After months of negotiations and countless amendments, the Inflation Reduction Act (the “Act”) was passed by the Senate on August 7. The Act, a downsized version of the House’s earlier Build Back Better Act (“BBBA”), is intended to target climate change, healthcare, taxes, and inflation. It is expected that the Act will be signed into law by the end of August.
For our clients, it’s important to know that unlike the proposed legislation of the BBBA, the Act does not include legislation directly impacting executive compensation (although like all legislation, it may have some derivative impact). Provisions in the BBBA that might have increased taxes on wealthy individuals were cut in the Senate negotiation process. However, the final provisions do include major corporate tax and healthcare-related provisions that boards will want to be aware of, some of which are outlined below. We also include some “behind the curtain” tidbits to help clarify how a few of the unexpected provisions were included in the final legislation.
Noteworthy Tax Provisions
The Act’s tax provisions primarily impact large profitable companies and adhere to President Biden’s campaign vow not to raise taxes on households earning less than $400,000 per year or on small businesses. Significantly, the provisions in BBBA that would have increased taxes on wealthy individuals, such as the surcharge on high income taxpayers, expansion of the net Investment Income tax, and restrictions on retirement plans of the wealthy, were stripped out of the final draft.
- Corporate Profits Minimum Tax
- The Act imposes a 15 percent minimum tax on corporate book income for corporations (other than S Corporations, regulated investment companies, and real estate investment trusts) that report an average of more than $1 billion of adjusted financial statement income over a three-year period.
- Last-minute negotiations resulted in the passage of an amendment so that the minimum tax will not apply to unrelated companies that are otherwise below the threshold but are under common ownership of an investment fund, where the aggregation of their earnings might put them over the $1 billion threshold. This exclusion was funded by extending the excess business loss limitations out two years (discussed in more detail below).
- The new tax would be effective for tax years beginning after December 31, 2022.
- One Percent Excise Tax on Stock Buybacks
- The Act generally imposes a one percent excise tax on publicly traded US corporations (and certain US subsidiaries of publicly traded non-U.S. corporations) on the value of any stock that is repurchased by the corporation. The Act contains technical exceptions to the excise tax, including for when the repurchase is part of a reorganization for tax purposes.
- This new tax was incorporated into the Act as a result of Democratic negotiations with Senator Kyrsten Sinema. Earlier versions of the Act proposed modifying the rules for carried interests (i.e., the special tax treatment that hedge fund managers and private equity executives get on the investment gains they take as compensation). After Ms. Sinema objected, the carried interest modifications were replaced with the stock buyback tax.
- The new tax would be effective for tax years beginning after December 31, 2022.
- Extension of Excess Business Loss Rules
- The Act extends the current cap on deductions for excess business losses applicable to non-corporate taxpayers by two years, extending the cap on deductions through 2028. Currently, deductions for excess business losses cannot exceed $270,000 (for single filers) or $540,000 (for married spouses filing jointly). The extension impacts owners of closely-held businesses who integrate business decisions with their own tax circumstances.
- The current limitation will be extended through tax years beginning before January 1, 2029.
- Energy and Climate Change Investments and Tax Credits
- The Act includes numerous investments in climate protection, including tax credits for households to offset energy costs, investments in clean energy production, and tax credits aimed at reducing carbon emissions.
- IRS Funding
- The Act includes an $80 billion increase in IRS funding over 10 years. Over half of the amount ($45.6 billion) is targeted for enforcement matters. Other key areas of funding include operations support, business systems modernization, and taxpayer services.
Noteworthy Health Care Provisions
The Act includes provisions designed to reduce governmental and individual health care costs such as:
