Key Tax Provisions of the Inflation Reduction Act of 2022
On August 16, 2022, President Joe Biden signed the Inflation Reduction Act of 2022 (the “Act”) into law. Among its provisions, the Act provides the biggest investment ever in the United States to fight climate change, places a cap on out-of-pocket prescription drug costs for Medicare participants, extends subsidies to help individuals who purchase health insurance on their own and permits the Medicare program to negotiate some prescription drug prices. The following are the highlights of some of the significant tax provisions included in the Act:
- 15% Corporate Alternative Minimum Tax: A new 15% alternative minimum tax will be imposed on the adjusted financial income of corporations with profits in excess of $1 billion for the 3-year period ending prior to the then current year. “Adjusted financial income” is essentially the profits a company reports to its investors on its financial statements. Notably, the tax does not apply to S corporations, regulated investment companies (e.g., mutual funds) and real estate investment trusts (REITs). Impacted corporations will generally be eligible to claim net operating losses and tax credits against the tax and will be eligible to claim a tax credit against the regular corporate income tax for any minimum tax paid in prior years, to the extent the regular income tax liability in any year exceeds 15% percent of the corporation’s adjusted financial income. This new alternative minimum tax applies for tax years beginning after December 31, 2022.
- 1% Excise Tax on Stock Buybacks: A new 1% excise tax will be imposed on the fair market value of stock repurchased by publicly-traded companies during the taxable year (i.e., stock redemptions). The tax will not apply (i) to a repurchase which is part of a nontaxable reorganization; (ii) to repurchased stock (or stock of equal value) which is contributed to an employer-sponsored retirement plan (ESOP); (iii) to where the total value of the stock repurchased in a tax year does not exceed $1 million; (iv) to a transaction allowed under regulations for repurchases by a dealer in securities in the ordinary course of business; (v) to repurchases by regulated investment companies or REITs; and (vi) to repurchases treated as a dividend for tax purposes. The tax is effective for tax years beginning after December 31, 2022.
- Increased IRS Funding: The Act allocates approximately $80 billion to the IRS over the next 10 years to enhance IRS enforcement (e.g., legal and litigation support, criminal investigations, and digital asset monitoring and compliance activities), operational support (e.g., rent, printing, postage and security), taxpayer services (e.g., filing and account services, prefiling assistance and education) and business systems modernization.
- Extension of Limitation on Net Business Losses: A provision enacted under the 2017 Tax Cuts and Jobs Act limits the amount of trade or business losses that can be used to offset nonbusiness income of non-corporate taxpayers. The Act extends the expiration date of this limitation for an additional two years so that it now applies through the 2028 tax year.
- Research and Development Credit Increase: Current law permits small businesses that are less than 5 years old and have less than $5 million of gross receipts to apply up to $250,000 of their research and development credit towards their social security payroll tax liability if they do not have sufficient income to absorb the credit. The Act increases the amount of credit that can be used against payroll taxes to $500,000 and also allows the credit to be applied against the Medicare portion of payroll taxes. This provision applies to tax years beginning after December 31, 2022.
- Climate Change Initiatives: The Act offers a number of tax incentives related to green energy including:
- A 10-year tax credit of up to $7,500 and $4,000, respectively, on the purchase of new and used electric vehicles placed in service after December 31, 2022 for households with income between $150,000 (single) and $300,000 (married filing jointly);
- A 10-year consumer tax credit for home energy efficiency and clean energy projects such as installing heat pumps, electric HVAC and water heaters and rooftop solar panels;
- Production tax credits to accelerate the manufacturing of solar panels, wind turbines, batteries and critical mineral processing; and
- Investment tax credits to incentivize the building of clean technology manufacturing facilities such as facilities that make electric vehicles, wind turbines and solar panels.
If you have any questions regarding the Inflation Reduction Act of 2022 or how it may impact your business or you personally, please contact Marc T. Finer, Tax Partner, at 860-240-6096 or firstname.lastname@example.org.