ARTICLE
Corporate Considerations and Planning Opportunities
September 22, 2022
As we get closer to the new tax year, it is important to make note of new and expired tax provisions that may affect your business or your client’s business. Within the last few months, Congress passed several bills that include tax provisions. Some of these provisions are extensions of existing tax credits, while other provisions create brand new tax regimes to incentivize certain initiatives.
As corporate taxpayers prepare for filing season, some of the big-ticket items to watch for are outlined below. Corporate taxpayers and tax preparers should be aware of new changes in order to use all credits and deductions available to them, ensure a smooth filing process, and avoid errors (and essentially, audit).
NEW ITEMS
Alternative Minimum Tax on Adjusted Financial Statement Income
The Inflation Reduction Act, Pub. L. No. 117-169, added a new alternative minimum tax (AMT) on an applicable corporation’s adjusted financial statement income; which is essentially the corporation’s book income. This tax is effective for taxable years beginning after December 31, 2022, leaving ambiguity on its nuances until regulations and guidance are issued.
The tax applies to C corporations that have average annual financial statement income greater than $1 billion (and at least $100 million for members of foreign-parented multinational financial reporting groups that also have an average annual book income greater than $1 billion). The two-part test for multinational groups is intended to ensure that the financial reporting group as a whole meets the size test, and that the member corporation has a significant enough U.S. presence to be subject to the tax.
The AMT is equal to the excess of 15% of the corporation’s average book income (with adjustments) over its corporate AMT foreign tax credit, and only applies to the extent that 15% of book income exceeds the corporation’s regular tax liability plus BEAT. The average book income is taken from three previous and consecutive years, so for tax year 2023, the relevant book income will be the average of tax years 2020, 2021, and 2022. Only net operating losses arising in tax years 2020 and later can be carried forward to calculate book income.
This AMT is similar to the former AMT, which was repealed by the Tax Cuts and Jobs Act of 2017, but the major differences are (1) the tax is based on book income, and (2) the general business credit is not limited by tentative minimum tax.
Corporations should start modeling different scenarios with the AMT in preparation for Q1 financial reporting and estimated tax payments, keeping in mind that valuation allowances and uncertain tax positions will likely not be settled, and that Q1 reporting could create a minimum tax credit which can be used to offset future tax liability.
[Inflation Reduction Act of 2022 Roadmap]
[Corporate Alternative Minimum Tax Decision Tree; Adjusted Financial Statement Income Checklist]
Excise Tax on Stock Repurchases
The Inflation Reduction Act also added a new 1% excise tax on the fair market value of stock repurchased by a publicly traded U.S. corporation (or foreign publicly traded corporation with domestic affiliates making the repurchase) during the taxable year. The fair market value of stock repurchases is reduced by the value of shares issued by the corporation during the same taxable year.
This new excise tax is effective for stock repurchases beginning after December 31, 2022, which is likely to be before Treasury Regulations and guidance are issued.
A repurchase is defined as a §317(b) redemption or an “economically similar transaction;” this term will need to be defined and clarified in forthcoming regulations. Regulations will also need to clarify timing issues surrounding when a repurchase occurs and what constitutes a stock issuance.
Companies with stock repurchase programs should pay close attention to updates regarding the new excise tax.
[T.M. 767.XI.G; Excise Tax Navigator] (subscriber only resources)
Creating Helpful Incentives to Produce Semiconductors
The CHIPS Act of 2022 introduced a new credit for investments in semiconductor manufacturing. This credit was originally part of President Biden’s Build Back Better Act, but the provision was pulled out of that bill and passed on its own.
Eligible taxpayers may claim the advanced manufacturing investment credit for 25% of their qualified investment, for property placed in service after December 31, 2022. Unlike other similar credits, which only include §1245 property, this credit includes §1250 property.
This credit is set to expire in 2032, meaning the potential benefit for companies investing in semiconductor manufacturing is high. Further, companies may elect to treat the credit as a direct payment against tax liability for the year.
There are certain nuances that companies intending to claim this credit will need to pay attention to, such as the transition rule and various effective dates with respect to when the property was placed in service – when construction began, which costs were incurred prior to the enactment date, etc.
[T.M. 512.III.A.6] (subscriber only resource)
New and Extended Tax Credits
The Inflation Reduction Act created several new tax credits and extended several existing 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 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. [§6418]
- Extension and modification of the Renewable Electricity Production Tax Credit (PTC) and Energy Investment Tax Credit (ITC) to allow for certain construction start dates through the end of 2024, reduce certain base credit rates, and allow up to five times the base credit amount for certain taxpayers that meet certain wage, apprenticeship, and production requirements.
- Extension and modification of the Carbon Oxide Sequestration Credit to allow for construction start dates before 2033, reduce the minimum capture requirement, and increase the credit amount for taxpayers that meet certain wage and apprenticeship requirements.
- Extension and modification of the Clean Vehicle Credit to allow for an increased dollar limit for eligible vehicles and eliminate the limit on the number of vehicles.
- New Advanced Manufacturing Production Credit for eligible renewable energy components and applicable minerals produced in the United States 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.
Many of these credits are set to continue until 2032, so companies can plan for a 10-year investment.
[For a full list of credits added by the Inflation Reduction Act and information on eligibility and effective dates, see the Inflation Reduction Act of 2022 Roadmap.] (subscriber only resource)
Direct Pay
Tax-exempt entities, state and local governments and their political subdivisions, and certain other entities are eligible to receive a direct payment in lieu of certain applicable credits.
This new provision applies to taxable years beginning after 2022, and certain credits are refundable if they exceed tax liability.
Penalty Relief
The IRS issued Notice 2022-36, providing penalty relief for certain taxpayers. For taxpayers filing Form 1120 for taxable years 2019 and 2020, that are filed on or before September 30, 2022, the 5% to 25% penalty under §6651(a)(1) will be automatically abated, refunded, or credited without any request by the taxpayer. This relief is also available to filers of Form 1120-F, Form 1120-FSC, Form 1120-POL, among others.
[Notice 2022-36; Corporate Tax Season Watch: Special Filing Season Alerts.]
Form 1120 Checklist available on the Corporate Tax Season Watch page.
EXPIRED & EXPIRING TAX PROVISIONS
As discussed above, many credits that expired or were expiring were extended until 2024 or later under the Inflation Reduction Act of 2022.
[Corporate Tax Season Watch: Expiring Federal Tax Provisions 2021-2031.]
Business Meals
Taxpayers may deduct the full cost of qualifying business meals provided by a restaurant and paid or incurred in 2021 or 2022. For meal expenses paid or incurred after December 31, 2022, taxpayers are limited to a 50% deduction.
[TM 520; Practice Guides & Checklists: Deducting Meals & Entertainment for expert insights, key considerations, and additional resources.]
Net Operating Loss (NOL) Carryback and Carryforward Limitation
Taxpayers may not carry back any NOLs arising in tax years after 2020. The CARES Act NOL carryback provision allows taxpayers to carry back NOLs arising in tax years 2018 through 2020, for up to 5 years.
For losses arising in tax years after 2020, taxpayers may only carry forward NOLs to offset up to 80% of taxable income. The CARES Act NOL carryforward provision temporarily suspended this limitation and allowed taxpayers to carry forward NOLs arising in tax years 2018 through 2020 to offset up to 100% of taxable income. [TM 539]
Taxpayers should be aware that NOLs carried back to pre-2018 tax years may implicate the former corporate alternative minimum tax (AMT) (repealed for tax years after December 31, 2017), allocations of consolidated group members, and other tax provisions.
[TM ; OnPoint: NOL Carrybacks] (subscriber only resource)
For a full list of expired and expiring tax provisions, see Corporate Tax Season Watch: Expiring Federal Tax Provisions 2021-2031.
Additional IRS Resources
- Corporate Tax Season Watch: Form 1120 Tax Prep Guide
- Corporate Tax Season Watch: Year End Tax Planning Practice Guides and Checklists