Federal Tax Planning Strategies

CORPORATE TAX PLANNING TOPICS

Corporate Tax Planning Strategies

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State Tax Planning for Corporations

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International Tax Planning for U.S. Corporations

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FEDERAL TAX PLANNING RESOURCES

2024 Federal Tax Calendar

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How to Calculate Net Operating Loss for Corporations

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Key Corporate Tax Provisions of the Inflation Reduction Act

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R&D Tax Credits and Deductions

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What Qualifies for Business Energy Tax Credits?

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Tax Implications of Mergers and Acquisitions

For corporate tax practitioners, it’s always important to stay on top of new and expiring federal tax provisions to understand how they may affect you or your client’s tax liability – and this year is no exception. After almost 30 years without major tax reform, Congress passed sweeping changes to the federal tax code through a series of laws – starting with the Tax Cuts and Jobs Act (TCJA) in 2017 and the Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 – that include extensions of existing tax credits and some brand-new tax regimes to incentivize certain initiatives.

As tax practitioners prepare their corporate tax planning strategies for the year, some of the big-ticket items to watch for are outlined below. Corporate taxpayers and tax preparers should be aware of new changes so they can leverage all credits and deductions available to them, ensure a smooth filing process, and avoid costly errors.

Inflation Reduction Act

Signed into law in August 2022, the Inflation Reduction Act (IRA) is the latest piece of federal legislation that impacts the federal tax code. The IRA is a climate and tax bill that includes new and extended tax credits designed to incentivize businesses and individuals to boost their use of renewable energy and reduce greenhouse gas emissions.

The IRA increases the limit that qualified small businesses may elect to treat as research credit against their payroll tax liability from $250,000 to $500,000. It also imposes a corporate alternative minimum tax (CAMT) equal to the amount that 15% of a corporation’s adjusted financial statement income (AFSI) exceeds its regular tax liability plus base erosion and anti-abuse tax (BEAT) liability.

Beginning in 2023, the IRA also expands the production tax credit (PTC) to include certain qualified solar and wind facilities.

Increased IRS enforcement focus

As part of its strategic plan to spend nearly $80 billion in increased funding in the coming years, the IRS plans to ramp up tax enforcement efforts through increased audit rates of high net-worth individuals, large corporations, and large and complex partnerships and other pass-through structures. The IRS also plans to use some of this new funding provided by the IRA to thoroughly examine issues surrounding digital asset transactions, listed transactions, and certain international issues.

New federal tax provisions

Corporate alternative minimum tax on adjusted financial statement income

The IRA added a new CAMT on an applicable corporation’s AFSI, which is essentially the corporation’s book income. This tax is effective for taxable years beginning after Dec. 31, 2022, but there is still some ambiguity on its nuances while regulations and guidance are issued during its first year of applicability.

The tax applies to C corporations that have an average annual AFSI greater than $1 billion (and at least $100 million for members of foreign-parented multinational groups that also have an average annual group AFSI greater than $1 billion). The two-part test for multinational groups is intended to ensure that the financial reporting group meets the size test, and that the member corporation’s U.S. presence is significant enough to be subject to U.S. tax. A safe harbor method for determining average annual AFSI is available for corporations that may want to avoid cumbersome financial statement adjustments.

The CAMT is equal to the excess of 15% of the corporation’s AFSI over its CAMT foreign tax credit and applies only to the extent that it exceeds the corporation’s regular tax liability plus base erosion and anti-abuse tax (BEAT). The average annual AFSI is taken from three previous tax years, so for tax year 2023, the relevant book income for a calendar year corporation will be the average of tax years 2020, 2021, and 2022.

This CAMT is similar to the former corporate alternative minimum tax, which was repealed by the TCJA, but the major differences are:

• The CAMT is based on book income.
• The general business credit is not limited by tentative minimum tax.

Excise tax on stock repurchases

The IRA also added a new, nondeductible 1% excise tax on the fair market value of stock repurchased by a publicly traded U.S. corporation (including affiliate acquisitions) during the taxable year. The tax also applies to certain affiliate acquisitions or repurchases of publicly traded foreign corporation stock. The fair market value of stock repurchases is reduced by the value of shares issued by the corporation during the same taxable year.

A repurchase is defined as a §317(b) redemption or an “economically similar transaction.” There are numerous exceptions to the tax, including a de minimis exception where total stock repurchased during the taxable year does not exceed $1 million. Treasury and the IRS released interim guidance in Notice 2023-2, which taxpayers can rely on until proposed regulations are issued. The guidance expands on the statutory exceptions, clarifies the meaning of “repurchase,” creates a funding rule for affiliate acquisitions, and provides timing and valuation rules.

This new excise tax is effective for stock repurchases occurring after Dec. 31, 2022. Companies with stock repurchase programs or M&A activity should pay close attention to updates regarding the new excise tax, including forthcoming proposed regulations.

New and extended federal tax credits

The IRA created several new tax credits and extended several existing tax credits. The law also created a new permission for a taxpayer to elect to transfer all or a portion of certain eligible credits to an unrelated eligible taxpayer in tax years beginning after 2022.

Energy production tax credits

While many of these credits focus on energy production, they may also apply to corporations in the transportation, technology, or real property industries, among others:

• New Clean Hydrogen Production Credit for producing low-emission hydrogen.
• New Previously-Owned Clean Vehicles Credit for qualifying used clean vehicles for the lesser of $4,000 or 30% of the sale price.
• New Advanced Manufacturing Production Credit for eligible renewable energy components and applicable minerals produced in the U.S. and sold after 2022.
• New Commercial Clean Vehicle Credit for qualifying commercial vehicles up to 30% or $40,000 of the basis for purchases after 2022, through 2032.
• Extension and modification of the Carbon Oxide Sequestration Credit to allow for construction start dates before 2033, reduce the minimum capture requirement, and quintuple the credit amount for corporate taxpayers that meet certain wage and apprenticeship requirements.
• Extension and modification of the New Qualified Plug-In Electric Drive Motor Vehicle Credit (renamed the Clean Vehicle Credit) to impose sourcing requirements for critical minerals and battery components, require final assembly in North America, and remove the limit on the number of credit-eligible vehicles per manufacturer. Available for qualifying new clean vehicles acquired through 2032.
• Extension and modification of the Renewable Electricity PTC and Energy Investment Tax Credit (ITC) to allow for certain construction start dates through the end of 2024, reduce the base credit rates, quintuple the base credit rates for meeting wage and apprenticeship requirements, and provide credit increases of: 10% for meeting domestic content requirements, 10% for location in an “energy community,” and 10-20% for certain solar and wind facilities on Indian land and in low-income communities if the facility is allocated environmental justice solar and wind capacity limitation.
• New technology-neutral Clean Electricity Production and Clean Electricity Investment Credit for zero-emissions electricity generation to replace the PTC and ITC for property placed in service after 2024.

Many of these credits are set to continue until 2032, so companies can plan for a 10-year investment.

Direct pay and refundability of energy credits

Tax-exempt entities, state and local governments, and their political subdivisions may elect to receive a direct payment in lieu of certain energy-related credits (“applicable credits”).

This new provision applies to taxable years beginning after 2022, and it effectively makes the applicable credits refundable to the extent they exceed tax liability.

Transferability of energy credits

This new provision permits eligible taxpayers to elect to sell all or a portion of certain energy-related credits (“eligible credits”) for cash to an unrelated taxpayer in tax years beginning after 2022. Taxpayers that are eligible for the direct pay election are excluded from this transferability permission. (I.R.C. §6418)

Foreign tax credit

The foreign tax credit is designed to relieve taxpayers from double taxation when income is subject to both U.S. and foreign tax. The TCJA made significant changes to the foreign tax credit rules. Subject to various limitations, the amount of tax paid to foreign countries and U.S. possessions on foreign-source income offsets any U.S. tax that would be paid on the same income.

Both direct and indirect foreign tax credits are possible. However, foreign tax credit rules limit the amount of annual U.S. tax on foreign-source taxable income as calculated under U.S. tax principles. Thus, if the U.S. corporation pays more tax to the source country on the foreign-source income than is due to the U.S. on the same foreign-source income, the U.S. will limit how much of the foreign income taxes paid to the source country can be used as credits against U.S. tax liability.

Research and development expenses

For tax years beginning Jan. 1, 2022, taxpayers must capitalize and amortize research and development (R&D) expenses over five years (15 years for R&D performed outside the U.S.). This is in stark contrast to the law for the past 70 years, which allowed immediate expensing for these investments. However, other paths still offer more immediate tax benefits, namely the R&D tax credit (I.R.C. §41).

The R&D tax credit is a dollar-for-dollar reduction against a taxpayer’s tax liability for qualified research expenditures for the tax year. Eligible research costs include those paid or incurred for research conducted by the taxpayer as well as research conducted on the taxpayer’s behalf.

While the TCJA didn’t make significant changes to I.R.C. §41, the benefit of the research credit increased due to the reduction in the corporate tax rate (i.e., a smaller I.R.C. §280C “haircut” of 21% as opposed to 35%, historically). Corporate tax teams can use this important tool to help maximize their company’s value.

In addition, the IRA doubled the amount of the credit (from $250,000 to $500,000) that qualified small businesses can use to offset payroll taxes for tax years beginning after 2022.

Semiconductor manufacturing credit

The CHIPS Act of 2022 introduced a new credit for investments in semiconductor manufacturing: the advanced manufacturing investment credit. Eligible taxpayers may claim a credit equal to 25% of their qualified investment for the tax year in an advanced semiconductor manufacturing facility. Unlike similar credits, which only include §1245 property, this credit includes §1250 property. Companies may elect to treat the credit as a direct payment against tax liability for the year, effectively making the credit refundable.

Companies intending to claim this credit will need to pay attention to certain nuances, including the transition rule and various effective dates with respect to when the property was placed in service, like when construction began and which costs were incurred prior to the enactment date.

This credit sunsets quickly. It generally applies to property placed in service after Dec. 31, 2022, but does not apply to property placed in service after Dec. 31, 2026.

Expired federal tax provisions

Business interest expenses

Business interest, as defined by I.R.C. §163(j), is “any interest paid or accrued on indebtedness properly allocable to a trade or business” (excluding investment income).

The TCJA limited the deduction for net business interest expenses to 30% of a taxpayer’s adjusted taxable income (ATI), with an exemption for small businesses. Although the CARES Act temporarily increased the ATI portion of the limitation from 30% to 50% of ATI for tax years 2019 and 2020, the statute’s current iteration is the same as it was in 2018, before the CARES Act. Section 163(j) stipulates that the amount of deductible business interest expense in a tax year cannot exceed the sum of:

• The taxpayer’s business interest income for the year, plus
• 30% of the taxpayer’s ATI for the year, plus
• The taxpayer’s floor plan financing interest for the year.

Business meal and entertainment expenses

The TCJA generally eliminated deductions for business entertainment expenses, though limited exceptions apply. Taxpayers may still deduct 50% of the ordinary and necessary food and beverage expenses associated with operating their trade or business. Notably, food and beverages provided at an entertainment activity remain deductible if the cost is separable from the cost of entertainment. There are six exceptions to the 50% limitation on food and beverage expenses under I.R.C §274(n)(1).

Net operating loss carryback and carryforward periods and limitations

A net operating loss (NOL) for a taxable year is equal to the excess of deductions over gross income, computed with certain modifications. It approximates a taxpayer’s actual economic loss from business-related expenses and is determined under the tax law applicable to that year.

Taxpayers may not carry back any NOLs arising in tax years after 2020 but can carry forward those NOLs indefinitely. NOLs arising in tax years 2018 through 2020 can be carried back for up to five years and carried forward indefinitely. Finally, NOLs arising in tax years before 2018 can be carried back two years and carried forward for 20 years.

NOL Year	Carryback Period	Carryforward Period
Pre-2018 NOLs	2 Years	20 Years
2018-2020 NOLs	5 Years	Indefinite
Post-2020 NOLs	No Carryback	Indefinite

Losses arising in tax years after 2017 and carried forward to tax years after 2020 can only offset up to 80% of taxable income. Losses arising in tax years before 2018 are not subject to the 80% limitation.

	Tax Years Before 2018	Tax Years 2018-2020	Tax Years After 2020
Pre-2018 NOLs	Not Limited	Not Limited	Not Limited
2018-2020 NOLs	N/A	Not Limited	80% Limitation
Post-2020 NOLs	N/A	N/A	80% Limitation

Federal taxation of foreign income

Global intangible low-taxed income (GILTI)

Global intangible low-taxed income is a deemed amount of income derived from controlled foreign corporations (CFCs) in which a U.S. person is a 10% direct or indirect shareholder. It is a newly defined category of foreign income introduced by the TCJA and effectively imposes a worldwide minimum tax on foreign earnings.

U.S. shareholders of CFCs are subject to current taxation on most income earned through a CFC in excess of a 10% return on certain tangible assets of the CFC – with a reduction for certain interest expenses. GILTI inclusions are reduced by a special deduction and a partial foreign tax credit. But foreign tax credits are limited annually to the amount of U.S. tax on foreign source taxable income as computed under U.S. tax principles.

Foreign-derived intangible income (FDII)

Foreign-derived intangible income is the portion of a domestic corporation’s intangible income derived from serving foreign markets. Under the broad definition of FDII, a corporation’s foreign-derived income may include sales of intangible or tangible products to a foreign person for use outside the U.S., as well as income derived from a broad range of services, with some exceptions.

The FDII deduction was introduced by the TCJA and applies to taxable years beginning after 2017. Both FDII and GILTI are an attempt by Congress to use tax reform to encourage U.S. multinational corporations to increase their domestic investments.

Base erosion and anti-abuse tax (BEAT)

Also enacted as part of the TCJA, the base erosion and anti-abuse tax is essentially a minimum tax that applies to certain multinational corporate taxpayers that make “base erosion payments” to foreign related parties. These payments can be deductible payments such as interest, royalties, or service payments.

The BEAT rate for 2018 was 5%. It rose to 10% in 2019 and is set to increase to 12.5% starting in 2026. BEAT is not an alternative to income tax; it’s an additional tax. It also seeks to discourage U.S. and foreign corporations from avoiding tax liability by shifting profits out of the U.S. A recent administrative proposal, issued in March 2023, would phase out the BEAT, but the prospects for this proposal are uncertain.