8 minute read
Congress enacts tax and energy bill
The Inflation Reduction Act of 2022 (which is now Public Law No. 117–169 and was previously titled the Build Back Better [BBB] Act), obtained final congressional approval when it passed the House in a party-line vote on Aug. 12. This followed a similar partisan vote of 51-50 in the Senate on Aug. 7, with Vice President Kamala Harris casting the tie-breaking vote. There was a flurry of debate on the Senate floor before final passage and a “Vote-a-Rama,” with various amendments submitted to modify the bill. Several amendments were adopted, but nothing significant enough to block the bill from final passage. The final bill was vastly different from the BBB that was introduced in September 2021. Here are some of the late changes made in the bill:
Excise tax
After the stunning agreement between Senators Joe Manchin and Chuck Schumer was unveiled on July 27, Sen. Krysten Sinema had not yet announced her position on the bill. Sinema indicated support for the bill in early August but said she would not allow it to move forward with a “carried interest provision.” As a result, this item was removed and replaced with a “1% excise tax on stock buybacks.” This particular provision was part of the BBB last fall.
SALT and large loss deduction limit
Sen. Sinema was also in favor of an amendment to reduce the new corporate book minimum tax (BMT), as it might impact private equity ventures (due to the aggregation rules that are part of the new tax). While a proposal to extend the $10,000 state and local tax (SALT) cap did not make it into the final bill, an extension of the large loss limit (under
By James D. Brandenburg, CPA, MST
Section 461(l)) of $250,000 ($500,000 for married filing jointly; both amounts indexed for inflation) was included for two years through 2028. Therefore, the SALT cap will remain in place, but only through 2025. Next, we explore several key items of the bill in greater detail:
Book minimum tax
This corporate tax hike would first become effective in 2023. The book minimum tax is a complicated new measure, but it is not likely to impact many corporations. It applies primarily to large corporations, and congressional leaders indicated it might impact only 150 or so companies. BMT applies if a corporation has over $1 billion in book profits. Book profits are measured as the three-year average of alternative financial statement income (AFSI). BMT does not apply to S corporations, regulated investment companies (RIC) or real estate investment trusts (REIT). There were several late changes made to the BMT: 1. Depreciation differences are not part of the BMT. This was an attempt to appease manufacturers. 2. Aggregation provisions for the BMT under Section 52 were scaled back. As noted, this was an attempt by Sen. Sinema to avoid subjecting private equity firms to BMT; however, they still might fall prey to this tax.
Budget projections show that the BMT will generate roughly $200–$250 billion in new tax receipts over the budget period.
Excise tax on stock buybacks
This tax would take effect beginning in 2023 and is limited to publicly traded corporations. This excise tax provision on stock buybacks is similar to the provision the House passed in the BBB last fall and is projected to raise roughly $70 billion. The proposed provision excludes certain repurchases from excise tax to the extent that: • repurchase is part of a tax-free reorganization; • repurchased stock or its value is contributed to an employee pension plan, ESOP or similar plan;
• total amount of stock repurchases within a year is less than $1 million; • repurchase is by a dealer in securities in its ordinary course of business; • repurchase is treated as a dividend (§301); or • repurchase is made by a RIC or a REIT.
Affordable Care Act (ACA) premium subsidies
The bill would extend the ACA subsidy of the premium tax credits through 2025 for qualifying individuals. The subsidies were scheduled to expire at the end of 2022, causing many taxpayers to have increased premiums in 2023 and beyond.
Enhanced IRS enforcement
This controversial measure includes additional IRS funding of $80 billion allocated as follows: • $4 billion for taxpayer service • $46 billion for enhanced enforcement activities (not just for audits but also for many other investigation activities) • $25 billion for support of IRS operations (for a variety of operational needs) • $5 billion for technology modernization and improvements The bill does not intend for these IRS enforcement efforts to apply to those making less than $400,000 per year; however, there are no clear assurances of that. It will have a wide-ranging impact on most businesses and individuals for many years.
Energy incentives
Numerous credits, deductions and other incentives for various energy measures are included in the legislation. For some of these that apply to construction or manufacturing, the credits can be increased when prevailing wages and apprenticeship requirements are satisfied. Here are several selected energy provisions:
Energy investment credit — This credit is extended through 2024. It includes enhancements for renewable electricity and solar facilities in low-income communities.
Energy from renewable resources — The credit for energy produced from certain renewable energy resources is extended through 2024. The credit could be enhanced if it satisfies certain wage requirements in operations or in the construction of the facility.
Residential energy incentives — The nonbusiness energy credit for residential property, which lapsed in 2021, is extended through 2032. A new annual cap of $1,200 for this credit is adopted. There is a credit of $150 for an annual energy audit in addition to the cap.
Elective direct payments — Instead of obtaining a tax credit, a business can elect to claim a direct payment for certain qualifying energy projects. Qualifying energy projects include carbon oxide sequestration credits, renewable energy production credits and alternative fuel refueling credits.
Credits for clean-energy vehicles — The tax credit for certain vehicles is extended through 2032. This covers fuel cell and plug-in vehicles. The maximum tax credit is $7,500. Taxpayers looking to claim this credit will have an income limitation that had not previously existed. Further, there will be a cap on the price of a vehicle. While this credit had been allowed only on new vehicles in the past, it is now also available on used vehicles. The used vehicle credit is limited to $4,000.
Credit for commercial clean-energy vehicles — For commercial vehicles used in a trade or business and designed for public roads, the clean-energy credit can range between $7,500–$40,000 depending on the weight of the vehicle.
Advanced manufacturing production credit — Tax credits are available based on a formula for manufacturers of components for battery and green energy technology. Different formulas are calculated for different components.
Credits and incentives for special fuels — The incentives for alternative fuels, alternative fuel mixtures and biodiesels are renewed through 2024.
Energy-efficient commercial building deduction (Sect.
179D) — Two key changes were made to Section 179D: 1. It increased the Section 179D deduction up to $5 per square foot (previously $1.80/sf). 2. It allows the §179D deduction for work with a tax-exempt organization (not just a governmentowned building).
Extension and increase in new energy-efficient home
credit — This credit is increased up to $2,500 per home, or up to $5,000 per home when the builder pays a “prevailing wage.”
Research tax credit for startups — The bill increases the research credit against payroll tax for small startup businesses to $500,000 (previously $250,000).
Special provision to sell energy credits and incentives
— The law would permit taxpayers obtaining several energy tax credits to be able to sell credits and incentives to other parties. We await IRS guidance on the details of this new approach, but it is something for those generating credits and those seeking to acquire such credits to be aware of.
A backward look at Build Back Better
The original BBB bill was projected to raise revenues of over $3 trillion, whereas the final bill ended up at around $700 billion (less than 25% of the initial proposal). The original bill started with major across-the-board corporate, individual and estate tax hikes. The final bill passed by both chambers included higher taxes only on major corporations and corporate stock buybacks, some sizable energy tax incentives, and funding for the IRS (projected to generate $124 billion), but no major tax increases. While many tax changes were proposed, few of them made it into the final law. The major change that will impact taxpayers — both businesses and individuals — is the expanded and enhanced IRS enforcement.
Closing remarks
Some of the initial tax measures that were not in the final bill could be reintroduced at some later point by Congress. So, many taxpayers might breathe a sigh of relief on what ended up in this bill — but they should keep a wary eye on future tax legislation in Congress. Lastly, the IRS (with its expanded budget) will be busy drafting guidance on this legislation over the coming weeks, so watch for this.
Jim Brandenburg, CPA, MST, is a tax partner with Sikich LLP in Brookfield. Contact him at 262-754-9400 or jim.brandenbug@sikich.com.
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