On August 16, 2022, President Joseph Biden signed into law a replacement for the Build Back Better Act, known as the Inflation Reduction Act of 2022 (the Act). The Act focuses its spending on:
(i) energy security and climate change, and
(ii) premium reductions for health insurance under the Affordable Care Act (ACA).
The Act raises revenue to cover expenses and reduce the federal budget deficit by
(i) increasing income tax on certain corporations,
(ii) reforming prescription drug pricing,
(iii) enhancing Internal Revenue Service (IRS) enforcement, and
(iv) adding a 1% excise tax on certain stock repurchases.
This article reviews selected provisions of the Act.
Corporate Alternative Minimum Tax
The Act adds a corporate alternative minimum tax (AMT), essentially imposing a 15% minimum tax on adjusted financial statement income of “applicable corporations”. Like other AMT provisions, this AMT is imposed in the amount by which the tentative minimum tax exceeds the corporation’s regular tax for the year.
Subject to exceptions, an applicable corporation is any corporation other than an S-corporation, a regulated investment company (RIC) or real estate investment trust (REIT) that has for any “applicable three-year period” average annual adjusted financial statement income that exceeds $1 billion.
An applicable three-year period is any three consecutive taxable years of such corporation ending with the taxable year that precedes the taxable year for which the tax is being calculated. If a corporation has been in existence less than three years, the rolling three-year average is reduced to an average for such number of years (or the single year) that the corporation has been in existence.
The tentative minimum tax is 15% of the corporation’s adjusted financial statement income for the taxable year reduced by the AMT foreign tax credit for such year. Adjusted financial statement income is calculated by first adjusting financial statement income by various general adjustments, and then, reducing the amount so determined by adjusted financial statement net operating loss carryforwards. The reduction for adjusted financial statement net operating losses cannot exceed 80% of financial statement income reduced by the general adjustments. Only financial statement net operating losses for years ending after December 31, 2019, are taken into consideration.
A corporation’s financial statement is, generally, the one filed with the Securities and Exchange Commission on Form 10-K.
If the corporation does not file Form 10-K certain other financial statements can be used as specified by the Internal Revenue Code (IRC) or as specified by the Secretary of the Treasury in regulations or other guidance.
Corporations under common control are aggregated. There are special rules for foreign-parented corporations. The corporate AMT and corresponding provisions shall apply to tax years beginning after December 31, 2022.
Excise Tax on Stock Repurchases
The Act adds a 1% excise tax on the fair market value of any stock repurchased by a U.S. domestic corporation that is traded on an established securities market (a covered corporation). For these purposes, a repurchase is a redemption by the covered corporation of its stock or any transaction determined by the Secretary of the Treasury to be the equivalent of a redemption.
The excise tax also applies when certain affiliates of a covered corporation (each a specified affiliate) purchase the stock of any person that is not the covered corporation or another specified affiliate. A specified affiliate is any corporation in which more than 50% of its stock (by value or voting rights) is owned by the covered corporation or a partnership of which more than 50% of its capital interests is owned by the covered corporation.
The amount subject to the tax is reduced by the value of any stock issued by the covered corporation during the taxable year, including stock issued to its employees.
Certain transactions are excepted from the excise tax, including:
- redemptions that are part of a tax-free reorganization,
- the repurchased stock or stock having equivalent value is contributed to an employer-sponsored retirement plan, an employee stock ownership plan (ESOP) or similar plan,
- the total value of the stock repurchased during the taxable year does not exceed $1 million,
- pursuant to regulations (to be published), in cases where the stock is purchased by a dealer in securities in the ordinary course of its business,
- the stock is repurchased by a RIC or REIT, or to the extent the stock repurchase is treated as a dividend.
Special rules apply to repurchases by certain foreign corporations.
The Secretary of the Treasury is directed to issue regulations and other guidance as necessary or appropriate to carry out and prevent the avoidance of the excise tax.
The Secretary of the Treasury is specifically directed to issue regulations to (i) prevent abuse of the exceptions listed above, (ii) address special classes of stock and preferred stock, and (iii) apply the rules pertaining to foreign corporations.
The excise tax applied to repurchases of stock after December 31, 2022.
The Act appropriates additional funds for the fiscal year ending September 30, 2022, to the IRS for, among other purposes, taxpayer services, business systems modernization, and operations support, with the largest appropriation to the IRS and the United States Tax Court to increase tax law enforcement.
Extension of ACA Premium Credits
Certain individuals are entitled to receive a refundable tax credit for health insurance purchased pursuant to the ACA. The American Rescue Plan Act of 2021 (ARPA), expanded the availability and increased the amount of the refundable tax credit for 2021 and 2022. The Act extends the increases made by ARPA through December 31, 2025.
To determine if the provisions of the Act (including those not discussed in this article) apply to you, contact your attorney or accountant.
For more information, please contact your PNC Private Bank advisor.