On Sunday, August 7, 2022, the United States Senate passed the Inflation Reduction Act of 2022 (the "Act") in a 51 - 50 vote with Vice President Harris providing the tie-breaking vote. The House of Representatives subsequently passed the legislation on Friday, August 12, 2022 in a 220-207 vote, with no Republicans joining Democrats in supporting the Act. The President signed the legislation into law on Tuesday, August 16, 2022. The Act allows Medicare to negotiate prescription drug pricing and extends health insurance premium subsidies under the Affordable Care Act. This FGMK Tax Alert provides a summary of some of the key tax provisions in legislation.
Tax Items Not in the Legislation
While the Act contains several tax provisions, it does not include many of the provisions that appeared in recent legislative proposals. The Act does not modify existing individual and corporate income tax rates. It also does not make any changes to the net investment income tax or self-employment tax. Further, it does not include any modifications to trust and estate tax provisions. Notably, the Act also does not change the current $10,000 limit on the state and local tax deduction for individual income taxpayers, which applies through 2025.
The Act also does not include any changes to the taxation of carried interests. While an initial draft of the Act contained modifications to Internal Revenue Code Section 1061, which governs the taxation of certain carried interests defined as applicable partnership interests, the proposed changes were removed from the final version of the Act.
Key Corporate Provisions in the Act
The Act reintroduces a minimum tax for C corporations (not applicable to S corporations, REITs, or RICs) by applying a 15% tax rate to adjusted financial statement income. This applies to those companies with adjusted financial statement income over $1 billion (based on prior 3-taxable year average). The tax also applies to U.S. entities with adjusted financial statement income in excess of $100 million (based on prior 3-taxable year average) if the entity is part of foreign-parented multinational group where such group has global book income of $1 billion or more. Aggregation rules apply in determining whether these thresholds are met. The final version of the Act does provide for accelerated depreciation and expensing in the computation of adjusted financial statement income. The tax applies to tax years beginning after December 31, 2022.
In lieu of the initial proposed changes to Section 1061, the final version of the Act includes a new 1% excise tax on the fair market value of stock repurchased by a domestic corporation whose stock is traded on an established securities market. The tax, which applies to stock repurchased after December 31, 2022, is not deductible. However, the tax does not apply in the following situations:
Energy Related Tax Incentives
The Act includes the extension and modification of several existing energy-related incentives and introduces new energy-related credits. The following provides an overview of some of the changes provided in the legislation.
Section 179D Energy Efficient Commercial Building Deduction
Clean Vehicle Credits
The Act amends the credit currently available under Section 30D for the purchase of a new qualified plug-in electric drive motor vehicle. The legislation, which relabels the credit as a clean vehicle credit, still provides up to $7,500 of potential credit for the purchase of a qualified vehicle, but it establishes new requirements for the credit. The maximum credit amount consists of $3,750 if the vehicle meets certain requirements as to the percentage of the value of certain critical minerals contained in the vehicle’s battery (percentage increases from 40% if vehicle placed in service before January 1, 2024 to 80% if placed in service after December 31, 2026) and another $3,750 if the vehicle meets certain requirements as to the percentage of the value of the components contained in the battery that are produced in North America as exceeds an applicable percentage (increasing from 50% if vehicle placed in service before January 1, 2024 to 100% if placed in service after December 31, 2028).
The credit is not available if modified adjusted gross income (“MAGI”) exceeds certain thresholds. The limitation applies to extent that the lesser of the MAGI for the taxable year or the MAGI for the preceding taxable year exceeds the threshold amount of:
The credit is not available where the manufacturer’s suggested retail price exceeds defined thresholds ($80,000 for vans, SUVs, and pick-up trucks; $55,000 for all other vehicles).
The credit is available for vehicles purchased through December 31, 2032.
In providing this extension, the legislation eliminates the current phase-out that occurs once a manufacturer’s vehicle surpasses the 200,000-limitation for vehicles sold for use in the United States. However, while the elimination of the limitation benefits certain automotive manufacturers that have already passed the limitation, e.g., Tesla, the new critical mineral and North American production requirements present significant challenges for all automotive manufacturers. Following the release of the initial version of the legislation, automotive manufacturers lobbied for changes to the provision noting that it may take a couple of years to produce vehicles that can meet the credit requirements. Despite the lobbying effort, the Act passed without any modification to the proposed changes to Section 30D.
The Act also introduces a new tax credit through December 31, 2032 (under new Section 25E) that provides a tax credit equal to the lesser of $4,000 or 30% of the sale price to a qualified buyer who places a previously-owned clean vehicle in service during the taxable year. The vehicle would have to be purchased from a dealer for a sales price that does not exceed $25,000 and would need to meet several of the requirements under the amended Section 30D, as well as constitute a model that is at least two years earlier than the calendar year of acquisition. Further, the credit is only available to taxpayers with MAGI that equates to 50% of the MAGI thresholds listed above for the Section 30D credit.
Both the modified Section 30D credit and new Section 25E credit allow for the transferability of the respective tax credit to the selling dealer. The payment or credit resulting from the transfer would not be included in the buyer’s income, and the dealer would not receive a tax deduction.
In addition to the above tax credits available to individuals, the Act also includes a new general business credit for qualified commercial clean vehicles under new Section 45W (again through December 31, 2032). The credit equates to the lesser of 15% of the basis of such vehicle (30% if the vehicle is not powered by a gasoline or diesel internal combustion engine) or an amount equal to the excess of the purchase price of such vehicle over the purchase price of a comparable vehicle which is defined as a vehicle powered solely by a gasoline or diesel internal combustion engine and which is a comparable size. The credit for any vehicle cannot exceed $7,500 if the vehicle has a gross vehicle weight rate of less than 14,000 pounds, or $40,000 in the vehicle exceeds such weight. To qualify, the vehicle would have to meet certain requirements, such as being manufactured for use on public streets, roads, and highways or constitute mobile machinery as defined by the tax code, as well as meet certain energy requirements (e.g., vehicle propelled by an electric motor which draws electricity from a battery which has capacity of not less than 15 kilowatt hours and is capable of recharge from an external source of electricity).
Additional Energy Incentives
The Act modifies and extends several energy production and energy investment incentives under Section 45 and Section 48, respectively, as well as creates new tax credits. Among the tax incentives that are extended and expanded are the following (not an exhaustive list):
For certain energy-related credits, the Act also provides for transferability of credits as provided by new Section 6418. Specifically, the following credits are transferable (NOTE: For certain taxpayers, e.g., tax-exempt entities, the below credits, as well as the above-mentioned Section 45W credit, are also be eligible for direct payment from the government under new Section 6417):
For those taxpayers who make capital investments in partnership entities in exchange for the receipt of energy-related tax credits, the ability to purchase tax credits (likely at a discount) may provide an alternative investment option.
Additional Tax Items of Note
The Act extends the excess business loss limitation under Section 461(l) through 2028. The extension of the limitation, which was set to expire at the end of 2026, resulted from last minute amendments to the legislation that eliminated a provision that would have exposed smaller portfolio companies to the 15% minimum tax on C corporations. However, some debate remains in the tax community as to whether the amendment completely insulates such portfolio companies from the tax.
The legislation also doubles the amount of the research and development tax credit that can be used against payroll tax liability by a qualified small business, increasing from $250,000 to $500,000 for tax years beginning after December 31, 2022. However, the legislation does not include any modification or delay to the new amortization requirement under Section 174 for research and experimentation expenditures, which includes any amounts paid or incurred in connection with the development of software. This provision, which requires amortization of such expenditures over five years for domestic activities and over 15 years for foreign activities beginning with the midpoint of the taxable year in which the expenditure is paid or incurred, took effect as of January 1, 2022, as a result of the Tax Cuts and Jobs Act of 2017. Republicans and Democrats have expressed support for the retroactive delay or elimination of the updated language of Section 174, which previously allowed current expensing of such expenditures. Future legislation could still address this issue.
Additionally, the legislation reinstates another dormant Superfund tax for hazardous substances. The tax applies to crude oil received at a U.S. refinery and petroleum products entered into the U.S. for consumption, use, or warehousing at a rate of 16.4 cents per barrel. The tax takes effect January 1, 2023.
Finally, the Act provides for nearly $80 billion of investment in the Internal Revenue Service over the next ten years, including funding for taxpayer services, enforcement (more than $45 billion), operations support, and business systems modernization.
FGMK continues to monitor new tax law changes. Please contact your FGMK professional for additional information.
The summary information in this document is being provided for education purposes only. Recipients may not rely on this summary other than for the purpose intended, and the contents should not be construed as accounting, tax, investment, or legal advice. We encourage any recipients to contact the authors for any inquiries regarding the contents. FGMK (and its related entities and partners) shall not be responsible for any loss incurred by any person that relies on this publication.
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