August 22, 2022

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022.  The legislation has provisions that promote spending on clean energy solutions offset by various tax provisions.  The focus on the tax provisions was to avoid impacting taxpayers making less than $400,000 but raise revenue to offset some of the costs of the other provisions included in the bill.  The key tax provisions are as follows:

Corporate Alternative Minimum Tax

  • This tax applies to C corporations with a three-year average applicable financial statement income in excess of $1 billion. In determining if you meet the three-year average of $1 billion, you must consider all persons considered a single employer under the rules of section 52.
  • Once you meet the criteria, you will always be subject to the alternative minimum tax unless you meet one of a few exceptions.
  • This would apply to foreign-parented multinational groups if a domestic corporation within the group has at least $100 million in net income.
  • The tentative minimum tax is the excess of 15% of the adjusted financial statement income over the corporate AMT foreign tax credits.
  • Adjusted financial statement income is book income or loss reported in applicable financial statements after certain adjustments are taken into account, including an adjustment for tax depreciation deductions under Sections 167 and 168.
  • This provision applies to taxable years beginning after 2022.
  • Given the high book income threshold, this provision will likely only impact the largest corporations. The Joint Committee on Taxation estimates that about 150 corporations would be subject to this tax each year

Extension of Limitation on Excess Business Losses

  • The Tax Cuts and Jobs Act of 2017 included a provision limiting the amount of trade or business deductions that offset nonbusiness income.
  • This provision was extended an additional two years through 2028.
  • This is one of the provisions that may significantly impact a broader group of individuals.

Excise Tax on Repurchase of Corporate Stock

  • For publicly traded U.S. corporations that make a stock buyback after 2022, a 1% tax is imposed on the fair market value of the stock repurchased.
  • The stock buyback amount can be reduced by stock issuance during the year, reducing the impact of this provision.
  • The excise tax will not apply to certain corporate reorganization transactions.

Extension/Modification of Various Energy Credits

  • Extension and expansion of the residential energy property credit for homeowners. The annual limitation increases from $1,200 per taxpayer per year. The lifetime limit on the credit has been repealed.
  • Credits for purchasing both new and used electric vehicles. Buyers of new electric vehicles (EVs) will be eligible for a $7,500 credit, and a credit of up to $4,000 will be available on purchases of previously-owned EVs.
  • Various energy credits have been extended, such as qualified plug-in electric drive motor vehicles, a new energy-efficient home credit, and various other clean energy credits.

Extension of Premium Tax Credits

  • Taxpayers who purchase health insurance through an exchange will continue to receive tax credits at the level enacted by the American Rescue Plan Act

Increased IRS Enforcement

  • The bill appropriates about $80 billion to the IRS to hire agents, improve customer service and modernize their technology.
  • It is unknown how hiring additional agents will impact the number of audits and the focus of these audits.

Increase in Research Credit against Payroll Tax for Small Businesses

  • Small businesses can claim a tax credit for qualified research and development expenses against their payroll tax liability instead of applying the credits against their income tax liability.
  • This provision will increase the amount of credit eligible to offset the payroll tax liability from $250,000 to $500,000.
  • This would provide small businesses in a startup mode with additional cash to perform research activities further.

As with any new legislation, there will be questions on how to implement these provisions.  The IRS will likely be issuing guidance to clarify the application of these provisions. We will continue monitoring these new developments and provide future guidance. Do not hesitate to contact us to discuss whether these provisions would impact your business.

 

Article written by:
Kevin Dunn, CPA
Director, Tax & Business Advisory Services

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