On Tuesday, August 16th, President Joe Biden signed into law The Inflation Reduction Act of 2022 (‘The Act’). The Act contains a variety of provisions, affecting health care, climate, and tax. This DOZ Insight will focus on the tax- related items included in The Act.
Corporate Alternative Minimum Tax
The Act imposes a new 15% corporate alternative minimum tax on the adjusted financial statement income of applicable corporations.
The Act defines an ‘applicable corporation’ as, with respect to any taxable year, any corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) which meets the average annual adjusted financial statement income test (‘Income Test’) for one or more taxable years which (i) are prior to the such taxable year, and (ii) end after December 31, 2021.
A corporation meets the Income Test if its average annual adjusted financial statement income for the three-taxable-year period ending with such taxable year exceeds $1,000,000,000. If the corporation was in existence for less than 3-taxable years, then the Income Test shall be applied based on the period during which such corporation was in existence.
The term ‘adjusted financial statement income’ means, with respect to any corporation for any taxable year, the net income or loss of the taxpayer set forth on the taxpayer’s applicable financial statement for the such taxable year, subject to certain adjustments. These adjustments are numerous and include such items as depreciation:
- Depreciation: Adjusted financial statement income is computed by taking the tax depreciation deductions for the tax year computed under IRC
- 167 with respect to IRC §168 tangible property, instead of financial statement depreciation.
It is also important to note under The Act that when a taxpayer is a partner in a partnership, the adjusted financial statement income of the taxpayer with respect to such partnership shall be adjusted to only take into account the taxpayer’s distributive share of adjusted financial statement income of such partnership. This distributive share, however, gets modified for the new adjustments listed in this section, including depreciation, as noted above. This will require additional disclosure(s) in the Schedule K-1 footnote(s) to any applicable partners.
The Act amends IRC §38 to allow for general business credits, including the historic tax credit (HTC), low-income housing tax credit (LIHTC), new markets tax credit (NMTC), and renewable energy tax credits (RETCs), to be taken against this minimum tax.
The Corporate Alternative Minimum Tax shall apply to taxable years beginning after December 31, 2022.
Excise Tax on Repurchase of Corporate Stock
The Act imposes on each ‘covered corporation’ a tax equal to 1% of the fair market value of any stock of the corporation which is repurchased by such corporation during the taxable year.
The Act defines the term ‘covered corporation’ as any domestic corporation the stock of which is traded on an established securities market (within the meaning of section 7704(b)(1)).
The excise tax does not apply in certain circumstances including, but not limited to, the following:
- To the extent that the repurchase is part of a reorganization (within the meaning of IRC §368(a)) and no gain or loss is recognized on such repurchase by the shareholder by reason of such reorganization, or
- In any case in which the total value of the stock repurchased during the taxable year does not exceed $1,000,000.
The Excise Tax on Repurchase of Corporate Stock shall apply to repurchases of stock after December 31, 2022.
Extension and Modification of Energy Credit
The Act extends the IRC §48 energy credit for certain energy property placed in service before January 1, 2024, to January 1, 2025.
While generally reducing the energy credit percentage to 6%, for certain energy property placed in service after December 31, 2021, and before January 1, 2025, The Act provides for a multiple of 5, or a 30% credit, when a project meets certain labor requirements on prevailing wages and apprenticeship requirements.
For certain energy properties placed in service after December 31, 2022, and before January 1, 2025, The Act provides for a credit rate increase of 10% when both the aforementioned labor requirements and a domestic content requirement are met; The Act provides for a 2% increase when just the domestic content requirement is met.
As originally written, IRC §50(c)(1) provides for a reduction in the basis of the property for which an IRC §48 energy credit is taken. The Act amends IRC
- 50(c) by adding to it that “paragraph (1) shall not apply for purposes of determining eligible basis under section 42”, relating to the low-income housing tax credit. This amendment applies to property placed in service after December 31, 2022.
The Act creates a new IRC §48E technology-neutral energy credit for any qualified electric generating facility and any energy storage technology that is placed in service after December 31, 2024, which coincides with the expiration of the extended IRC §48 energy credit. IRC §48E provides for a phase-out of the credit percentage for property placed in service in the later of 2032 or when the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25% of the annual greenhouse gas emissions from the production of electricity in the United States for the calendar year 2022.
The new IRC §48E generally provides the same 6% base rate as the modified IRC §48 and provides similar rate increases when certain labor requirements on prevailing wages and apprenticeship requirements are met and/or a domestic content requirement is met, as noted above. Additionally, the IRC §48E credit is not taken into account for purposes of determining eligible basis under IRC
- 42. Finally, the new IRC §48E provides for a similar bonus credit for certain solar and wind facilities located in low-income communities, as noted below.
Increase in Energy Credit for Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities
The Act amends IRC §48 to provide for an increase in the credit percentage when certain solar and wind facilities are placed in service in connection with low-income communities. This amendment shall take effect on January 1, 2023.
When a qualified solar and wind facility is placed in service in a low-income community (as defined in IRC §45D(e)) or on Indian land (as defined in section 2601(2) of the Energy Policy Act of 1992 (25 U.S.C. 3501(2))), The Act provides for a credit percentage increase of up to 10%.
If instead a qualified solar and wind facility is placed in service as part of a qualified low-income residential building project or a qualified low-income economic benefit project, The Act provides for a credit percentage increase of up to 20%.
Among other requirements, in order to be treated as a ‘qualified low-income residential building project’ for purposes of this credit percentage increase, the financial benefits of the electricity produced by such facility must be allocated equitably among the occupants of the dwelling units of such building.
A facility shall be treated as part of a ‘qualified low-income economic benefit project’ if at least 50% of the financial benefits of the electricity produced by such facility are provided to households with income of less than 200% of the poverty line (as defined in IRC §36B(d)(3)(A)) applicable to a family of the size involved, or less than 80 percent of area median gross income (as determined under IRC §142(d)(2)(B)).
Extension, Increase, and Modifications of New Energy Efficient Home Credit
The Act extends the period for which the New Energy Efficient Home Credit applies from December 31, 2021, to December 31, 2032, and modifies the credit amount available from $1,000 – $2,000 to $500 – $5,000, based upon certain energy saving requirements.
Additionally, through its update to the definition of what qualifies as a dwelling unit under IRC §45L(c), the Act now allows for the New Energy Efficient Home Credit to be claimed on buildings more than three stories in height above grade.
Finally, as originally written, IRC §45L(e) provides for a reduction in the basis of property for which a credit under this section is taken. The Act amends IRC
- 45L(e) by adding to it that “This subsection shall not apply for purposes of determining the adjusted basis of any building under section 42”, relating to the low-income housing tax credit.
The extension of this credit applies to dwelling units acquired after December 31, 2021. Other modifications to IRC §45L, including the modifications to IRC
- 45L(c) and (e), apply to dwelling units acquired after December 31, 2022.
Extension of Limitation on Excess Business Losses of Noncorporate Taxpayers
The Act extends the limitation on excess business losses of noncorporate taxpayers by two years. The IRC §461(l) limitation was previously applicable to any taxable year beginning after December 31, 2020, and before January 1, 2027. The Act extends the limitation to any taxable year beginning after December 31, 2020, and before January 1, 2029.
Funding the Internal Revenue Service and Improving Taxpayer Compliance
Finally, The Act makes additional funding available to the IRS in support of its various functions including, but not limited to, the following activities:
- Taxpayer Services,
- Operations Support, and
- Business Systems
What the Inflation Reduction Act of 2022 Does Not Include
Earlier drafts of the Inflation Reduction Act included a provision on carried interest which would have extended the hold period from 3 to 5 years to receive the preferential tax treatment associated with that income. This provision was dropped in favor of the excise tax on corporate stock repurchases in order to gain the necessary votes to get the bill passed through the Senate.
The Act has made significant additions and modifications to the income tax code. Taxpayers should analyze the effects that The Act has on their current operations and determine to what extent any of these updates affect, and could benefit future transactions.
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