Senate Passes Significant Tax Changes Over the Weekend

Jackson Walker
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Jackson Walker

Over the weekend, the U.S. Senate passed H.R. 5376, the Inflation Reduction Act of 2022 (the “Act”) as part of the fiscal year 2022 budget reconciliation bill. The U.S. House of Representatives will consider the Act this week. In an effort to monitor tax changes that may impact our clients, we’ve highlighted the Act’s key tax components below.

15% Minimum Corporate Book Tax

The Act includes a 15% minimum “book tax” on C corporations with annual profits in excess of $1 billion in pre-tax income (with some adjustments). This marks a departure from current law, under which C corporations haven’t been subject to the alternative minimum tax (AMT) since 2018. Such a departure could impact large enterprises’ thinking on the advantages of incorporation, which has historically included low income tax rates (currently 21%).

Under the Act, C corporations with at least $1 billion in income would be subject to the greater of:

  • the current 21% tax on a C corporation’s adjusted gross income, or
  • a 15% tax on a C corporation’s “adjusted financial statement income” (“AFSI”)

AFSI generally consists of a C corporation’s “book income,” which tracks generally accepted accounting principles, or “GAAP” accounting with some adjustments.

Renewable Energy Credits

The Act provides for several new and expanded renewable energy tax credits including:

  • an amended section 45Q carbon capture credit for certain projects that begin construction before January 1, 2033;
  • an extended section 48 energy investment tax credit for certain biogas, energy storage technology, microgrid controllers, thermal energy storage property, solar, and wind projects;
  • a new section 45Y clean electricity production credit; and
  • a new section 45X advanced manufacturing production credit aimed at increasing domestic production and sale of integrated components used in solar, wind, storage projects, and critical minerals.

Notably, most of the credits are fully transferrable and allow for a 3-year carryback period, which could open up new investment and tax planning opportunities.

Increased Funding for the IRS

The Act provides for nearly $80 billion in appropriations to the IRS budget to employ more auditors, improve customer service, and modernize technology. With increased enforcement measures, the IRS could collect billions more in additional tax revenue.

Excise Tax on Stock Buy Backs

The Act includes a 1% excise tax on corporate stock buybacks. The excise tax applies to the fair market value of any stock of a “covered corporation,” which is repurchased by such corporation during the taxable year. Covered corporations only include publicly-traded domestic corporations.

What Didn’t Make the Act?

Notably, the Act does not include any changes to how carried interests are taxed under current law. Originally, the draft bill included a proposal to increase fund managers’ three year holding period requirement to five years in order to be entitled to long-term capital gain tax rates (with a top rate of 20%) on exit. If the extended holding period was not met, then short term capital gain tax rates (with the top rate of 37%) would result.

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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