Changes to Federal Tax Provisions– Inflation Reduction Act of 2022
By: Christopher Nuss
In a somewhat surprising turn of events over the last few weeks, on Sunday, August 7th, the Senate passed as part of the budget reconciliation process the Inflation Reduction Act of 2022 (H.R. 5376) (the Act). As expected, the House proceeded to pass the Act on Friday, August 12th, thereby sending it to President Biden for his signature, which he is scheduled to do on Tuesday, August 16th.
The Act is generally considered a successor to the Build Back Better Act (the BBB) passed by the House in 2021, which became deadlocked in the Senate, although the Act is not as robust as the BBB. The Act includes a number of changes to federal tax provisions, including a significant focus on environmental and green energy tax credits. The Senate Democrats claim the Act would raise about $739 billion in revenue while spending a total of $433 billion thereby reducing the deficit.
This article summarizes, at a high level, the changes that taxpayers should expect to see as a result of the Act beginning in 2023 – please reach out to us with questions and for further exploration of any of these topics. Also, some of the more meaningful provisions being considered that did not become part of the Act are set forth below at the end.
Notable Changes as Federal Tax “Revenue Raiser” Provisions– Most relate to large corporations other than the loss limitation extension applicable to noncorporate taxpayers:
- Creation of a 15% corporate alternative minimum tax on “book income” (expected to raise $222 billion over 10 years)
- Creation of a 1% excise tax on stock buybacks/repurchases (estimated revenue of $74 billion over 10 years)
- Extension of loss limitation rules for noncorporate taxpayers to 2028 (additional revenue of $53 billion over 10 years)
- Reinstatement and increase in the hazardous substance superfund tax on crude oil and petroleum products (approximately $12 billion in 10 years)
Notable Changes to Federal Tax “Spending” Provisions:
- Increase in small business payroll tax credits for increasing research activities
- Favorable tax treatment of certain payments to farmers
- Three-year extension of the refundable premium tax credit created by the American Rescue Plan Act of 2021 (ARPA)
- Various environmental and green energy tax credit modifications, including but not limited to creating a credit for clean energy production, a credit for clean fuel production, a credit for previously owned clean vehicles, a credit for zero-emission nuclear power production, a credit for clean hydrogen production, and many more extensions or increases on currently available credits, for example, carbon capture and sequestering
- $80 billion was dedicated to the Internal Revenue Service (over 10 years), primarily for enforcement activities, which was estimated by the Congressional Budget Office to generate more than $200 billion in revenue over that same 10-year period, although some is to be spent on improving service and technology
Corporate Alternative Minimum Tax on Book/GAAP Income
The new alternative minimum tax (AMT) on “book” income will apply only to certain “applicable corporations.” Additionally, the AMT will apply if it exceeds the taxpayer’s regular tax, including its base erosion and anti-abuse tax for the given tax year. An applicable corporation is any corporation, excluding S corporations, regulated investment companies, and real estate investment trusts, that meets an income test for one or more earlier tax years that ends December 31, 2021. The income test is basically if the corporation’s average annual adjusted financial statement income for the three-tax-year period ending with the current tax year exceeds $1 billion. A corporation’s adjusted financial statement income is the net income or loss as presented in their applicable financial statements (or book or GAAP income as it is known). This new version of the corporate AMT is distinct from the previous AMT, due to the starting point of the calculation being the corporation’s average annual adjusted financial statement income, rather than their taxable income. It is expected that this new tax will apply to about 150 corporations, approximately 30% of the existing Fortune 500 companies.
Excise Tax on Stock Buybacks
This excise tax on stock buybacks will apply to any domestic corporation whose stock is traded on an established securities market. The tax will be equal to 1% of the fair market value of any stock of the corporation that is repurchased by the corporation itself during the given tax year. The excise tax will not apply, however, in a variety of situations, including the following: if the repurchase of stock is part of a reorganization when the repurchased stock is contributed to an employer-sponsored retirement plan, employer stock ownership plan, or other similar plans, when the value of the repurchased stock does not exceed $1 million in the given tax year, when the repurchase of stock is by a dealer in securities in the ordinary course of business, when the stock is repurchased by a regulated investment company or real estate investment trust, or when the repurchase is treated as a dividend.
Extension of Loss Limitation on Excess Business Losses of Noncorporate Taxpayers
This limitation was originally part of the Tax Cuts and Jobs Act in 2017 and restricts the extent a noncorporate taxpayer can use trade or business losses to offset other income. For 2022, the limitation for a married couple filing jointly adjusted for inflation is about $524,000. Thus, any losses above this threshold are suspended and carried forward. Before the Act, the limitation was set to expire in 2026; however, now it will apply for another two years through 2028.
Increase in the Tax on Crude Oil and Petroleum Products & Excise Taxes on Coal
The Act reinstated the hazardous substance superfund tax and increased the tax amount to $0.16 per barrel. This tax applies to any crude oil received at a U.S. refinery and petroleum products that enter the U.S. for consumption, use, or warehousing. Additionally, under the Act, manufacturers will pay excise taxes of $1.10 per ton of coal mined from underground and $0.55 per ton of surface-mined coal. These taxes are not to exceed 4.4% of the sales price. Taxes will be assessed in calendar quarters, beginning after the date of enactment of the Act.
Small Business Payroll Tax Credits for Research Activities
Previously, qualified small businesses that incurred research expenses could elect to claim up to $250,000 of a tax credit for increasing research activities as a payroll tax credit against the employer’s share of social security tax. A qualified small business is one that, in any given tax year, has gross receipts of less than $5 million and did not have gross receipts for any tax year preceding the five-year tax period ending with the current tax year. Now, under the Act, qualified small businesses may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer’s share of Medicare. The credit cannot exceed the tax imposed for any calendar quarter and unused amounts of credit can be carried forward.
Tax Treatment of Payments to Farmers
The Act provides that, for income tax purposes, any payments made to farmers under the ARPA sections 1006(e) or 22006 (payments related to farm loan immediate relief) shall not be included in the gross income of the person on whose behalf, or to whom, the payment was made. Additionally, no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied as a result of the taxpayer receiving the payments.
ARPA Premium Tax Credit Extension
The premium tax credit (PTC), established by the ARPA, was created to help individuals and families cover the cost of their marketplace healthcare insurance premiums. To calculate the credit amount for each eligible taxpayer, the taxpayer’s household income is multiplied by a percentage set by the IRS for the given tax year. This number is referred to as the “taxpayer’s required share.” This required share is then subtracted from the cost of the premiums for the second lowest cost silver plan offered in the Marketplace – the resulting amount is the tax credit granted to the taxpayer.
Normally, before the ARPA, the applicable percentages set by the IRS were indexed based on the rates of premium growth relative to the rates of income growth. The ARPA suspended indexing for the 2021 and 2022 tax years, replacing the indexed table with a set statutory table of percentages. The set percentages were lower than the indexed percentages, resulting in higher PTCs for taxpayers. The Act extended the ARPA rules governing PTCs. This means the indexing is suspended for the tax years 2023-2025. Additionally, the Act continues to allow individuals with household incomes over 400% of the federal poverty level to be eligible for the PTC.
Environmental and Green Energy Tax Credits
The Act includes the largest burst of spending ever in U.S. history to address global warming and pressing climate issues. The Act includes over $300 billion for programs designed with the hope of reducing greenhouse gas emissions to 40% below their 2005 levels by the end of the decade. The monetary investments in the bill include a wide range of new and expanded tax credits to incentivize the use of renewable energy sources such as wind and solar, encourage the purchase of electric vehicles, and assist people in installing energy-efficient heating and cooling systems in their businesses and homes. Additionally, the Act includes a significant amount of funding for payments to companies who cut emissions of methane, one of the most potent greenhouse gases.
One of the most noteworthy and fundamental changes involves how certain credits can be monetized – now, there is a “direct pay” election in which certain credits are refundable, and/or some credits can be sold for cash without taxation of the sales proceeds. Previously, tax equity investors often had to become partners in a partnership that qualified for and generated the credit to monetize it into cash. This should help reduce the complexity of tax credit structuring.
Tax Provisions that Remain the Same or Were Excluded
While the Act modified or added multiple federal tax provisions, there were proposed changes that did not find their way into the final bill. Below are provisions that do not appear in the Act, but were considered by Congress when debating the bill:
- Increase to the current $10,000 cap on the state and local tax deduction for individuals.
- Taxing carried interests (generally partnership interests held in connection with performing services) as ordinary income rather than capital gain.
- A 5% surtax on taxpayers with personal income above $10 million and an additional 3% added on income above $25 million.
- A 15% minimum tax on foreign profits of U.S. corporations and other international-related provisions such as an increase to the global intangible low taxed income rate and modifications to the base erosion and anti-abuse tax for multinational corporations.
If you have any questions about navigating the new tax provisions included in the Inflation Reduction Act, please contact Chris Nuss at (515) 242-2432 or Christopher.firstname.lastname@example.org or any other member of BrownWinick’s Tax Group or the BrownWinick attorney with which you regularly communicate. You can also submit a message through the Contact Us form. A special thank you to Becca Coleman, a summer associate at BrownWinick this year and a current law student at Drake University.