On August 7, 2022, the U.S. Senate passed the Reducing Inflation Act (House resolution 5376), which contains tax, climate, and health care provisions. The legislation is widely expected to pass the House of Representatives unchanged and be signed into law by President Joseph R. Biden shortly thereafter. The Inflation Reduction Act contains a number of revisions to the Internal Revenue Code (the “Coded”), including a 15% alternative minimum corporate tax and a 1% excise duty on corporate share buybacks. Despite earlier proposals, the legislation does not contain any changes to the tax treatment of deferred interest or the cap on deductions for state and local taxes.
This alert highlights a few key provisions of the Cut Inflation Act that may apply to Cooley customers.
Corporate Alternative Minimum Tax
In tax years commencing after December 31, 2022, the Reducing Inflation Act imposes an alternative minimum tax of 15% (the “Corporate AMT”) on US companies whose book profits exceed a certain threshold. This provision is expected to impact large corporations that have previously reported high income in their financial statements but have significantly reduced or even eliminated their tax liability due to certain attributes or accounting differences, such as corporations with stock important. base pay. Very few corporations are expected to be subject to the corporate AMT as currently proposed. In an analysis of an earlier version of the proposal, the Joint Committee on Taxation estimated that approximately 150 taxpayers would be subject to tax each year.
The corporate AMT would generally apply to U.S. corporations – excluding S corporations, regulated investment companies and real estate investment trusts – with an average of more than $1 billion in annual adjusted state revenues (AFSI) over a three-year measurement period. The corporate AMT would also apply to a US corporation (including, for these purposes, a trade or business carried on by a foreign corporation in the United States) in a foreign-parent multinational group if, during the period three-year measurement, the United States company’s average annual AFSI is at least $100 million and the multinational group’s average annual AFSI exceeds $1 billion. A company’s AFSI is the net income or loss shown on the company’s applicable financial statements (usually a Securities and Exchange Commission Form 10-K or other audited financial statement) for the taxation year, subject to certain adjustments to reflect accelerated tax depreciation and certain other items. The provision has been amended with the intent that otherwise unrelated companies under common ownership of an investment fund will not have their AFSI aggregated for the purposes of the $1 billion threshold.
In some cases, corporate AMT may simply expedite taxes, as payments made under corporate AMT can be used as a credit in future years when a corporation’s regular tax liability exceeds its obligation under the corporate AMT. In other cases, the corporate AMT may permanently increase the overall tax liability. For example, taxpayers with large net operating losses in tax years prior to 2020 may realize a permanent increase in tax liability because the Inflation Reduction Act prevents carryovers. ahead of the financial statement net operating losses occurring in those years.
Excise tax on redemptions of corporate shares
For publicly traded U.S. corporations and certain U.S. subsidiaries of non-U.S. publicly traded corporations, the Reducing Inflation Act imposes a 1% excise tax on the fair market value of any stock redeemed by the corporation or its “specified affiliate” (generally, corporations or partnerships of which the corporation owns more than 50%) during the tax year. The taxable amount is reduced by the fair market value of any shares issued by the acquiring company during the tax year, including the fair market value of any shares issued or provided to employees of the company or a corporation specified affiliate. Excise tax is subject to several exceptions (the outlines of which are uncertain), including exclusions for redemptions that are part of a tax-free reorganization, contributions to pension or employee stock ownership plans , redemptions that are treated as dividends, and corporations that redeem shares with an aggregate value not exceeding $1 million in a tax year. Excise tax applies to share redemptions after December 31, 2022.
Although the excise tax only applies to share redemptions after December 31, 2022, corporations may already have outstanding shares that are subject to redemption rights, including redeemable preferred shares and shares issued in IPOs of Special Purpose Acquisition Companies (SPACs). Excise tax could also be triggered in transactions that are not traditionally considered share buybacks, including:
- Mergers or other reorganizations involving cash payments to target shareholders to the extent that such payments are funded by target’s cash or debt incurred or assumed by target in connection with the transaction.
- Cash payments instead of fractional shares.
- Payments to Dissenters.
- Separative reorganizations that use a “split” structure.
In addition, the Secretary of the Treasury is authorized to define “repurchase” to include “economically similar” transactions. Unless the fair market value of the shares treated as redeemed in a taxation year is less than the fair market value of the shares issued by the target company in that taxation year, or another exception applies, such transactions could expose a subject company to excise tax.
Other tax provisions
Other notable tax provisions of the Inflation Reduction Act include:
- A two-year extension (to tax years beginning before January 1, 2029) of the loss limitation rules applicable to unincorporated taxpayers under Section 461(l) of the Internal Revenue Code.
- An increase in the research tax credit available to offset payroll taxes for eligible small businesses under Section 41(h) of the tax code.
- An increase in IRS funding of approximately $80 billion over 10 years, with nearly $46 billion for enforcement efforts such as “digital asset monitoring and compliance activities.”
- A new excise tax on drug producers who do not comply with new drug pricing requirements.
- The reinstatement of a Superfund excise tax on imported crude oil and certain petroleum products at the rate of 16.4 cents per barrel (indexed to inflation) effective January 1, 2023.
- The permanent extension of an excise tax on coal from American mines.
- Climate and energy related taxes, tax credits and other incentives.