The most important thing to know about the Inflation Reduction Act of 2022 (the “Act”)^[1] is that your company will likely not be subject to the most publicized aspects of the Act. The 15% corporate alternative minimum tax on your financial statement income is only applicable if your corporation has annual average financial statement income in excess of $1 billion and the 1% stock buyback tax is only imposed if your stock is publicly traded.

The Act does include many tax credits that may benefit your company. The tax provisions of the Act, including the publicized aspects discussed above, are generally summarized below:

• The Act requires an “applicable corporation” to pay an annual income tax of at least 15% of its “adjusted financial statement income.” The “adjusted financial statement income” is the corporation’s net income reported on its financial statements filed with the Securities and Exchange Commission or its equivalent in another country, subject to numerous adjustments. An “applicable corporation” is a corporation (i.e., not an S corporation, mutual fund, or REIT) whose adjusted financial statement income, not including carryovers of net operating losses and subtracting certain foreign income tax credits, has averaged $1 billion over the prior 3 tax years. Corporations with $100 million of net income that are part of a multinational group with $1 billion of net income may also be subject to this corporate alternative minimum tax. The Joint Committee on Taxation projects that “only approximately 150 taxpayers” will be subject to this corporate alternative minimum tax, which is estimated to be about 30% of existing Fortune 500 companies.^[2] This corporate alternative minimum tax will take effect for tax years beginning after December 31, 2022.
• The Act generally imposes a 1% excise tax on the repurchase of a publicly traded U.S. corporation’s stock (or equivalent transaction) by either the publicly traded U.S. corporation or its affiliates in which the corporation holds a majority interest. The tax is applied to the excess of the fair market value of any purchased stock during the taxable year over the fair market value of any stock issued by the corporation during that year. Importantly, this excise tax only applies to corporate stock which is traded on an established securities market. This 1% excise tax applies to repurchases of stock after December 31, 2022.
• The IRS is granted additional funding of over $8.8 billion over the next ten years, including $45.6 billion for additional enforcement (e.g., hiring additional IRS agents), $4.8 billion to update its technology, and $3.2 billion to improve taxpayer services such as filing assistance and education.
• The Act generally extends some temporary energy tax credits and increases clean energy tax credits for qualified energy facilities, clean fuel, clean vehicles, energy-efficient buildings and homes, and alternative refueling/recharging facilities. In addition to technical requirements, the credits take into account factors such as the level of wages paid to employees and whether components were produced in the United States.
• Qualified small businesses (i.e., those that have gross receipts of less than $5 million and had no gross receipts for any tax year before the 5 prior years) have an option to credit research expenses against payroll taxes, and the Act potentially doubles the amount of this credit. Previously, a business could claim a credit against its Social Security employer payroll tax liability for its research expenses up to $250,000. Now, it can claim an additional $250,000 research credit against its Medicare employer payroll tax liability. As the Medicare tax is smaller than the Social Security tax (1.45% vs. 6.20% tax rate), it may be more difficult to take full advantage of this new research credit, although unused amounts can be carried forward. The research credit increase takes effect for tax years beginning after December 31, 2022.
• Prior to the Act, non-corporation taxpayers could only, for tax years beginning before January 1, 2027, deduct excess business losses up to $250,000 ($500,000 for a joint return) indexed by inflation. The Act extends this limitation to tax years beginning before January 1, 2029.
• The Act imposes a new excise tax of 186% to 1900% on sales by drug manufacturers, producers, and importers of “designated drugs” during the time that the manufacturer, etc., fails to enter into drug pricing agreements under the Social Security Act. The excise tax will take effect for sales on or after October 2, 2026.

If you would like to further discuss the ramifications of the Act on your company, please contact Jeff Groshek or Charles McGonigal.

This summary does not include or address every provision of the applicable tax laws discussed above. Any information contained in this communication is not intended as a thorough, in-depth analysis of specific issues. It is also not sufficient to avoid tax-related penalties. This has been prepared for informational purposes and general guidance only, and does not constitute legal advice. You should not act upon the information contained in this publication without obtaining specific legal advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and Hinckley Allen, its members, employees, and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

[1] Inflation Reduction Act of 2022, H.R. 5376, 117th Cong. (2022).

[2] Memorandum from the Joint Committee on Taxation, “Proposed Book Minimum Tax Analysis by Industry” (July 28, 2022).