Inflation Reduction Act Signed into Law: Important Tax Provisions and Energy Incentives You Need to Know

Wilson Sonsini Goodrich & Rosati

On August 12, 2022, the U.S. House of Representatives approved H.R. 5376, the "Inflation Reduction Act" (the Act), which was signed into law by President Biden on August 16, 2022. The approval and subsequent enactment follow the prior passage of the Act by the Senate on August 7, 2022. The Act contains a number of provisions of interest to Wilson Sonsini clients, including:

  • One-Percent Excise Tax on Repurchases of Publicly-Traded Corporate Stock: The Act imposes a one-percent non-deductible excise tax on repurchases of stock that are made by U.S. publicly-traded corporations and certain non-U.S. publicly-traded corporations on or after January 1, 2023. Set forth below is a brief summary of selected aspects of the excise tax provision and related considerations. For a more detailed discussion of the one-percent excise tax, including planning considerations and recommended best practices, see The New One-Percent Excise Tax on Stock Repurchases and Its Potential Implications for Common Corporate Transactions.

    In general, the excise tax will impose an incremental cost of one percent on all forms of stock repurchase transactions, including open market repurchases, privately negotiated purchases (such as those effected pursuant to accelerated share repurchase (ASR) programs) and purchases in registered self-tender offers. However, certain repurchases are exempted from the excise tax, including, among others: i) repurchases that are accompanied by a contribution of the repurchased stock (or an amount of stock equal to the value of the stock repurchased) to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan; ii) repurchases during a taxable year that do not exceed $1,000,000 in the aggregate; and iii) repurchases that are treated as a "dividend" for U.S. income tax purposes. The new legislation also provides for an annual adjustment (or "netting") mechanism that reduces the amount of any stock repurchases subject to the excise tax by the fair market value of any stock issued by the corporation during the same taxable year.

    The excise tax will also generally apply to any equity securities that are puttable by the holder, callable by the issuer, or mandatorily redeemable by their terms (such as mandatorily redeemable preferred stock), even if such equity securities were originally issued prior to the enactment of the new statute. Certain stock hedging arrangements, including "call-spread" or "capped call" agreements that are often entered into in connection with convertible bond offerings and that may be settled in shares of the issuer, will similarly be affected.

    In addition, common transactions undertaken by special purpose acquisition corporations (or SPACs) may also be affected, including the potential exercise of redemption rights by a SPAC’s shareholders in connection with an initial business combination (or "de-SPAC" event). Moreover, pending the issuance of future regulatory or other guidance, there appears to be a variety of ways in which routine merger and acquisition, restructuring, or recapitalization transactions may be affected (including in connection with pre-transaction distributions of cash or other property, the payment of cash to dissenting shareholders or in lieu of fractional shares, the payment of cash "boot" in connection with certain reorganization transactions or mergers of equals, and cash or other property that is distributed in connection with a complete or partial liquidation). Some types of "spin-off" transactions may also be impacted to the extent that the form of the spin-off is not undertaken as an actual pro-rata distribution of shares to all shareholders (such as would be the case in connection with a non-pro-rata "split-off" or "split-up"). Finally, the new legislation also grants the Secretary of the Treasury the authority to determine what transactions should be considered "economically similar" to a stock repurchase for purposes of the excise tax and, as a result, additional types of corporate actions may be affected in the future.

  • Book Minimum Tax on Certain Corporations with at Least $1 Billion in Book Income: The Act imposes a 15 percent alternative minimum income tax on corporations with an average of at least $1,000,000,000 of "adjusted financial statement income" over a three-year period. The tax also applies to a U.S. subsidiary of a non-U.S. parented group if the group meets the $1,000,000,000 threshold and the U.S. subsidiary has average adjusted financial statement income over the same period of at least $100,000,000. Adjusted financial statement income is the net income or loss set forth on the corporation’s financial statements for a given taxable year after making certain adjustments, including a deduction for tax depreciation (rather than book depreciation) and an 80 percent limitation on the utilization of book net operating losses. In addition, certain aggregation rules apply with respect to commonly controlled corporations, flow-through entities, and interests in "controlled foreign corporations" (CFCs). The tax applies if it exceeds the normal tax liability of the corporation (including any tax liability resulting from the "Base Erosion and Anti-Abuse Tax" (BEAT)). The minimum income tax does not apply to S corporations, regulated investment companies, or real estate investment trusts. The minimum income tax applies to taxable years beginning after December 31, 2022.
  • Payroll Tax Credit for Businesses with Annual Gross Receipts of Less Than $5 Million: Under current law, certain small businesses are entitled to make an election to utilize the credit for research expenditures under Section 41 of the Internal Revenue Code of 1986, as amended, to offset the employer portion of the 6.2 percent Social Security payroll tax (FICA taxes), capped annually at $250,000 per taxpayer (or entities treated as a single taxpayer). A partnership or corporation is eligible for such credit for a taxable year if it has less than $5,000,000 in gross receipts in that taxable year and no gross receipts before the five-taxable-year period ending with that year. The Act adds an additional credit against the employer portion of the 1.45 percent Medicare Hospital Insurance payroll tax, also capped at $250,000, for tax years beginning after December 31, 2022, which results in a total available annual credit of $500,000.
  • Energy Tax Incentives: The Act provides an unprecedented scope of incentives for wind, solar, energy storage, EV charging, green hydrogen, industrial decarbonization, carbon capture, and nuclear businesses. It also contains substantial modifications to the existing wind and solar tax credit programs. These changes will stimulate increased activity in all business verticals providing decarbonization solutions to U.S. companies. Such companies can expect to see a proliferation of new products and a reduction in prices on existing products.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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