Tax Services • Published 9/27/2022 Tax Tip Tuesday: The Inflation Reduction Act of 2022

President Biden signed the Inflation Reduction Act (IRA) of 2022 into law on August 16, 2022. The approximately $740 billion spending package aims to address inflation by investing in green energy, subsidizing pharmaceutical costs, and reducing the deficit. While it is unclear how the IRA's provisions will help reduce inflation in the near future, the act includes various tax provisions to help pay for the spending.

The Inflation Reduction Act reintroduces the concept of a corporate minimum tax in a new form.

Corporate minimum tax 

The Tax Cut and Jobs Act (TCJA) of 2017 repealed the original U.S. corporate alternative minimum tax effective starting with the 2018 tax year. However, the Inflation Reduction Act reintroduces the concept of a corporate minimum tax in a new form. The IRA imposes a 15% minimum tax requirement on certain corporations' adjusted financial statement income (AFSI) for tax years beginning after December 31, 2022.  

The minimum tax applies only to C corporations and private equity firms organized as partnerships (collectively referred to as "corporations"). The provision does not apply to S corporations, regulated investment companies, real estate investment trusts, and all other partnerships. The Inflation Reduction Act further narrows its scope to apply only to:  

• U.S. corporations and consolidated groups with an average AFSI of $1 billion or more over the previous three-year period.  
• Foreign-owned U.S. corporations with at least $100 million in average U.S. source AFSI over the last three-year period. It only applies when the international reporting group has an average AFSI of $1 billion or more over the same period. 
• New U.S. corporations less than three years old will be tested based on the AFSI in the years they existed.  

AFSI starts with the corporation's income as reported on its GAAP/IFRS financial statements, such as audited financial statements for the Securities and Exchange Commission or financial statements utilized for any other non-tax purpose. The GAAP/IFRS financial income statement income is then adjusted to consider the following items:  

• Depreciation utilizing U.S. tax rules; 
• Amortization – AFSI will follow book amortization except for the costs related to the purchase of wireless spectrum, which can be amortized under U.S. tax rules;
• State and local income taxes;
• Net Controlled Foreign Corporation (CFC) losses are removed (used as a carryover to offset future CFC income);
• Foreign taxes paid (foreign tax credit is allowed for foreign taxes paid on the financial statements); and 
• Income and deductions related to defined benefit plans must be calculated on a U.S. tax basis.  

The IRA includes an exhaustive list of other items that could impact the determination of AFSI. The items include, but are not limited to:

• Partnership income 
• Dividends 
• Disregarded entities 
• Cooperatives 
• Alaska Native Corporations
• Mortgage servicing income 
• Tax-exempt entities 
• Tax credits, losses, and other items to be explained in future regulations published by the U.S. Treasury 

In determining a corporation's tax liability for future years, the 15% minimum tax rate will be applied against AFSI. The minimum tax due will equal the 15% calculated minimum tax minus your normally calculated corporate tax. In the future, a tax credit for the additional minimum tax paid will help to offset regular tax when it exceeds the minimum tax.  

The 15% minimum tax contains many complex parts. If you suspect that your corporation could be subject to the new minimum tax rules, contact your P&N advisor to discuss how to prepare for the new law. 

The excise tax only affects publicly traded corporations and repurchases made after December 31, 2022.

Excise tax on corporate stock repurchases 

The Inflation Reduction Act introduces a new provision to apply a 1% excise tax when a corporation repurchases stock from its shareholders. The excise tax only affects publicly traded corporations and repurchases made after December 31, 2022. The excise tax will be assessed on the fair market value of the stock repurchased and is not tax deductible. The provisions apply to a subsidiary's purchase of parent stock and to purchases by a U.S. subsidiary of stock of a foreign-owned group. However, the excise tax will not be applied to the following repurchases of stock:

• Repurchases treated as a dividend for U.S. tax purposes;  
• De minimis repurchases (less than $1 million);  
• Repurchase shares to be contributed to an employee pension, retirement plan, or similar;  
• Transactions conducted by a securities dealer in the ordinary course of business; and
• Buybacks by a regulated investment company or real estate investment trust. 

Excise tax on the pharmaceutical industry 

The IRA allows Medicare to negotiate the price of certain drugs with manufacturers, producers, and importers. Any pharmaceutical industry organization that fails to enter into a drug pricing agreement for the drugs identified by the Inflation Reduction Act will be subject to a new excise tax under the new Internal Revenue Code Section 5000D. The excise tax can range from 185.71% to 1,900% of the selected drug's price, depending on how long the organization is non-compliant. Contact your P&N advisor if you are in the pharmaceutical industry and have concerns that the excise tax may be applicable to your operations. 

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Extension of the limitation on excess business losses 

The Inflation Reduction Act extends the limitation on excess business losses for individuals through the 2028 tax year. As a result, a deduction in the current year for excess business losses is disallowed, and the loss is treated as a net operating loss carryover to the next year. An excess business loss is one where the taxpayer's aggregate deductions related to trades and business exceeds the corresponding income plus $250,000 ($500,000 married filing jointly). Any loss generated by an S corporation or a partnership will apply to the individual at the partner or shareholder level.    

The IRA expands the small business incentive.

Research and development credits for small businesses 

Taxpayers can claim an income tax credit for qualified research and development expenses incurred during the taxable year. However, many small businesses (less than $5 million in gross receipts and less than five years old), including start-ups, don't have enough taxable income to take advantage of the R&D tax credit. Former tax laws allowed small businesses to apply the R&D tax credit toward a maximum of $250,000 in Social Security payroll tax liability.  

The IRA expands the small business incentive so that taxpayers can claim additional credit of up to $250,000 in Medicare hospital insurance tax liability for years beginning after December 31, 2022. The R&D tax credit cannot exceed the tax liability for any quarter, with any unused credits being carried forward to the next quarter.

Clean energy tax incentives for business 

The Inflation Reduction Act introduces some new clean energy tax credits to incentivize green energy investments, including:  

• A $7,500 income tax credit for qualified clean energy vehicles under 14,000 pounds.
• An income tax credit of up to $40,000 for qualified clean energy vehicles over 14,000 pounds.
• A tax credit for the sale of clean aviation fuel starting at $1.25 per gallon.
• A tax credit to produce qualified clean hydrogen starting at $0.60 per kilogram.
• A new nuclear power energy production credit starting at 0.3 cents per kWh.
• A tax credit for the domestic production and sale of qualifying solar and wind products.
• A clean electricity production tax credit starting at 0.3 cents per kWh.  

The IRA modifies and extends existing tax incentives for clean energy. Updates include:  

• The tax production credit for biodiesel and renewable diesel is extended for production through 2024.  
• The tax credit for the sequestration of carbon oxide has been extended for products that begin construction prior to December 31, 2032.
• The renewable energy production and investment tax credits are extended to cover projects that begin construction prior to December 31, 2024.
• Manufacturers and contractors can now claim up to $2,000 credit to produce qualifying energy-efficient homes through 2032. 

Clean energy tax incentives for individuals 

The IRA includes three areas of tax incentives for individual taxpayers starting in 2023:  

• A new non-refundable income tax credit of up to $4,000 on the purchase of a used qualified clean energy (electric & fuel cell) vehicle.  
• The IRA terminates the original tax credits for electric cars and introduces a new credit for new qualified clean energy vehicles. The non-refundable income tax credit could be as high as $7,500. The IRA does create a new limitation: qualifying vehicles include only those vehicles that had "final assembly" in North America.  
• The IRA allows a non-refundable income tax credit of up to $1,200 on the purchase of an energy-efficient property.  

How does the Inflation Reduction Act impact your organization? 

P&N will continue to provide insights related to the IRA and the tax benefits and new provisions created under the act. Contact us or connect with your P&N advisor to discuss your organization’s questions, concerns, and unique situation.