July 27, 2022, Sen. Joe Manchin (D-West Virginia) and Senator Majority Leader Chuck Schumer (D-New York) announced a reconciliation package entitled the Inflation Reduction Act of 2022 (the Act) (H.R. 5376) to address climate change, taxes and inflation. On August 7, the Senate voted 51-50 to pass the Act and it is expected to pass the House of Representatives this week without any changes and thereafter be sent for President Biden’s signature. These new tax rules would impact 2023 taxes and possibly 2022 taxes as well. We will continue to monitor negotiations on the Inflation Reduction Act of 2022 as well as any other federal tax updates, as they may be relevant to 2022 year-end tax planning and planning for 2023.
Section 1 – Brief summary: The Inflation Reduction Act ‘at-a-glance’
The Act raises over $700 billion from various sources, including from new corporate taxes—namely, the proposed 15% alternative corporate minimum tax (AMT) (see Section 2) and a 1% excise tax on certain corporate stock repurchases (see Section 3).
Included under the Act are tax credits intended to boost U.S. solar and green energy industries (see Section 4), Superfund excise taxes on crude oil and petroleum products (see Section 5), and federal funding programs implemented through an array of environmental policy initiatives (see Section 6). Taxpayers (and especially business owners) should also be aware of the increased IRS funding under the Act: approximately $80 billion over a 10-year period (see Section 7).
Section 2 – 15% alternative corporate minimum tax (AMT)
Under the Act, for tax years beginning after Dec 31, 2022, U.S. corporations with $1 billion or more in “adjusted financial statement income” (not adjusted taxable income) would be subject to a 15% tax rate. All corporations—other than S corporations, regulated investment companies (RICs) or real estate investment trusts (REITs)—would be subject to the AMT.
The Act would have an effect on depreciation deductions that traditionally support investment in capital-intensive businesses such as manufacturing or telecommunication. While it appears that the election to expense business assets (bonus depreciation) under Internal Revenue Code § 179 would not be directly amended by the Act in its current form, the Act’s AMT does significantly target accelerated depreciation deductions. The AMT (also referred to as a “minimum book tax”) would operate to penalize certain businesses for fully deducting the cost of an item from their tax returns. The changes to depreciation deductions that would be brought by the AMT are complex, but, in sum, the Act’s most recent amendments would change the definition of book income to account for investment-related tax incentives such as deductions for accelerated depreciation and amortization. Despite the proposed changes to depreciation deduction rules, it appears that the expiration (sunset) dates for the election to expense business assets (bonus depreciation) under § 179 would be preserved under the Act: a 100% deduction is allowed through 2022 and the percentage then subsequently decreases to 80% (2023), 60% (2024), 40% (2025), and 20% (2026).
Section 3 – 1% corporate excise tax on certain stock repurchases
The Act creates a new I.R.C. § 4501 which imposes an excise tax on certain corporations that repurchase their shares (themselves or through a “Special Affiliate”) at a rate equal to 1% of the fair market value of the repurchased stock. This excise tax would not be deductible for federal income tax purposes and is set to go into effect January 1, 2023.
Section 4 – Tax credits for solar industry
The Act aims for $30 billion plus in credits to incentivize U.S. manufacturing of solar panels as well as battery processing. Such credits include:
- A 5-year extension of the production tax credit (PTC) (which was to sunset December 31, 2021) for building energy efficient facilities where construction began prior to January 1, 2025. There are certain wage standards for area workers that must be met in order qualify for the 100% credit.
- A 10-year extension of the investment tax credit (ITC) which applies to provision of solar products (e.g., rooftop solar panels). This is a 30% tax credit that is expected to save residential homeowners $7,000 on average. Included is an “enhanced” incentive available for “environmental justice solar facilities” located in low-income communities, native-American lands, or land that is covered under a federal housing assistance program.
Section 5 – Superfund excise taxes on certain crude oil and petroleum products
Under the Act (and for the first time since 1995) Superfund excise taxes would be imposed on crude oil received at a refinery located in the U.S. and on imported petroleum products used for consumption and/or warehousing. The tax is imposed at 16.4 cents per barrel and is indexed for inflation. This excise tax would be effective beginning on January 1, 2023.
Section 6 – Environmental policy initiatives
Under the Act, nonprofit organizations as well as for-profit entities would be eligible to apply for several direct funding programs implementing Congress’ proposed environmental policy initiatives. Direct funding opportunities include competitive grants for tree planting, climate research, production of sustainable (alternative) fuels, efforts to reduce air pollution at ports and schools, developing plans for greenhouse gas reduction, etc.
Section 7 – IRS Funding
The IRS would receive approximately $80 billion in funding under the Act. IRS Commissioner Chuck Rettig has stated to lawmakers that the funding would be “transformative” for the Service and provide a substantial boost, adding that the additional resources would not be “about increasing audit scrutiny on small businesses or middle-income Americans.” However, there are some tax practitioners concerned that the Act’s tax provisions—especially the AMT, which presents a substantial shift in U.S. corporate tax policy—would increase administrative burdens for the IRS at a time when the agency is already struggling to keep pace.