On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (“the 2022 Act”), which contains both tax increases and tax benefits, as well as an increased funding package for the Internal Revenue Service (IRS).
- Research and Development (R&D) Credit Applied Against Payroll Tax for Startups Doubled from $250,000 to $500,000
The 2022 Act will increase the amount of R&D credit that a qualified small business can use to offset payroll tax liability. For tax years beginning after December 31, 2022, the amount of credit that can be used against payroll tax liability will increase from a maximum of $250,000 to a maximum of $500,000 per year for up to five years. It is important to note that the first $250,000 will offset the employer portion of the Federal Insurance Contributions Act (FICA) tax liability and the next $250,000 will be applied against the employer portion of Medicare payroll tax liability. Any unused balance of credit will be carried forward quarter after quarter until fully utilized.
- Section 45X Advanced Manufacturing Production Credit
The 2022 Act added new Section 45X to the Internal Revenue Code that is intended to incentivize U.S. manufacturers to produce “eligible components” for clean energy equipment. The 2022 Act lists several specific types of eligible components for use in solar energy production, wind energy production, inverters and batteries, alongside varied amounts of credit for each category. The credits available under Section 45X would apply to qualifying components produced and sold after December 31, 2022, with phase-outs starting after December 31, 2029, and terminating after December 31, 2032. It is important to note that the Section 45X credit is limited to the production of eligible components in the United States.
- Corporate Alternative Minimum Tax (CAMT)
The 2022 Act has enacted a CAMT, which is a 15% minimum tax applied to adjusted financial statement income (AFSI) for corporations with an average annual AFSI over a three-tax year period in excess of $1 Billion. This provision is effective for years beginning after December 31, 2022. The provision would impose a tax equal to the excess of (1) 15% of an applicable corporation’s AFSI less the corporate alternative minimum tax foreign tax credit, over (2) the regular tax liability plus any Base Erosion and Anti-Abuse Tax (BEAT) tax for the year. The CAMT also applies to a corporation that is a foreign-owned U.S. entity, in which the group members meet the above test, and the U.S. business (including U.S. members, U.S. trades or business and foreign subsidiaries of U.S. members) have a three-year average AFSI that exceeds $100 Million. The computation of AFSI is rather complicated and will be the subject of IRS guidance, but has two notable adjustments to book income: (1) tax depreciation is substituted for book deprecation and (2) a decrease is provided for financial statement Net Operating Losses.
- Excise Tax on Public Company Buybacks
The 2022 Act has enacted a 1% excise tax on the value of corporate stock repurchases during the year. The tax is nondeductible and applies to publicly traded U.S. corporations. A “repurchase” is generally defined as a redemption of the stock of the corporation, but includes certain other similar transactions. There are allowable reductions to the gross repurchased value under the new law. The provision would apply to repurchases of stock after December 31, 2022.
There are ample exceptions to the provision, which include certain tax-free reorganizations under Section 368(a); specific employer-sponsored retirement plan contributions; repurchases of stock, if during the tax year, the total repurchased value does not exceed $1 million; dealers in securities in the ordinary course of business; dividend repurchases; and others.
- Net Operating Losses
The Tax Reform Act of 2017 instituted certain limitations on non-corporate taxpayers with respect to the use of excess business losses. This provision was set to expire on December 31, 2026. The 2022 Act extends this provision for two additional tax years.
Not Included in the 2022 Act
The 2022 Act does not include any direct changes to the corporate or individual income tax rates, or the current Global Intangible Low-Taxed Income (GILTI) or BEAT tax provisions.
Additionally, the 2022 Act does not include the legislative fix to amend the 2017 Tax Cuts and Jobs Act (TCJA). Starting for taxable years beginning on or after January 1, 2022, the TCJA requires taxpayers to capitalize and amortize their Section 174 Research & Experimental (“R&E”) costs over a 5- or 15-year period, depending on U.S. or foreign spend, respectively. Since Section 174 was enacted in 1954, taxpayers had the option to immediately deduct or amortize such costs over a 60-month period. The failed Build Back Better Act included a provision to postpone the capitalization requirement and the newly passed CHIPS Act was also thought to be a possible vehicle for allowing taxpayers the ability to immediately expense R&E costs. Taxpayers are now forced to wait and see if the Section 174 fix will be addressed in the year-end extenders bill, following the November elections.
The 2022 Act provides funding to the Internal Revenue Service of roughly $80 billion over the next ten years. Uses of the funding could include updating computer systems, improving taxpayer services, and clearing out the lengthy backlog of unprocessed requests and paper filings. It is likely, however, that most of the funds will be spent on enforcement efforts and audit activities. The Agency has six months to devise a detailed plan.
For questions about how these changes may impact you, do not hesitate to contact us or speak with your BPM tax professional.