increases in the Act could impact a variety of taxpayers in three key areas: a new corporate alternative minimum tax (AMT), a new excise tax on corporate stock buybacks and a two-year extension of the business loss limitations. The additional IRS funding and energy credit focus will likely be significant changes as well.
1. New Corporate AMT
A new corporate AMT will be effective for tax years beginning after December 31, 2022, and applies to the extent it exceeds the taxpayer’s regular tax liability. The tax is 15% of the adjusted financial statement income for applicable corporations. Generally, an applicable corporation — excluding S Corporations, Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITS) — is one that has a three-year average adjusted financial statement income greater than $1 billion.
The provision also has rules that address foreign-parented corporations, aggregation of related entities, short tax years, predecessor entities, entities not in existence for three years, change of control and more.
Impact: Due to the exclusion of certain types of corporations and an income threshold of $1 billion, it’s estimated that fewer than 200 corporate taxpayers will be subject to the tax. However, when taxes are raised on suppliers, prices will generally increase to align with the additional tax burden. If your business is close to generating $1 billion in net financial statement income, proper planning could help you minimize or at least defer the new minimum tax. Even entities not subject to this tax, such as partnerships, could have additional reporting requirements if an applicable corporation has an ownership interest.
2. Excise Tax on Buyback of Corporate Stock
The IRA imposes a new 1% excise tax of the fair market value of stock repurchased by a covered corporation after December 31, 2022. The amount of the stock repurchased subject to this tax is reduced by the fair market value of stock issued by the covered corporation during the tax year.
A covered corporation is any domestic corporation traded on an established securities market as defined in Sec. 7704(b)(1). Repurchases are defined as a redemption or economically similar transactions. Exceptions to the tax include:
- Certain reorganizations under section 368(a);
- When the repurchased stock, or an amount of stock equal to the repurchased stock, is contributed to an employer-sponsored retirement plan, ESOP or similar plan;
- If the total value of stock repurchased during the taxable year does not exceed $1 million;
- Repurchases by dealers in securities in the ordinary course of business;
- Repurchases by regulated investment companies (RICs) or real estate investment trusts (REITs); and
- To the extent the repurchase is treated as a dividend.
Impact: It is probably too early to tell the full impact of this provision. The excise tax was put in place to curtail the practice of large corporations conducting stock buybacks as a means to increase the trading price of their shares, with the result of increasing performance-based bonuses tied to share prices. As this is the first time Congress has enacted such a tax, time will tell its impact. Taxpayers selling shares back to the corporate issuer will not notice a direct impact, since the excise tax is imposed on the purchaser of the shares.
3. Two-year Extension of the Excess Business Loss Limitation
The IRA has extended the application of section 461(l), or excess business loss limitations, to tax years beginning before January 1, 2029. This is a two-year extension of the provision originally put in place by the Tax Cuts and Jobs Act (TCJA).
As a reminder, the TCJA limited the amount of trade or business losses a noncorporate taxpayer can claim on their return to $250,000, or $500,000 for a joint return, as adjusted for inflation. Losses disallowed in a year are referred to as excess business losses and are treated as net operating losses (NOLs) in subsequent tax years. The TCJA’s excess business loss limitations originally applied for tax years beginning after December 31, 2017, and before January 1, 2026, but was extended under the CARES Act to tax years beginning after December 31, 2020, and before January 1, 2027.
Impact: While the limitation generally only defers the timing on when taxpayers can deduct excess business losses, this limitation can also result in cash out of pocket upfront. Taxpayers should continue to monitor the timing of income/deductions and conduct advanced planning to try to minimize or eliminate the impacts of this provision.
4. Increased Funding for IRS Enforcement
The IRA provides for approximately $80 billion of additional funding to the IRS through September 30, 2031, with almost $46 billion of that money being earmarked for tax enforcement activities. Based on the revenue and expense estimates for the Act, the revenue generated from the increased enforcement activities is expected to exceed the cost by $124 billion.
Impact: While not a direct tax increase, the IRA will likely increase scrutiny placed upon taxpayers.
5. Energy Credits
Despite the revenue raising tax provisions discussed above, the IRA also includes significant opportunities for taxpayers in the form of tax credits related to the energy and climate change aspects of the Act. Below is a list of some of the most impactful tax credits added, modified or extended as part of the IRA:
- Production Tax Credit
- Energy Investment Tax Credit
- Energy Credit for Solar and Wind Facilities in Low-Income Communities
- Nonbusiness Energy Property Credit
- Residential Energy Efficient Property Credit
- New & Previously Owned Clean Vehicle Credit
- Qualified Commercial Clean Vehicle Credit
- Biodiesel, Alternative Fuel and Alternative Fuel Mixtures
- Energy Efficient Commercial Building Deduction
- Alternative Fuel Vehicle Refueling Property Credit
- New Energy Efficient Homes Credit
Impact: Many of the new, extended and modified credits have limitations that could limit their availability to certain taxpayers or more broadly. However, these credits also may offer taxpayers expanded opportunities, such as enhanced credit amounts and transferability. Look for more detail on the IRA’s energy credits in a future article.
As with any new piece of legislation, advance planning with your tax advisers will be key to taking advantage of opportunities and minimizing your tax burden.
Contact Robert Venables a email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
For more information on the Inflation Reduction Act, watch Robert Venables' recent webinar covering the IRA and other timely tax topics.