Author: Daniel F. Laughlin
On Sunday, August 7, 2022, the United States Senate passed The Inflation Reduction Act of 2022 (the "Act") in a 51 - 50 vote with Vice President Harris providing the tie-breaking vote. The House of Representatives will now consider the legislation, which it is anticipated to pass with a vote potentially occurring on Friday, August 12, 2022. The Act allows Medicare to negotiate prescription drug pricing and extends health insurance premium subsidies under the Affordable Care Act. This FGMK Tax Alert provides a summary of some of the key tax provisions in legislation.
Tax Items Not in the Legislation
While the Act contains several tax provisions, it does not include many of the provisions that appeared in recent legislative proposals. The Act does not modify existing individual and corporate income tax rates. It also does not make any changes to the net investment income tax or self-employment tax. Further, it does not include any modifications to trust and estate tax provisions. Notably, the Act also does not change the current $10,000 limit on the state and local tax deduction for individual income taxpayers, which applies through 2025.
The Act, as passed by the Senate, also does not include any changes to the taxation of carried interests. While an initial draft of the Act contained modifications to Internal Revenue Code Section 1061, which governs the taxation of certain carried interests defined as applicable partnership interests, the proposed changes were removed from the final version of the Act that passed the Senate.
Key Corporate Provisions in the Act
The Act reintroduces a minimum tax for C corporations (not applicable to S corporations, REITs, or RICs) by applying a 15% tax rate to adjusted financial statement income. This would apply to those companies with adjusted financial statement income over $1 billion (based on prior 3-taxable year average). The tax would also apply to U.S. entities with adjusted financial statement income in excess of $100 million (based on prior 3-taxable year average) if the entity is part of foreign-parented multinational group where such group has global book income of $1 billion or more. Aggregation rules would apply in determining whether these thresholds are met. The final version of the Act passed by the Senate does provide for accelerated depreciation and expensing in the computation of adjusted financial statement income. The tax would apply to tax years beginning after December 31, 2022.
In lieu of the initial proposed changes to Section 1061, the final version of the Act includes a new 1% excise tax on the fair market value of stock repurchased by a domestic corporation whose stock is traded on an established securities market. The tax, which would apply to stock repurchased after December 31, 2022, would not be deductible. However, the tax would not apply in the following situations:
- Stock repurchased as a part of a corporate reorganization where no gain or loss is recognized by the taxpayer on the stock repurchase;
- Repurchased stock (or an amount equal to such repurchased stock) contributed to an employer-sponsored retirement plan;
- Repurchase by a RIC or REIT;
- Repurchase by a dealer in securities in ordinary course of business;
- Any case in which total value of stock repurchased during taxable year does not exceed $1,000,000; and
- To the extent that the repurchase constitutes a dividend.
