Inflation Reduction Act Introduces New Corporate Taxes and Includes New Clean Energy Tax Incentives | Practical Law

Inflation Reduction Act Introduces New Corporate Taxes and Includes New Clean Energy Tax Incentives | Practical Law

On August 12, 2022, the House of Representatives passed the Inflation Reduction Act of 2022. The Act introduces two new corporate taxes: a 15% corporate minimum tax on the book income of certain large corporations and a 1% excise tax on certain stock buybacks by publicly traded corporations. The Act also includes new clean energy tax incentives, and modifies and extends a number of existing energy tax credits.

Inflation Reduction Act Introduces New Corporate Taxes and Includes New Clean Energy Tax Incentives

by Practical Law Corporate & Securities
Published on 15 Aug 2022 • USA (National/Federal)
On August 12, 2022, the House of Representatives passed the Inflation Reduction Act of 2022. The Act introduces two new corporate taxes: a 15% corporate minimum tax on the book income of certain large corporations and a 1% excise tax on certain stock buybacks by publicly traded corporations. The Act also includes new clean energy tax incentives, and modifies and extends a number of existing energy tax credits.
On August 12, 2022, the House of Representatives passed the Inflation Reduction Act of 2022 (the Act), a climate, healthcare, and tax bill approved by the Senate on August 7 (H.R. 5376). In addition to increased funding for IRS enforcement, the Act introduces two new corporate taxes:
  • A 15% corporate alternative minimum tax (AMT) on the adjusted financial statement income of certain large corporations, effective for taxable years beginning after December 31, 2022 (see Corporate AMT).
  • A 1% excise tax on certain stock buybacks by publicly traded corporations, applicable to buybacks after December 31, 2022 (see Excise Tax on Stock Buybacks).
The Act also:
  • Extends the limitation on excess business losses of noncorporate taxpayers for two years, to include taxable years beginning before January 1 2029.
  • Contains several new clean energy tax incentives, and also extends and modifies a number of existing energy tax credits (see Tax Incentives for Clean Energy).
Previous proposals to modify the tax treatment of carried interests are not included in the Act.

Corporate AMT

The corporate AMT is intended to tax large corporations that have book profits but pay little or no federal income tax. The AMT applies to an "applicable corporation," which is a corporation with average adjusted financial statement income (AFSI) in excess of $1 billion for three consecutive years, if the minimum tax exceeds the corporation's regular tax plus the base erosion and anti-abuse tax (BEAT). Once a corporation meets the $1 billion threshold it generally remains an applicable corporation even if its AFSI in subsequent years is less than the $1 billion threshold.
The corporate AMT does not apply to S-corporations, regulated investments companies (RICs), or real estate investment trusts (REITs).

Determining AFSI

A corporation's AFSI is the net income reported in its audited financial statements filed with the SEC (or certain other financial statements) with specified adjustments, including reductions for accelerated tax depreciation (to the extent not otherwise taken into account in calculating book income). To determine whether the $1 billion threshold is met, the AFSI of all persons with which the corporation is treated as a single employer under IRC § 52(a) or (b) is included.

Foreign-Parented Groups

The corporate AMT also applies to a US corporation that is a member of a foreign-parented multinational group if both:
  • The AFSI of the group including all foreign group members exceeds $1 billion.
  • The AFSI of the US corporation equals or exceeds $100 million.
Under the foreign-parented rules, if a foreign corporation that is engaged in a US trade or business, the US business is treated as a separate US corporation that is wholly-owned by the foreign corporation.

Calculating the Corporate AMT

If the corporate AMT applies, a corporation first determines its tentative minimum tax for the taxable year, which equals 15% of AFSI (as adjusted under applicable rules) less the corporate AMT foreign tax credit for that year. For this purpose, AFSI is reduced by financial statement loss carryovers (capped at 80% of AFSI). The corporate AMT equals the excess (if any) of the tentative minimum tax over the sum of the applicable corporation's regular tax liability plus liability for the BEAT.
The corporate AMT is effective for taxable years beginning after December 31, 2022. It introduces additional complexity to US federal income taxation of corporations, and requires corporations to calculate a third tax on a separate tax base, in addition to the regular corporate tax and the BEAT (if applicable).

Excise Tax on Stock Buybacks

The Act imposes a 1% non-deductible excise tax on the fair market value (FMV) of stock repurchased after December 31, 2022 by "covered corporations", which are generally publicly-traded US corporations (not including RICs and REITs). The excise tax is imposed on the corporation repurchasing stock. The FMV of stock repurchased during a taxable year is determined on a net basis, allowing reductions for the FMV of stock issued by the corporation during the year, including as compensation.
A repurchase subject to the excise tax includes:
  • A redemption of stock within the meaning of IRC § 317(b). This generally includes a corporation's repurchase or ordinary buyback of its stock.
  • Any transaction determined by the Secretary of the Treasury to be economically similar to a stock redemption.
The excise tax also applies to certain purchases of a corporation's stock by an affiliated corporation or partnership.
Various exceptions apply to the excise tax, including for stock repurchases that are part of tax-free and tax-deferred reorganization transactions, in which no gain or loss is recognized by a shareholder from the stock repurchase, and repurchases in which the repurchased stock is contributed to retirement, employee stock ownership, or similar plans.
The excise tax as written applies whether or not the particular class of stock redeemed is publicly traded if the redeeming corporation is a covered corporation, although the Act grants the Secretary of the Treasury authority to issue regulations addressing the applicability of the tax to special classes of stock and preferred stock.
In de-SPAC transactions (where a SPAC acquires a target company), SPAC investors typically have the option to redeem their shares. The excise tax therefore may apply in this situation, although the tax is measured on the net fair market value of stock redeemed. If the SPAC issues new shares to shareholders or investors (including PIPE investors), it is possible the excise tax may not apply. For more information on the tax aspects of de-SPAC transactions, see Practice Note, De-SPAC Transactions: US Tax Considerations.

Tax Incentives for Clean Energy

The Act introduces several new clean energy tax incentives including:
  • A 10-year credit for clean energy production, available for facilities placed in service after 2024, with a phase-out for facilities placed in service after certain emissions targets are met or 2032, whichever is later (IRC § 45Y).
  • A credit for investments in clean electricity, available for property placed in service after 2024 with a phase-out beginning after certain emissions targets are met or 2032, whichever is later (IRC § 48E).
  • An advanced manufacturing production credit for the production and sale of solar, wind energy, and battery components (IRC § 45X).
  • A credit for clean hydrogen production, available for the first 10 years a qualified clean hydrogen production facility is in service (IRC § 45V).
  • A credit for clean fuel production for low-emissions transportation fuel (IRC § 45Z).
  • A credit for zero-emission nuclear power production for existing facilities (IRC § 45U).
  • An income or excise tax credit for sustainable aviation fuel for 2023 and 2024 (IRC §§ 40B, 6426(k), 6427(e)).
  • Adding three categories of green energy property to the five-year property category for depreciation purposes, applicable to facilities and property placed in service after December 31, 2024 (IRC § 168(e)(3)(B)).
  • A credit for qualified commercial clean vehicles (IRC § 45W).
  • A credit for certain qualified buyers of previously-owned clean vehicles (IRC § 25E).
In addition, several existing tax incentives have been extended and modified, including:
  • The credit for electricity produced from certain renewable sources (extending the beginning of construction deadline to projects that begin construction before January 1, 2025) (IRC § 45).
  • The Section 48 energy credit, available for certain new or reconstructed depreciable property (for example, property that uses solar energy to generate electricity, heat, or cool a structure or provide solar process heat).
  • The credit for carbon oxide sequestration (extended to qualified facilities that begin construction before January 1, 2033) (IRC § 45Q(d)(1)).
  • The nonbusiness energy property credit for certain expenditures to improve the energy efficiency of a taxpayer's home (providing an increased credit, with the credit extended through 2032 and no longer limited to expenditures for a taxpayer's principal residence) (IRC § 25C).
  • The residential clean energy credit (extended through 2034) (IRC § 25D).
  • The alternative fuel refueling property credit (IRC § 30C).
The Act also:
  • Extends the advanced energy project credit (IRC § 48C).
  • Provides an increased energy credit for solar and wind facilities located in certain low-income communities or on Native American land, applicable for calendar years 2023 and 2024 (IRC § 48(e)).
  • Modifies the credit for plug-in electric vehicles (IRC § 30D) to, among other changes, eliminate the limitation on the number of vehicles eligible for the credit and to require that the final assembly of the vehicle be in North America.
  • Modifies the accelerated cost recovery deduction for energy efficient commercial buildings (IRC § 179D).
  • Extends incentives for biodiesel, renewable diesel, and alternative fuels (IRC §§ 40A, 6426), and for second generation biofuels (IRC § 40(b)(6)).
The Act also allows eligible taxpayers to transfer eligible credits to unrelated taxpayers for cash (IRC § 6418(a)). Eligible credits are credits for:
For more on the key energy provisions in the Act, see Legal Update, Inflation Reduction Act: Key Energy Provisions.