On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“the Act”), delivering what he has called the “final piece” in his domestic agenda. As previously reported, the legislation includes substantial investments to fight climate change and to cap prescription costs for Medicare recipients, in addition to new taxes on corporations.
The final version of the Act resulted in few changes from the original bill, which included many provisions from the stalled Build Back Better Act from last year. The provisions of the Act impacting corporations include the following:
- Minimum Tax: The Act reinstates the corporate minimum tax under Internal Revenue Code (IRC) Section 55(b), effective for taxable years beginning after December 31, 2022. The tax is assessed on corporations with a three-year average of adjusted financial statement income (AFSI) of $1 billion for U.S.-owned corporations. Foreign-owned corporations with AFSI three-year average more than $1 billion, including all members of the foreign financial reporting group, and $100 million for the domestic corporation are also assessed. As an alternative minimum tax, the 15% tax is assessed only to the extent that it exceeds the regular tax liability and can be reduced by the alternative minimum tax foreign tax credit.
- AFSI starts with book income from applicable financial statements and allows adjustments, such as excess depreciation, income from controlled foreign companies, and losses, among others.
- Excise Tax on Corporate Stock Repurchases: A new 1% excise tax is imposed on domestic corporations that repurchase their stock that is traded on established securities markets for tax years beginning after December 31, 2022. Repurchases treated as redemptions under IRC Section 317(d), as well as repurchases made by affiliates of more than 50% ownership, will be subject to the excise tax. The amount of the repurchased stock subject to tax is reduced by the fair market value of any stock issued by the corporation. There are some exceptions for reorganizations, regulated investment companies, and repurchases treated as dividends, to name a few.
- Increased Internal Revenue Service (IRS) Funding: Over the next 10 years, $80 billion in funding is appropriated to improve day-to-day operations and customer support, modernize technology, and enhance audit and compliance enforcement. It is anticipated that the IRS will provide an estimated additional $122 billion in revenue from increased audit enforcement and Treasury Department initiatives.
- Green Energy Incentives and Credits: The new Act extends and modifies some existing credits. The Energy Investment Tax Credit was expanded and extended through 2032, with an increased credit percentage. Carbon Capture Credits were also expanded and increased. The Domestic Content Credit Bonus allows a 10% credit for use of steel, iron, or manufactured product used in construction that was produced in the U.S. An Energy Community Bonus Credit is allowed for facilities placed in qualifying localities with higher than the average national unemployment rates or localities near recently closed coal mines.
- New Credits: Six new credits are established:
- Advanced Manufacturing Production Credit,
- Clean Fuel Production Credit,
- Zero-Emission Nuclear Power Production Credit,
- Sustainable Aviation Fuel Credit,
- Clean Hydrogen Production Credit, and
- Credit for Qualified Commercial Clean Vehicles.
Ryan tax professionals are available to assist in determining the impact of these changes on your company.
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