Key Tax Provisions of the Inflation Reduction Act of 2022

By David Neuman, JD and Alan Wong, CPA

Late last week, the Inflation Reduction Act of 2022 (the “Act”) was passed by the House of Representatives and has been sent to President Joe Biden for his signature and enactment into law. This important piece of legislation would, among other things: (1) establish a 15% corporate alternative minimum tax; (2) create a 1% excise tax on corporate stock repurchases; (3) provide for increased funding of Internal Revenue Service enforcement; and (4) extend and revise existing electric vehicle tax credits; and (5) extend the limitation on net business losses.

KEY TAX PROVISIONS

• Corporate Alternative Minimum Tax. The Act creates a Corporate Alternative Minimum Tax (“AMT”) equal to 15% of financial statement income, less foreign tax credits, that applies to corporate taxpayers that have average adjusted financial statement income for a three-year period that exceeds $1 billion. The Act also contains rules for the computation of financial statement income for the purposes of this determination and authorizes the Secretary of the Treasury to promulgate additional regulations and guidance relating to the effect of these rules. This provision would be effective for tax years beginning after December 31, 2022.

• Corporate Stock Repurchases. The Act creates a 1% excise tax on corporations that buy back stock from their shareholders. Buybacks are one of the mechanisms corporations use to shift their profits to shareholders, the other being a dividend. Buybacks are taxed as capital gains because they increase the stock value, but they may not be taxed for years, and in some cases are never taxed at all because the taxable event is when the stock is sold. Some investors will hold on to their stocks for life, and upon death, the investor’s heirs will benefit from a step-in basis. The Act would subject corporations to a tax equal to 1% of their stock repurchases, thereby ensuring the shifted profits are taxed in some form. This excise tax will apply to repurchases of stock after December 31, 2022.

• IRS Enforcement. The Act appropriates funding for the Internal Revenue Service of $80 billion across 10 years, for necessary expenses to: (1) determine and collect taxes, including the hiring and training of new staff, as well as, modernizing IRS operations; (2) provide legal and litigation support; (3) conduct criminal investigations (including investigative technology); (4) provide digital asset monitoring and compliance activities; (5) enforce criminal statutes related to violations of the Internal Revenue Code and other financial crimes; (6) purchase and hire passenger motor vehicles; and (7) provide other services. These appropriated funds are to remain available until September 30, 2031, and the bill summary states, “no use of the funds is intended to increase taxes on any taxpayer with taxable income below $400,000.”

• Tax Credit for Electric Vehicles The Act extends and tweaks an existing tax credit — worth up to $7,500 — to individuals who buy new “clean” vehicles like electric cars, plug-in hybrids and hydrogen fuel cell vehicles. The credit would be available through 2032, subject to some limitations.
  • Income requirements: Married filers will not qualify for the new-vehicle credit if their modified adjusted gross income exceeds $300,000. The limit for single tax filers is $150,000.
  • Vehicle price requirements: Individuals will not qualify for the tax break if their van, sport utility vehicle or pickup truck costs more than $80,000. There’s a $55,000 sticker-price limit for other vehicles.
  • Vehicle qualifications: There are also limits that apply to where the car was manufactured and the sourcing of battery and other vehicle components. The intent is to accelerate development of domestic supply chains and U.S. manufacturing of clean vehicles but this may limit the tax break’s availability in the near term as auto companies adjust.

• The Act also creates a tax credit for used versions of clean vehicles. Individuals could get a $4,000 credit or 30% of the purchase price, whichever is lower. As with the new vehicle credits, there are limitations:
  • Income requirements: Married filers will not qualify if their modified adjusted gross income is greater than $150,000. The limit for single tax filers is $75,000.
  • Vehicle price: The purchase price can not exceed $25,000.
  • Sale qualifications: Individuals can only get the credit if it’s the first sale of the used vehicle. They can only get the credit once every three years.
  • Vehicle qualifications: The car model must be at least 2 years old.

• Extension of Limitation on Net Business Losses The Act includes an extension of the Section 461(l) rules, which limit an individual’s ability to use net operating losses for two additional years. This limitation, which was included as part of the Tax Cuts and Jobs Act, was scheduled to terminate in 2026. The limitation will now apply through 2028.

If you have any questions please reach out to your LMC professional.