Summary of Stipulations Included in the Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022, signed into law by President Biden on August 16, has several implications for sectors across the board. The law aims at reducing the nation's deficit by $300 billion and speeding up the development of clean energy by way of a $369 billion investment in energy security and climate change programs. Reflecting significant regulatory updates in the healthcare sector, the law also allows Medicare to negotiate for prescription drug prices, extends the Affordable Care Act through 2025 and imposes a 15% corporate minimum tax on businesses with more than $1 billion in profit.

Table of Contents

• Impact to Corporations
• Private Clients/Individuals [INFOGRAPHIC]
• Energy Tax Credits
• Healthcare
• What Is Not in the Act?
• Final Thoughts

Below is a summary of the tax changes plus insights on what impact the act might have on businesses and individuals.

Impact to Corporations

The Inflation Reduction Act contains provisions that benefit small businesses — and ones that come at a cost to larger corporations. Key provisions of the act affecting businesses include doubling a small business tax credit, a 1% excise tax on repurchases of corporate stock and a 15% corporate minimum tax for large corporations.

• Increase in Qualified Small Business Payroll Tax Credit for Increasing Research Activities
  • Research credit against payroll tax for small businesses gives qualified small businesses (including startup companies) an additional $250K to apply to their payroll taxes (employer share of Medicare), which in effect doubles the current benefit from $250K to $500K.
  • The first $250,000 of the credit limitation will be applied against the FICA payroll tax liability and the second $250,000 of the limitation will be applied against the employer portion of Medicare payroll tax liability imposed under section 3111(b).
  • The increased credits go into effect for tax years beginning after December 31, 2022.
  • Note: A qualified small business is a partnership, corporation or person with gross receipts of less than $5 million for the current tax year and no gross receipts for any taxable year preceding the five taxable year period ending with the current taxable year.
• Excise Tax on Stock Buybacks
  • Publicly traded U.S. corporations (covered corporations) will be subject to a 1% excise tax on repurchases of their stock. This could impact many corporations, especially as repurchasing stock trends in line with a bear market.
    • Note: This is an excise tax, not an income tax under ASC 740, and therefore should not be included in a company’s income tax provision.
  • The transactions that will be subject to this tax include not only conventional stock buybacks, but also transactions that are “economically similar,” including acquisitive reorganizations, recapitalizing reorganizations under Section 368(a)(1)(E), transferor-corporation reorganizations under Section 368(a)(1)(F), split-offs, and certain types of complete liquidations.
  • This new excise tax will take effect on January 1, 2023.
  • Taxpayers will report their stock repurchase excise tax annually on Form 720, due for the first full quarter after the end of their taxable year, with payment due at the filing deadline and no extensions permitted for either reporting or payment. For example, a taxpayer with a taxable year ending on December 31, 2023 would report its stock repurchase excise tax on Form 720 for the first quarter of 2024 (due on April 30, 2024).
  • There are several situations where the excise tax does not apply, including:
    • If the repurchased stock, or any amount equal to the repurchased stock, is contributed to an employer sponsored retirement plan, ESOP or similar plan
    • If the stock buyback is part of a nontaxable corporate reorganization under IRC 368(a)
    • If the total value of repurchased stock in the taxable year does not exceed $1 million
    • If the repurchase is by a securities dealer in the ordinary course of business
    • If the repurchase is by a regulated investment company (RIC) or a real estate investment trust (REIT)
    • If the repurchase qualifies as a dividend
  • Additionally, acquisitions of stock of “applicable foreign corporations” and “surrogate foreign corporations” have special rules.
  • Notice 2023-2 was released on December 27, providing guidance regarding the application of the corporate stock repurchase excise tax until the issuance of proposed regulations.
• New 15% Corporate Alternative Minimum Tax
• The new corporate AMT is intended to impact large corporations with financial accounting profits exceeding $1 billion that have significantly reduced, or even eliminated, cash taxes.
• The corporate alternative minimum tax (AMT) provision based on financial statement income would impose a 15% minimum tax on adjusted financial statement income (AFSI) of large corporations (those reporting over $1 billion in earnings on their financial statements to shareholders). In the case of U.S. corporations that have foreign parents, it would apply only to income earned in the United States of $100 million or more of average annual earnings in the previous three years (and apply when the international financial reporting group has income of $1 billion or more).
• Very few corporations are expected to be subject to the corporate AMT as currently proposed. The Joint Committee on Taxation estimates that about 150 corporate taxpayers would be subject to the tax each year.
• The corporate minimum tax applies to tax years beginning after December 31, 2022, so calendar year taxpayers need to start preparing for a January 1, 2023, effective date.
• Notice 2023-7 was released on December 27, clarifying who will be subject to the tax and what adjustments will be made to their financial statement income for purposes of the tax. Additionally, the Notice indicated that financial-statement gains resulting from certain kinds of split-offs and other “nonrecognition transactions” will not be included when determining income subject to corporate AMT.

Private Clients/Individuals

The primary tax components of the act affecting individuals and other noncorporate taxpayers are changes to excess business loss limitations and Internal Revenue Service enforcement funding.

• Addition of a Two-Year Extension of Excess Business Loss Deduction Limitation for Noncorporate Taxpayers
  • Excess business loss deductions under Sec 461(I) are limited under current law, which is set to expire after 2026. This provision extends the limitation for two additional years. Noncorporate taxpayers are limited on deducting excess business losses above certain thresholds ($540,000 for joint filers and $270,000 for single/married filing separate in 2022 indexed for inflation).
  • Any amounts that are suspended are essentially converted to an excess business loss and carried over to the following tax year under Section 172.
  • With Section 461(I) having been repealed for tax years prior to 2021 through the CARES Act, many taxpayers were/are able to amend returns for 2018, 2019 and 2020.
  • From 2021 through 2028, taxpayers should plan around these thresholds and consider timing certain income and loss transactions to minimize the effect of the excess business loss limitation.
• IRS Funding
  • In line with Biden’s plan to tax the wealthiest taxpayers, a key measure in the bill allocates $80 billion to the IRS, over 10 years, to increase enforcement with better technology and additional employees. At this time, the funds would be used to focus on taxpayers with income more than $400,000.
  • The nearly $80 billion in allocated funds will be broken out as follows:
    • $46 billion for enforcement
    • $25 billion for operations support
    • $5 billion for business systems modernization
    • $3 billion for taxpayer services
  • Given this spending breakout, taxpayers will need the help of services providers now more than ever. With 90% of funds being spent on enforcement and operations, and only 10% being spent on taxpayer services and modernization, expect all the burden to fall on the taxpayer with little IRS support.
  • The appropriated funds would remain available until September 30, 2031, and the IRS is required to provide a report to Congress detailing how these funds will be spent as well as quarterly updates regarding the implementation of its plan.

The following infographic provides facts about new IRS funding and how to be audit ready:

Energy Tax Credits

Many of the tax and nontax provisions of the Inflation Reduction Act strive to bring down consumer energy costs, increase American energy security and reduce greenhouse gas emissions, with the goal of putting the U.S. on a path to roughly 40% emissions reduction — and lowering annual U.S. energy expenditures by at least 4% — by 2030. Achieving these objectives could yield a savings of nearly $50B per year for households and businesses.

These provisions seek to spur investments by traditional energy companies, as well as those in the transportation, real estate and manufacturing industries.

Some of the most notable credits include:

• Extensions, expansions and enhancements of EV credits, including the Consumer Tax Credit, for purchase of electric vehicles (up to $7,500)
• Extending the current credits for renewable energy and alternative fuel incentives through 2024, with new “technology-neutral” clean electricity credits beginning in 2025 to support nuclear energy and other lower-carbon technologies
• Provisions to support investments in building energy efficiency by both commercial real estate owners and homeowners

Monetizing the Credits

Additional provisions provide new ways for taxpayers to monetize certain credits in new ways including:

• Transferring certain credits to more quickly utilize the credits in transactions rather than waiting to claim them on tax returns
• Nonprofit organizations monetize the credit by electing direct payments of the credits without needing unrelated business income tax to offset. This creates an opportunity for nonprofits to receive a benefit in places that wasn’t previously available.

These new or expanded tax credits and penalties demonstrate the value of incorporating ESG in a company’s strategic growth plan.

Healthcare

Although the act has far-reaching implications to multiple industry segments, the sweeping impact to Medicare and its beneficiaries as well as the overall healthcare industry is perhaps the most impactful. The two key changes are:

1. The federal government can negotiate some drug prices for Medicare beneficiaries, and
2. Extension of the subsidies established through the American Rescue Act of 2021 through 2025 for people buying insurance through the ACA Marketplaces

At first glance the topics identified look like just additional regulatory changes focused on Medicare and the ACA. However, the end goal of reducing drug cost and ensuring healthcare coverage for all has been debated for years with less impact than some had hoped for. If the implementation of the act is as successful as projected, the reduction of cost of care to the consumer helps close disparities in insurance coverage rates and the affordability of care.

Another big saver for Americans enrolled in Medicare would be a $2,000 cap on out-of-pocket drug costs, which would begin in 2025. However, consumers will receive the benefits on drug pricing starting as soon as 2023. Additional savings would be available to consumers for government approved vaccines as they will be fully covered by Medicare, Medicaid and the Children’s Health Insurance Program.

In addition, the bill caps cost-sharing under the Medicare prescription drug benefit for a month's supply of covered insulin products at (1) for 2023 through 2025, $35; and (2) beginning in 2026, $35, 25% of the government's negotiated price, or 25% of the plan's negotiated price, whichever is less.

The other key healthcare provision extends the subsidies for marketplace coverage through 2025 originally enacted by the American Rescue Plan of 2021. An estimated 3 million people currently insured in the individual marketplace would have lost coverage and become uninsured without the act’s passage according to the Department of Health and Human Services.

Learn more about the effect the act will have on healthcare.

What Is Not in the Act?

• High Net Income Tax Increases — Sweeping tax provisions focused on increasing taxes on individuals making more than $400,000 including capital gain rate changes have been removed.
• SALT Cap — The hotly debated increase to the $10,000 cap on the state and local tax deduction is not addressed. Unless Congress passes another law changing this cap, it is set to expire at the end of 2025 with no limitation.
• Carried Interests — There was a provision to change the taxation on carried interests by requiring private equity funds to hold assets more than the current three-year period which was set to increase to five years, but this was stripped from the bill just days before the Senate vote. A revised version of this proposal has been discussed as something Senators Sinema and Warren would be working to bring back.
• International changes to implement the global minimum tax approved by the OECD — Global intangible low-taxed income (GILTI), base erosion and anti-abuse tax (BEAT), interest limitations
• Current Expensing of Research and experimentation expenditures (§ 174)

Final Thoughts

While the Inflation Reduction Act of 2022 may negatively impact the bottom line for some major corporations, it should provide welcome relief to individuals and small business owners. However, because the act is so comprehensive and far-reaching, there are many complexities to navigate. For tailored support in navigating regulatory compliance and preparing for upcoming changes, including guidance on tax credits, don't hesitate to reach out to our knowledgeable tax experts.