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

As we move into 2022, manufacturers continue to report strong demand and increased production. However, the labor market remains tight and the global supply chain disruptions, inflation, and the omicron variant continue to present obstacles for companies. These are the highlights of the National Association of Manufacturers (NAM) Fourth Quarter 2021 Outlook Survey.