[co-author: Ben Cantor - Law Clerk]

On August 12, 2022, the U.S. Congress passed the Inflation Reduction Act of 2022 (the “Act”), which was signed into law by President Biden on August 16, 2022. Alongside sweeping changes to energy, environmental and healthcare policy, the Act creates a new 15% corporate alternative minimum tax (“AMT”), imposes a new 1% excise tax on certain corporate stock buybacks, and extends the limitation on excess business losses of non-corporate taxpayers by two years.

Key Takeaways

• The 15% AMT generally applies to U.S. corporations with financial statement income of over $1 billion measured by grouping the financial statement income of sufficiently related entities.
• Due to last-minute changes to the Act, it appears that the corporate portfolio investments of private equity funds will not be treated as a single group for this purpose and, thus, each such portfolio company likely will be subject to the AMT only if it separately exceeds $1 billion of financial statement income.
• Stock buybacks by publicly traded corporations are subject to a 1% excise tax, with potential implications reaching beyond simple repurchases (e.g., certain tax-free transactions may be subject to the tax).
• The limitation on excess business losses of non-corporate taxpayers has been extended by two years.

Corporate Alternative Minimum Tax

The AMT potentially applies in any taxable year to any “applicable corporation,” which is any corporation which meets the “adjusted financial statement income” (“AFSI”) test for one or more prior taxable years. Applicable corporations do not include S corporations, real estate investment trusts or regulated investment companies. An applicable corporation generally must pay the greater of the AMT or its regular corporate tax.

The AFSI test generally is met for a taxable year if the corporation has average AFSI in excess of $1 billion over the three taxable year period preceding the tested taxable year. For a calendar year corporation with a tested taxable year ending December 31, 2023, the AFSI test could be met for 2023 based on the average AFSI over the period including 2020, 2021 and 2022. U.S. subsidiaries (or U.S. trades or businesses) of foreign-parented corporate groups may be subject to the AMT if the foreign group satisfies the $1 billion average AFSI test and the domestic subsidiary (or an unincorporated business) additionally satisfies a $100 million average AFSI test.

Once a corporation satisfies the AFSI test to be an applicable corporation, it generally will remain an applicable corporation in future years, though the statute permits the U.S. Department of the Treasury to determine rules for ceasing to be an applicable corporation if the AFSI test is not met for some number of periods. A change of ownership may also result in a corporation ceasing to be an applicable corporation.

AFSI is calculated using the aggregate book income of any group of entities aggregated as a “single employer” for tax purposes, with a broad set of adjustments. Generally, entities are aggregated if they are controlled by a common parent corporation or if they are controlled by five or fewer persons who are individuals, estates or trusts. Partnerships not engaged in a trade or business (like private equity funds) generally are not required to aggregate their subsidiaries, but partnerships with sufficiently concentrated ownership may end up owning applicable corporations. Partnerships engaged in a trade or business may be aggregated with related corporations. The Act was amended to remove certain provisions that would have aggregated entities controlled by a partnership even if that partnership is not engaged in a trade or business.

The AMT is applicable for taxable years beginning after December 31, 2022.

Excise Tax on Stock Buybacks

The Act also imposes a 1% excise tax—payable by the repurchasing corporation—on the fair market value of any stock repurchased by a U.S. corporation whose interests are publicly traded on an established securities market and certain U.S. subsidiaries of foreign corporations whose interests are similarly publicly traded. Repurchases include redemptions and any other transactions determined by the U.S. Department of the Treasury to be economically similar. The fair market value of the repurchased stock is offset by the fair market value of stock issuances by the corporation in the same taxable year. Exceptions to the 1% excise tax include repurchases that are a part of tax-free reorganizations in which no gain or loss is recognized by the shareholders, transactions where the total value of the stock repurchased during the taxable year does not exceed $1 million, repurchases by a regulated investment company or a real estate investment trust, and repurchases treated as dividends for U.S. federal income tax purposes.

The term “repurchase” has been broadly defined in the statute, and, absent regulatory guidance, the 1% excise tax could potentially apply to split-off transactions, and other transactions that are not conventionally considered stock repurchases, such as payments for fractional shares and payments to dissenters in exchanges that are a part of tax-free reorganizations.

Any excise tax payments are not tax-deductible. The excise tax applies to repurchases of stock after December 31, 2022.

Business Losses of Non-Corporate Taxpayers

The Act also extends the limitation on excess business losses of non-corporate taxpayers by two years. Excess business losses are the amount by which business deductions exceed gross business income. Prior to the Act as well as the enactment of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the excess business loss limitation applied to any taxable year beginning after December 31, 2017, and before January 1, 2026, limiting the ability of non-corporate taxpayers to offset net business losses to $250,000 of non-business income for single filers, including trusts, and $500,000 for joint filers (with such amounts being indexed for inflation). The CARES Act amended the excess business loss limitation, making it applicable for taxable years beginning after December 31, 2020, and before January 1, 2026. The American Rescue Plan Act of 2021 further extended the sunset date by one year, i.e., through taxable years beginning before January 1, 2027. The Act further extends the application of the excess business loss limitation rules to taxable years that begin before January 1, 2029.