News & Insights

A trimmed down rendition of the original $1.75 trillion Build Back Better Act, this legislation introduces significant new tax provisions to help raise revenue and reduce the federal deficit.

President Joe Biden recently signed the Inflation Reduction Act (the act) — an ambitious new bill which will spend approximately $375 billion over the next decade to fight climate change as well as slash health care costs.

A trimmed down rendition of the original $1.75 trillion Build Back Better Act, this legislation introduces significant new tax provisions to help raise revenue and reduce the federal deficit.

Originally, the bill was not expected to pass, but in a surprise deal Senate Majority Leader Chuck Schumer and Senator Joe Manchin agreed on a revised package. Senator Kyrsten Sinema, the last Democratic holdout on the bill, later negotiated dropping the Carried Interest measure — which would have narrowed a loophole that minimizes taxes on profits paid to hedge fund managers and other investors — once positioned as a major revenue raiser. Although Democrats were forced to drop this tax measure to pass the act, the revised bill still contains a number of other important changes to the tax code, including new taxes on large corporations and increased IRS enforcement of wealthy individuals and companies.

According to the White House, the act will achieve hundreds of billions in deficit reductions — largely through tax reform. The law also has a number of tax breaks designed to help encourage the use of green energy sources. Highlights of the tax changes in the bill — which primarily impact large corporations — include: A corporate minimum tax rate: Corporations with at least $1 billion in income will have a new tax rate of 15%, a revision which is expected to generate $200 billion. Taxes on individuals and households won’t be increased. This tax only applies to the very largest corporations with net incomes of $1 billion or more. There are adjustments, so it’s not purely on book income or financial statement income. Companies can offset financial statement income with net operating losses. After Dec. 31, 2022, the act will introduce a 15% corporate minimum (AMT) on the “adjusted financial statement income” (sometimes referred to as “book” income) of certain large corporations. This AMT will apply to any corporation — other than an S corporation, regulated investment company, or real estate investment trust with average annual adjusted financial stated income that exceeds $1 billion dollars — for any three-year period ending with a year prior to the current taxable year and after Dec. 31, 2021.

The act will also have an effect on the current bonus depreciation under Code Section 179. While the act does not directly change Code Section 179, it does target accelerated depreciation deductions of large corporations and penalizes companies that have a large book-tax income disparity. These disparities often arise from stock-based compensation or from depreciation deductions. Now, large companies that otherwise would owe limited annual income due to bonus depreciation will be subject to a 15% minimum tax regardless of the amount of depreciation deduction available per year.

Increased funding for IRS tax enforcement: Due to underfunding, IRS audits have plunged in recent years. Nearly doubling the IRS’s budget, the bill invests $80 billion in the nation’s tax agency — funding new hires and upgraded systems — over the next 10 years, enabling the IRS to focus on enforcement and collections from corporate and high net worth tax evaders. These improvements are projected to bring in $203.7 billion in revenue from 2022 to 2031, according to the congressional budget office.

A stock buyback tax. Expected to bring in upwards of $78 billion, corporations will pay a 1% excise tax when they purchase their own stock from shareholders, reducing — but not eliminating — the tax advantages for stock buybacks. The act adds a new IRC Section 4501, which would impose a 1% excise tax on publicly traded U.S. corporations for the value of any of its stock that is repurchased by the corporation during the tax year. This applies to repurchases of stock after Dec. 31, 2022.

Climate related tax changes. Providing over $370 billion in new energy-related tax credits over the next 10 years, the act offers incentives and tax breaks for the following clean and renewable energy
initiatives:

The creation and expansion of tax credits for the sweeping adoption of electric vehicles, including a revamped $7,500 tax credit if buying a new electric vehicle, or $4,000 if purchasing a used one. But only single taxpayers with incomes up to $150,000 a year and couples who file taxes jointly who earn up to $300,000 will qualify. The act also includes a new requirement that qualifying electric vehicles are assembled in North America.

Expired in 2021, the production tax credit (PTC), an annual credit based on the amount of energy produced and sold by a project over a 10-year period, will be renewed for five years for facilities that begin construction before Jan. 1, 2025. To qualify for the full PTC, projects must comport with prevailing wage standards for workers in the area where the facility is located; if not, the PTC would drop to 20 percent of the full benefit.

The act extends for 10 years the investment tax credit (ITC) — a one-time credit based on a percentage of the qualifying costs of a project — for residential solar, including solar products such as rooftop panels. Until 2032, consumers can claim a tax credit of 30% of their solar costs, dropping to 26% in 2033 and 22% in 2034. Overall, the 30% tax credit could save homeowners, on average, $7,000 for a typical rooftop system. Home-use batteries connected to solar systems would see tax incentives effectively reducing their costs by 30% too. Beginning in 2023, the ITC also includes an enhanced incentive for “environment justice solar facilities” located in a low-income community, on Native American land or if the facility is installed on a residential building that participates in a covered Federal housing assistance program. Additionally, the act overturns the current phaseout for both the PTC and ITC, but the existing phaseout would continue to apply to renewable projects that entered service before 2022.

The act extends (and in certain cases expands) a number of existing tax incentives, including those relating to carbon capture facilities, energy-efficient commercial buildings, energy-efficiency improvements to residential property and credits for biodiesel and renewable and alternative fuels.

An extension of the excess loss limitation on non-C corporate businesses. Generally, Section 461(1) of the tax code is a mechanism that restricts the extent to which business deductions of a noncorporate
taxpayer may be used to offset non-business income of a taxpayer. This limitation is calculated by taking the total aggregate deductions of the business over the gross income attributable to the business, plus a threshold amount. Any excess business deduction will be moved to the taxpayer’s tax return as a net operating loss carryover.

This limitation was set to expire; however, the act has extended the limitation through Jan. 1, 2029.

Extension of limits on deductions for business losses. The act further extends the application of the excess business loss limitation rules to taxable years that begin before Jan. 1, 2029.

All of these provisions should take effect soon — some immediately and others by early 2023. In the meantime, stay tuned for further revisions and changes to this sweeping legislation.

Phil Jelsma is a partner and chair of the tax practice team at CGS3.

The article can also be read in the Daily Journal here and in the Daily Transcript here (subscription required).