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Inflation Reduction Act: New Corporate Alternative Minimum Tax and Tax Credits
What is the Inflation Reduction Act?
The Inflation Reduction Act (H.R.5376) is a climate and tax bill that advances elements of the administration’s economic agenda. President Biden signed the Inflation Reduction Act (IRA) into law in August 2022.
The legislation includes provisions designed to prevent the largest corporations from exploiting tax loopholes that allow them to pay little or no federal income tax. It also includes new and extended tax credits designed to incentivize businesses to boost renewable energy usage as part of their federal tax planning strategies.
While additional guidance and regulations are expected in the coming months and years, tax practitioners can get a jump on incorporating the Inflation Reduction Act’s new corporate tax rate and credits into their corporate tax planning strategies for 2023 and beyond. Unless otherwise noted, all changes became effective Dec. 31, 2022.
New corporate alternative minimum tax
The Inflation Reduction Act imposes a corporate alternative minimum tax (AMT) equal to the excess of 15% of a corporation’s adjusted financial statement income (AFSI) over its corporate alternative minimum tax foreign tax credit.
AFSI is the net income or loss set forth on an applicable financial statement, with certain adjustments.
What triggers the alternative minimum tax?
The AMT applies to C corporations that, for three taxable years, have an average annual AFSI greater than $1 billion (and at least $100 million for members of foreign-parented international financial reporting groups where the group has average annual AFSI greater than $1 billion).
The act provides rules for calculating AFSI for certain entities and types of income (e.g., consolidated groups, foreign-parented groups, and effectively connected income). AFSI is reduced by accelerated depreciation deductions.
The Joint Committee on Taxation estimates that only 150 companies will be subject to the minimum tax.
Corporate excise tax changes
Excise tax on corporate stock buybacks
The IRA imposes a 1% tax on the fair market value of stock repurchased by a publicly traded U.S. corporation during the taxable year.
The amount subject to this 1% tax is generally the amount paid by the issuing corporation during the year to shareholders in exchange for their issuing corporation stock, reduced by the value of any stock issuances during the taxable year.
The excise tax applies to IRC §317(b) redemptions, economically similar transactions, and stock acquired by a corporation’s specified affiliate from another person. It also applies to certain acquisitions and repurchases of publicly traded foreign corporation stock.
The 1% excise tax generally does not apply to:
- IRC §368 tax-free reorganizations
- Total repurchased stock of $1 million or less for the taxable year
- Repurchases treated as dividends
- Repurchases of stock that are contributed to employer-sponsored retirement plans, employee stock ownership plans, or similar plans
- Repurchases by regulated investment companies (RICs) or real estate investment trusts (REITs)
- Certain repurchases by a securities dealer in the ordinary course of business
Superfund excise tax on hazardous substances
Beginning in 2023, the Inflation Reduction Act permanently reinstated the hazardous substance Superfund excise taxes on domestic crude oil and imported petroleum products at a rate of 16.4 cents per gallon, adjusted for inflation annually thereafter.
When the Superfund excise taxes previously expired in December 1995, the rate was 9.7 cents per barrel. The 2021 Infrastructure Investment and Jobs Act separately renewed certain excise taxes that became effective on July 1, 2022.
Revenues from this excise tax finance the Hazardous Substance Superfund Trust Fund through 2032.
Inflation Reduction Act tax credits
A significant portion of the Inflation Reduction Act is devoted to incentives for green energy, including tax credits.
In some cases, the tax credits are extensions or expansions of existing credits. However, the IRA also creates new tax credits for businesses and individuals.
Research credit against payroll for small businesses
The IRA increases the research credit limit that qualified small businesses may use against their payroll tax liability from $250,000 to $500,000.
Restoration and extension of the renewable electricity production tax credit and the investment tax credit
The act extends the production tax credit (PTC) for renewable energy projects that begin construction through the end of 2024.
Facilities that pay prevailing wages during construction and for the first decade of operation and that fulfill apprenticeship requirements can qualify for up to five times the base amount of the credit. Increased credit amounts apply to domestic content, energy communities, and hydropower facilities placed in service after 2022.
The act also extends to the end of 2024 the election to treat certain facilities that otherwise qualify for the IRC §45 PTC (“qualified investment credit facilities”) as energy property qualified for the IRC §48 ITC instead.
The IRA extends through the end of 2024 the beginning-of-construction deadline for some types of energy property – like qualified fuel cell property – to qualify for the investment tax credit (ITC). It also extends the beginning-of-construction deadline for geothermal equipment through the end of 2034.
The base energy credit rate is reduced unless wage and apprenticeship requirements are met. The act also allows the credit for new types of energy property, including energy storage technology, qualified biogas, and microgrid controller property.
Beginning in 2023, the IRA expands the ITC to include certain qualified solar and wind facilities. To qualify, a facility must have a maximum net output of less than 5 megawatts and must be: in low-income communities, on American Indian land, part of a low-income residential building project, or part of a low-income economic benefit project.
Business credit for commercial clean vehicles
The Inflation Reduction Act provides a new business credit for qualified commercial clean vehicles in an amount equal to the lesser of:
- 15% of basis, or 30% for a vehicle not powered by a gas or diesel internal combustion engine
- The incremental cost of the vehicle (excess of the purchase price of such vehicle over the purchase price of a comparable vehicle)
The credit is worth a maximum of $7,500, or $40,000 for a vehicle with a gross vehicle weight rating of at least 14,000 pounds.
The credit is set to expire after 2032.
Clean electricity production credit
The IRA creates a new business credit for producing clean electricity for facilities placed in service after 2024, where the greenhouse gas emissions rate is not greater than zero.
The credit equals the kilowatt hours of electricity produced and sold, multiplied by a base amount of 0.3 cents or 1.5 cents (adjusted for inflation).
Increased credit amounts are available if certain wage and apprenticeship requirements are met. The credit begins to phase out one year after the latter of 2032, or the year when annual greenhouse gas emissions from U.S. electricity production are equal to or less than 25% of the emission rate for 2022.
Clean fuel production credit
The IRA creates a new business credit for clean fuel that a business produces at a qualifying facility and sells for qualifying purposes.
The fuel must meet certain emissions standards. The credit-per-gallon base amounts are:
- $0.20 for nonaviation fuel
- $0.35 for aviation fuel
Increases are available if the business meets prevailing wage and apprenticeship requirements. All amounts are adjusted for inflation.
The credit applies to clean fuel produced after 2024 and sold before 2028.
Clean electricity investment credit
The IRA creates a new investment credit for clean electricity property investments in energy storage technology and qualified facilities placed in service after 2024, where the greenhouse gas emissions rate is not greater than zero.
The base credit rate is 6% of the qualified investment, with increases available if specific requirements related to construction date, output, and wages, among other factors, are met.
The credit begins to phase out one year after 2032, or the year when annual greenhouse gas emissions from U.S. electricity production are equal to or less than 25% of the emission rate for 2022.
Extension and modification of alternative fuel vehicle refueling property credit
The IRA extends the alternative fuel vehicle refueling property credit through 2032 and lowers the credit rate from 30% to 6% if the refueling property is depreciable.
It also increases the credit limit to $100,000 per item of depreciable refueling property and $1,000 per item of nondepreciable refueling property. Bidirectional charging equipment and electric charging stations are now included as credit-eligible property if requirements are met.
It also quintuples the credit amount for any depreciable qualified alternative fuel vehicle refueling property that is part of a refueling project that begins within a specified period of time and meets wage and apprenticeship requirements. To qualify, alternative fuel refueling property must be placed in service in a low-income community or in a nonurban area.
Authoritative analysis of the latest federal corporate tax changes
The Inflation Reduction Act made significant changes to federal corporate tax law by closing tax loopholes used by the largest corporations and incentivizing businesses and individuals to boost their use of renewable energy. Tax professionals need to be aware of these changes as they advise clients and stakeholders on federal tax planning strategies that optimize their tax position while remaining compliant.
Stay up to date with the Inflation Reduction Act changes for corporate tax planning, specifically the potential effects of the corporate tax increases on job creation and investment. Download the Inflation Reduction Act Roadmap to learn more about the law’s tax provisions and corporate tax credits. Review key rules, definitions, and examples of the new corporate alternative minimum tax in this OnPoint presentation of Initial Guidance on the Corporate AMT.
From in-depth research and analysis to timesaving practice tools, Bloomberg Tax has the resources you need to provide informed advice to your clients and stakeholders. Request a demo to see how you can adapt your tax planning strategies quickly with Bloomberg Tax Research.