On August 16th, 2022, United States President Joe Biden signed into law the Inflation Reduction Act.
The bill principally aims to raise tax revenue by capturing some of the traditionally tax-free benefits for high-level executives and shareholders and requiring large corporations to pay a minimum tax. With that in mind, the changes should be analyzed to anticipate any unexpected consequences to smaller businesses.
The bill contains three basic tax law provisions applicable to companies:
- Reinstitutes an “alternative minimum tax”, or “AMT”;
- Imposes a 1% excise tax on the repurchase of corporate stock; and
- Commits $80 billion of additional funding for the IRS primarily for enforcement.
Note that the bill contains multiple other tax changes aimed at individuals, such as electric vehicle credits, clean energy credits, and health care credits, that are outside the scope of this article.
Corporate AMT
AMTs exist to reduce an individual taxpayer’s ability to leverage multiple deductions, credits, and other tax benefits to minimize or totally eliminate their tax liability. Historically, the United States has recognized that only large corporations or wealthy individuals have the means to pull those levers. As a consequence, the American AMT has traditionally been applied only to taxpayers above a specific income threshold and then required a computation where commonly inflated deductions and credits are “added back” to arrive at a minimum amount of tax owed. The AMT was mostly eliminated by the Tax Cuts and Jobs Act in 2017 (0.1% of individuals paid it, and it was wholly repealed for corporations).
The Inflation Reduction Act reinstitutes the AMT with the same basic theory. First, it only applies to C Corporations and LLCs that elect to be taxed as corporations; pass-throughs like partnerships, standard LLCs and S Corporations are excluded. Corporations that recently experienced a change of control are also excluded. Next, the threshold for when the AMT applies is high: $1 billion average “adjusted financial statement income” or “AFSI” (roughly pre-tax net income with some adjustments) over three years. This test is a little different for US corporations owned by foreign parents; in that situation, the international reporting group is aggregated, and if the total exceeds $1 billion and the US corporation has $100 million in AFSI of its own, the AMT applies to the international reporting group. Even where it might apply, foreign tax credit and loss carryforward provisions may serve to mitigate or eliminate this impact.
At the end of the day, the Joint Committee of Taxation concluded that AMT would only apply to about 150 taxpayers per year.
Stock Buyback Excise Tax
In contrast to the old-school AMT, the Inflation Reduction Act taxes something never before touched by the IRS: Stock buybacks. Traditionally, stock buybacks presented a tax-free way for companies to increase their stock price and earnings per share and rewarded existing shareholders through either that valuation increase or through buying the stock from them at a premium. The Inflation Reduction Act applies a new tax to those transactions, equal to 1% of the company’s “net buybacks” (total repurchases minus shares issued during the year).
Overall, this new tax goes slightly toward encouraging companies to reinvest in their operations or reward shareholders with dividends.
Additional IRS Funding
The last tax provision of the Inflation Reduction Act is the most unclear in its application, allocating $80 billion toward IRS enforcement of existing tax laws. The IRS Commissioner and Treasury Secretary have indicated that this enforcement is intended to target high net worth individuals and large corporations, but conclusions can’t yet be drawn on whether only those groups will be affected.
