What Taxpayers Need to Know About the Inflation Reduction Act
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (The Act) after its passage by both the Senate and House. The Act includes the following key tax provisions that may impact tax obligations for businesses and business owners.
Taxation of Carried Interests
As we detailed in our article, “Changes to Taxation of Carried Interest Off the Table for Now”, the Act contains no changes to the taxation of Carried Interests.
Corporate Alternative Minimum Tax
The Inflation Reduction Act imposes a new 15% corporate alternative minimum tax on the adjusted financial statement income of applicable corporations.
What is an Applicable Corporation?
An applicable corporation for a tax year is any corporation (other than an S corporation, regulated investment company, or a real estate investment trust) which meets the average annual adjusted financial statement income test for one or more earlier tax years that ends after December 31, 2021.
The Act’s alternative minimum tax can be thought of as a “Book Minimum Tax” because the starting point of the calculation is a corporation’s average annual adjusted financial statement income which includes financial statements prepared in accordance with generally accepted accounting principles (GAAP).
Overview of adjusted financial statement income
- Adjusted financial statement income is the net income or loss of the taxpayer as presented in the taxpayer’s applicable financial statements.
- The adjusted financial statement income is computed by taking the tax depreciation deductions allowed under IRS regulations, rather than the financial statement depreciation.
- Adjusted financial statement income is determined by taking only 80% of the adjusted financial statement net operating loss and the remainder is carried forward.
A corporation meets the income test if its average annual adjusted financial statement income for the three-tax-year period (determined without regard to loss carryovers) ending with the tax year exceeds $1 billion.
Effective date. This provision is effective for tax years beginning after December 31, 2022.
1% 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 the corporation during the tax year.
What is a covered corporation?
A “covered corporation” is any domestic corporation the stock of which is traded on an established securities market.
Cases where the 1% excise tax does not apply
- To the extent that the repurchase is part of a reorganization and no gain or loss is recognized on such repurchase by the shareholder by reason of such reorganization.
- In any case in which the stock repurchased, or an amount of stock equal to the value of the stock repurchased, is contributed to an employer sponsored retirement plan, employee stock ownership plan, or similar plan.
- In any case in which the total value of the stock repurchased during the tax year does not exceed $1
- Under regulations prescribed by the IRS, in cases in which the repurchase is by a dealer in securities in the ordinary course of business.
- To repurchases by a regulated investment company or a real estate investment trust, or
- To the extent that the repurchase is treated repurchase is treated as a dividend.
Effective date. The 1% excise tax applies to repurchases of stock after December 31, 2022.
Extension and Expansion of Energy Credits
The Act contains provisions expanding and extending energy tax credits and deductions. These provisions are beyond the scope of this article.
Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities
What is a Qualified Small Business?
A QSB is one that, in the case of a corporation or partnership, with respect to any tax year, has gross receipts of less than $5 million, and did not have gross receipts for any tax year preceding the five-tax-year period ending with the tax year.
Under pre-Inflation Reduction Act of 2022 law, a “qualified small business” (QSB) with qualifying research expenses may elect to claim up to $250,000 of its credit for increasing research activities as a payroll tax credit against the employer’s share of Social Security tax.
In general, the research credit equals the sum of: (1) 20% of the excess (if any) of the qualified research expenses for the tax year over a base amount (unless the taxpayer elected an alternative simplified research credit); (2) the university basic research credit (i.e., 20% of the basic research payments); and (3) 20% of the taxpayer’s expenditures on qualified energy research undertaken by an energy research consortium.
Due to concerns that some small businesses may not have a large enough income tax liability to take advantage of the research credit, for tax years beginning after December 31, 2022, QSBs may apply an additional $250,000 in qualifying research expenses as a payroll tax credit against the employer share of Medicare. The credit cannot exceed the tax imposed for any calendar quarter, with unused amounts of the credit carried forward.
Effective date. This applies to tax years beginning after December 31, 2022.
Extension of Limitation on Excess Business Losses of Noncorporate Taxpayers
The Act includes an extension of the limitation rules for deducting excess business losses for non-corporate taxpayers through 2029. Excess business losses are the amount in which business deductions exceed gross business income. This provision would limit such losses to $500,000 (married filing jointly, $250,000 others) per year with both amounts indexed for inflation. The Tax Cuts and Jobs Act imposed this limitation, which was set to expire in 2026.
Effective date. This is effective for tax years beginning after December 31, 2026.
We will provide more information on the tax and business implications of the Act as well as other new or changing tax legislation that may impact you and your business.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.