By Serge O. Béchade and Simona Altshuler
On August 16th, 2022, President Biden signed the Inflation Reduction Act of 2022 (the “IRA”). While the IRA primarily addresses climate change, it contains tax provisions that affect many businesses, including a 15% corporate alternative minimum tax, a 1% excise tax on the repurchase of corporate stock, various environmental and green energy tax credits, and additional funding for the IRS. The following is a high-level overview of select provisions in the IRA.
Corporate Alternative Minimum Tax.
The IRA creates a 15% corporate alternative minimum tax on certain large corporations if their prior three-year average annual adjusted financial statement income (effectively book income in accordance with generally accepted accounting principles) is in excess of $1 billion. Unlike the previous alternative minimum tax in place prior to the passage of the Tax Cuts and Jobs Act of 2017, where the starting point was taxable income, the new alternative minimum tax is effectively a “Book Minimum Tax.” The $1 billion income test is applied on a consolidated basis for consolidated groups, including foreign owned multinational groups with certain US subsidiaries or activities. The new alternative minimum tax is only expected to apply to approximately 150 of the largest Fortune 500 Companies, and does not apply to S corporations, regulated investment companies, or real estate investment trusts.
1% Excise Tax on the Repurchase of Corporate Stock.
Of slightly broader application, the IRA also imposes a tax on domestic corporations whose stock is traded on an established securities exchange equal to 1% of the fair market value of any of the corporation’s stock that is repurchased. This excise tax does not apply in several specific scenarios, which include, among others, tax-free reorganizations, situations where the total value of the stock repurchased does not exceed $1 million for the tax year, and where the repurchase is completed by a securities dealer in their ordinary course of business.
Increase in the Qualified Small Business Payroll Tax Credit for Research Activities.
The IRA encourages research activities by providing that qualified small businesses can apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer’s Medicare share.
New Advanced Manufacturing Production Credit.
In addition to the general business credit, the IRA now also creates an advanced manufacturing production credit, which is distinct from the advanced manufacturing investment credit related to computer chips. The credit amount is the sum of the credit amounts determined for each eligible component produced by the taxpayer and then sold by the taxpayer to an unrelated person during the tax year. Eligible components include solar and wind energy components and their related inverts, batteries, and critical minerals.
Limitation on Excess Business Losses of Noncorporate Taxpayers Extension.
Under prior law, if a taxpayer was not a C corporation and received any applicable subsidy for a tax year, the excess business losses would not be allowed. For such a taxpayer, Internal Revenue Code Section 461 would not allow excess business loss for years beginning after December 31, 2020 and before January 1, 2027. The IRA now extends the timeline through December 31, 2029, thus limiting excess business losses for any tax year beginning before December 31, 2029 for noncorporate taxpayers.
The Credit for Electricity Produced from Certain Renewable Sources is Extended and Modified.
Under prior law, the renewable energy production credit provided 1.5 cents per kilowatt hour of electricity that was produced by the taxpayer from qualified energy sources at qualified facilities during the 10 years following the original placed-in-service date and then sold by the taxpayer to an unrelated person during the tax year. Construction on a facility to be deemed qualified must have begun prior to January 1, 2022. Under the IRA, the deadline to begin construction on a facility has been extended until January 1, 2025. The IRA also adds additional requirements for taxpayers to obtain the full 1.5 cent per kilowatt hour credit or the credit is limited to 0.3 cents per kilowatt hour. Furthermore, the IRA introduces a domestic content bonus, narrows the reduction of the credit for other government financing, and eliminates the 50% reduction in the credit for qualified hydroelectric production and marine and hydrokinetic renewable energy facilities.
The Energy Credit is Extended and Modified.
The IRA expands the definition of qualifying property for the credit to include energy storage technology, qualified biogas property, and microgrid controllers. The IRA adjusts the deadline to begin construction to January 1, 2025 for Type 2 solar property, qualified fuel cell property, qualified microturbine property, cogeneration property, qualified small wind property, and waste energy recovery property, and adjusts the start of construction deadline to January 1, 2035 for ground water heating and cooling property.
Increase in the Energy Credit for Solar and Wind Facilities in Low-Income Communities.
The IRA adds an additional credit of either 10% or 20% (in addition to the existing 30% credit) for qualified solar or wind facilities in a low-income community or as part of a low-income residential building project.
Accelerated Cost Recovery for Green Building Property.
The IRA provides an accelerated cost recovery deduction for energy efficient commercial building (EECB) property placed in service and reduces the efficiency minimum required standard for benefit deduction from 50% to 25%. The IRA also modifies the formula for calculating the maximum deduction, eliminates the allowance of partial deductions, provides more detailed criteria for the allocation of the deduction when EECB property is installed on tax-exempt property, and creates an election for a new alternative deduction for energy efficient building retrofit properties.
The Qualifying Advanced Energy Project Credit.
The IRA provides for additional $10 billion allocations, with $4 billion earmarked for specified census tracts. The credit will range between 6-30% depending on whether projects meet certain wage and apprenticeship requirements. The credit applies to solar or wind property and property designed to reduce greenhouse emissions amongst many other advanced energy projects.
The New Clean Energy Production Credit and the New Clean Energy Investment Credit.
The IRA establishes a new clean energy production credit, available for facilities placed in service after 2024, until the later of 2032 or certain emissions targets are reached. The IRA also establishes a clean energy investment credit, available for facilities placed in services after 2024, until the later of 2032 or certain emissions targets are reached. Taxpayers will have to choose between a clean energy production credit and a clean energy investment credit.
Elective Payments and Transferable Credits for Energy Property and Renewable Resource-Produced Electricity.
For many renewable and green tax credits, applicable entities can elect to be treated as making a payment against income tax liability in the year such credit was determined equal to the amount of the applicable credit.
Additional Funding of the Internal Revenue Service.
The IRA appropriates additional funds to the Internal Revenue Service (IRS) for a variety of purposes, primarily categorized as taxpayer services, enforcement activities, operations support, and business system modernization. For taxpayer services, approximately $3.1 billion is available until September 30, 2031 to use for pre-filing assistance, education, taxpayer advocacy, and other authorized activities. Enforcement activities are allocated approximately $45 billion to increase efforts in determining and collecting taxes owed, providing legal and litigation support, conducting investigations and monitoring activities, and other authorized services. Congress allocated approximately $25 billion for Operations Support, encompassing wide-range taxpayer service and enforcement program support, such as rent, facilities, research, technology enhancement, and security. Finally, approximately $4.7 billion is allocated for business systems modernization, for the IRS to develop callback technology and other technology to improve personalized customer service. Additionally, the IRA appropriates $15 million to a task force entrusted to create an IRS-run free direct e-file system.
Additional provisions and further detail on the Inflation Reduction Act of 2022 can be found in H.R. 5376 at https://www.congress.gov/bill/117th-congress/house-bill/5376/text.