Inflation Reduction Act of 2022 Highlights
Inflation Reduction Act of 2022 Highlights
This month, Congress passed and the President signed the Inflation Reduction Act of 2022, a bill which has the primary stated purpose of reducing inflation and warding off an economic recession. The legislation is lengthy and dense, spanning 273 pages of the congressional record and dozens of subjects from tax policy to environmental regulations to extensions of the Affordable Care Act to prescription drug reform. This article covers just a few of the most significant tax-related provisions for businesses: 1) Corporate AMT, 2) Excise Tax on Stock Repurchases, and 3) New Funding for IRS Enforcement.
Return of the Corporate Alternative Minimum Tax
The Inflation Reduction Act creates a new version of the Corporate Alternative Minimum Tax CAMT). Unlike the previous version, which has been gone since the 2017 passage of the Tax Cuts and Jobs Act, the new CAMT will have a vastly more limited application. Only “applicable corporations” will be subject to a 15% corporate minimum tax beginning in 2023. “Applicable corporations” will be determined using a 3-year Average of Annual Financial Statement Income” (Average Annual AFSI), and excludes S-Corps, RICs, and REITS. There are two tests for determining whether a Corporation is subject to the CAMT.
$1 Billion Test: Generally, only Corporations and Controlled Groups whose Average Annual AFSI exceeds $1 Billion are subject to the CAMT. Sections 52(a) and 52(b) of the Tax Code provide the Aggregation Rules for determining what constitutes a “Controlled Group.”
$100 Million Test: Corporations with a foreign parent company are subject to special rules. In those cases, the test looks to whether the “foreign-parented multinational group” has an Average Annual AFSI exceeding $1 Billion. If so, the US corporation must also have an Average Annual AFSI of $100 Million in order to be subject to the CAMT.
This focus on financial statement income, as opposed to taxable income, as an approach was conceived in order to target those mega-corporations that have made a newsworthy habit of paying little to no tax, while reporting significant amounts of financial statement income.
There are several notable exceptions to this income calculation primarily based on Generally Accepted Accounting Principles (GAAP) for Book Income. AFSI will use Tax Depreciation instead of Book. AFSI does not take into account certain limitations on net operating loss (NOL) under Section 382, applying a different rule to limit GAAP NOL.
Additionally, a number of credits factor into the CAMT calculus. A corporation subject to the CAMT in a prior taxable year, which later finds itself subject to regular corporate tax, may apply amounts paid against its regular tax liability. General business credits under Section 38 can reduce both regular tax and CAMT, including many of the new renewable energy tax credits being introduced in the Inflation Reduction Act. Foreign Tax Credits are also available subject to limitations but with a 5-year carryforward for any excess.
Treasury Guidance still remains to be published.
Excise Tax on Repurchase of Corporate Stock
The Inflation Reduction Act creates a new excise tax of 1% on the fair market value of stock repurchases by publicly traded corporations in excess of $1 million during the taxable year.
As with the CAMT, the tax on stock repurchases is meant to be limited, but will also include transactions deemed to be economically similar to a stock redemption with the meaning of section 317(b) (meaning a corporation acquires its own stock from a shareholder in exchange for property, regardless of what the corporation does with the stock afterward). Generally, the tax only applies to domestic corporations, but certain foreign corporations may also be affected where tests under Section 7874 treat them as surrogate foreign corporations.
There are a half-dozen exceptions to the tax on stock repurchases. One such exception applies in the case of stock repurchased as part of a reorganization in which no gain or loss is recognized by the shareholder. Another exception exists where the repurchased stock is then contributed to certain employee benefit plans. RICs and REITs may repurchase stock without incurring the excise tax as well.
Funding the Internal Revenue Service
The Inflation Reduction Act includes $79.6 billion in new funding for the IRS over the next 8 years.
The bill earmarks $45.6 billion of the appropriation for “enforcement,” including hiring more enforcement agents and legal support as well as significant investing in “investigative technology.” Other measures include new reporting requirements related to cryptocurrency investing and an appropriation of $153 million to the US Tax Court.
Another $25.3 billion is dedicated to “operations support,” such as rent, facilities, printing, postage, security, and telecom/ information technology. This is separate from the $4.8 billion for “business system modernization,” which includes taxpayer services, operations, and cybersecurity. Among other things these funds can be invested in new customer service technologies like automated callback systems, but are specifically not to be used to continue operating existing systems.
Taxpayer Services make up $3.2 billion. Congress took serious notice of customer service failures at the IRS during the COVID-19 pandemic which can be measured in unprocessed returns (which increased by a multiple of 5 from 2019 to 2021) and the answer rate of phone calls to the IRS (which dropped by 40% from 2019 to 2021). These measures include $15 million designated to a task force that will study the potential of a free direct e-file program.
Finally, the bill gives other offices of the Treasury Department another half-billion dollars for oversight of the IRS in administering all of the new funding.