The Inflation Reduction Act (the “Act”) includes a number of important tax, climate, and health care provisions. The major tax provisions of the Act include an extension of the expanded Affordable Care Act premium assistance program through 2025, the imposition of an excise tax on stock buybacks, an increase in funding for IRS tax enforcement, expanded energy incentives, and the imposition of a corporate minimum tax.

Affordable Care Act Premium Assistance ¹

The Act extends the reduced percentage of household income that is used to calculate the premium contribution for an individual claiming the premium tax credit through 2025. Also, for taxable years 2022 through 2025, taxpayers with household income exceeding 400% of the federal poverty line are allowed to qualify for the credit.

Excise Tax on Stock Buybacks ²

The Act imposes a 1% excise tax on the fair value of stock repurchased by a publicly traded corporation during taxable years after 2022. Taxable stock repurchases for each year are reduced for stock issuances during each such year. This tax applies to redemptions and similar transactions, including stock acquired by a corporate affiliate. The tax includes several exceptions, including tax-free reorganizations, repurchases of $1 million or less for the year, repurchases treated as dividends, and certain other transactions.

This excise tax is expected to raise $74 billion and prevent the favoring of buybacks for shareholders and executives over investments in workers and innovation.

IRS Funding for Enforcement ³

The Act appropriates about $80 billion to the IRS to add auditors, improve customer service, and modernize technology. The Congressional Budget Office estimates that this appropriation will allow the IRS to collect an additional $203 billion from tax enforcement efforts. A letter from IRS Commissioner Rettig recently reinforced that no family making under $400,000 per year will see increased audits.

An additional $15 million is appropriated to fund a report to Congress on the potential creation and maintenance of an IRS-run e-file system.

Expanded Energy Incentives

The Act’s expansion of energy incentives is its most extensive investment – introducing, expanding, and extending over 20 different deductions and credits. The Act also permits a taxpayer to elect to transfer all or a portion of certain eligible energy-related credits to unrelated eligible taxpayers (but the recipient taxpayer may not thereafter re-transfer any portion of the credit). The Congressional Budget Office estimates the cost of these incentives to be $369 Billion.

Corporate Minimum Tax ⁴

The Act imposes a corporate alternative minimum tax (AMT) equal to the excess of 15% of a corporation’s adjusted financial statement income (AFSI) over its AMT foreign tax credit. The AMT applies to C corporations with average annual AFSI greater than $1 billion during a three taxable year period (a reduced threshold applies to members of foreign-parented international financial reporting groups). AFSI is the corporation’s net income (loss) reported on an applicable financial statement, with certain adjustments described further in the Act.

The AMT applies to taxable years beginning after 2022 and is expected to raise $222 billion.

Excess Business Losses⁵

The Act also extends limitation on excess business losses by two more years (through 2028). This limitation applies to noncorporate taxpayers. This extension is expected to raise an additional $52 billion.

This Act has far-reaching tax effects that will impact a wide variety of taxpayers and has the potential to impose significant burdens on many taxpayers. If you believe that you may be impacted by any of this Act’s provisions, please contact an HBK tax advisor.

¹ IRC §36B; Act §12001

² New IRC §4501; Act §10201

³ Act §10301

⁴ IRC §55, §59, New IRC §56A; Act §10101

⁵ IRC §461(l); Act §13903

With Covid-19 relief measures expiring across the board, taxpayers should be aware that the limitation on “excess business losses” (EBLs) is now in effect. This limitation is expected to impact many taxpayers and hinder their ability to offset taxable income with business losses. The EBL limitation was originally enacted by the TCJA and scheduled to apply to tax years 2018 through 2025. However, the CARES Act retroactively postponed the limitation until 2021, and the ARPA extended the limitation through 2026.

The limitation disallows any EBL of a non-corporate taxpayer. For 2021, EBLs are trade or business losses that exceed trade or business income (without regard to any deduction for Qualified Business Income or Net Operating Losses) by more than $524,000 for married individuals filing jointly or $262,000 for other taxpayers. In the case of a partnership or S corporation, the EBL limitation applies at the partner or shareholder level. Each partner’s or shareholder’s allocable share of trade or business income or loss is taken into account in applying the EBL limitation to such partner or shareholder.

Disallowed EBLs are treated as Net Operating Loss carryovers to the following tax year. Accordingly, the carryforward amount will not factor into the following year’s EBL limitation and the disallowance generally operates as a one-year deferral. (Note, however, that various versions of the Build Back Better Act have contained provisions under which the EBL would retain its character as a trade or business loss and be subject to annual testing under the limitation – potentially postponing deduction of the EBL over multiple years).

Some things to note:

• The EBL limitation applies after the application of (1) the passive activity loss limitation and (2) the at-risk loss limitation. Thus, if a loss is disallowed under either limitation, the loss will not be taken into account in applying the EBL limitation.
• Employee wages aren’t taken into account in computing the EBL, so EBLs cannot shelter employment income. It is unclear whether guaranteed payments from a partnership are taken into account in computing the EBL.
• When calculating the EBL limitation, taxpayers take into account the lesser of: (1) capital gain net income attributable to a trade or business, or (2) capital gain net income. Capital losses are not taken into account.
• It is unclear whether gain or loss from the disposition of an interest in a partnership or S corporation conducting an active trade or business would be taken into account in computing the EBL. We will advise as future guidance becomes available.

If you have any questions or believe that this limitation may impact you, please reach out to an HBK Tax Adviser.