On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA), which is a scaled back version of the Build Back Better Bill in play last fall. The IRA contains a handful of federal revenue raising provisions — to the tune of more than $700 billion — as well as prescription drug pricing reform, more dollars for IRS tax enforcement, and a significant number of new, extended, modified or enhanced energy credits.
The tax increases in the Act could impact a variety of taxpayers in three key areas: a new corporate alternative minimum tax (AMT), a new excise tax on corporate stock buybacks and a two-year extension of the business loss limitations. The additional IRS funding and energy credit focus will likely be significant changes as well.
1. New Corporate AMT
A new corporate AMT will be effective for tax years beginning after December 31, 2022, and applies to the extent it exceeds the taxpayer’s regular tax liability. The tax is 15% of the adjusted financial statement income for applicable corporations. Generally, an applicable corporation — excluding S Corporations, Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITS) — is one that has a three-year average adjusted financial statement income greater than $1 billion.
The provision also has rules that address foreign-parented corporations, aggregation of related entities, short tax years, predecessor entities, entities not in existence for three years, change of control and more.
Impact: Due to the exclusion of certain types of corporations and an income threshold of $1 billion, it’s estimated that fewer than 200 corporate taxpayers will be subject to the tax. However, when taxes are raised on suppliers, prices will generally increase to align with the additional tax burden. If your business is close to generating $1 billion in net financial statement income, proper planning could help you minimize or at least defer the new minimum tax. Even entities not subject to this tax, such as partnerships, could have additional reporting requirements if an applicable corporation has an ownership interest.
2. Excise Tax on Buyback of Corporate Stock
The IRA imposes a new 1% excise tax of the fair market value of stock repurchased by a covered corporation after December 31, 2022. The amount of the stock repurchased subject to this tax is reduced by the fair market value of stock issued by the covered corporation during the tax year.
A covered corporation is any domestic corporation traded on an established securities market as defined in Sec. 7704(b)(1). Repurchases are defined as a redemption or economically similar transactions. Exceptions to the tax include:
- Certain reorganizations under section 368(a);
- When the repurchased stock, or an amount of stock equal to the repurchased stock, is contributed to an employer-sponsored retirement plan, ESOP or similar plan;
- If the total value of stock repurchased during the taxable year does not exceed $1 million;
- Repurchases by dealers in securities in the ordinary course of business;
- Repurchases by regulated investment companies (RICs) or real estate investment trusts (REITs); and
- To the extent the repurchase is treated as a dividend.
Impact: It is probably too early to tell the full impact of this provision. The excise tax was put in place to curtail the practice of large corporations conducting stock buybacks as a means to increase the trading price of their shares, with the result of increasing performance-based bonuses tied to share prices. As this is the first time Congress has enacted such a tax, time will tell its impact. Taxpayers selling shares back to the corporate issuer will not notice a direct impact, since the excise tax is imposed on the purchaser of the shares.
