After a long weekend of proposed amendments, with only two passing, the Senate approved the Inflation Reduction Act of 2022 late Sunday evening. The House will return to session Friday and is expected to pass the measure quickly with President Biden signing it into law as early as next week. We will provide more detail on the separate provisions after the Bill is signed into law.
In the meantime, here is a high-level overview.
Corporate Minimum Tax
The Bill imposes a 15% minimum tax on the book income of a corporation that has had average adjusted book income for the last three years of more than $1 billion. However, this tax does not apply to S Corporations, regulated investment companies (RICs) or real estate investment trusts (REITs). There are a number of provisions related to this tax intended to exclude or include various corporations and to determine how long the tax applies once it is imposed. This new tax is effective for years beginning after December 31, 2022.
Excise Tax on Stock Buy-Backs
Effective for transactions after December 31, 2022, the Bill imposes a 1% excise tax on the fair market value of any stock repurchased by a covered corporation. The tax is limited to any domestic corporation whose stock is traded on an established securities market. In addition, there are a number of exceptions. For instance, the tax does not apply if the total value of stock repurchased during the year does not exceed $1 million. RICs and REITs are also excluded.
Section 179D Expansion
The provisions for Section 179D could be significant for architects, engineers and designers who work on qualified projects. For example, the Bill increases the maximum deduction from $1.88 to $5.00 per qualified square foot. Historically 179D allowed a deduction for energy efficient buildings and improvements owned by the government, including public schools. The Bill improves the deduction by expanding qualified building ownership to include charities, churches, private schools and universities, private foundations, political organizations, Native American tribal governments and Alaska Native corporations. The Bill also reduces the necessary level of energy efficient improvement from 50% to 25%. These, and other revisions to 179D, become effective for property placed in service after December 31, 2022.
The state and local tax deduction cap of $10,000 will remain in effect for the foreseeable future. However, many states have implemented what are called “SALT cap work-arounds”.
The Bill includes a number of credits relating to energy improvement and the environmental. For example, the Bill extends, increases, and expands the New Energy Efficient Home Credit. The expiration is moved back from January 1, 2022 to January 1, 2033. The maximum credit is increased from $2,000 to $5,000. Further, the definition of qualifying homes is expanded to allow more homes to meet the requirements.
Additionally there are changes made to tax credits or new credits created for previously-owned clean vehicles, alternative fuel refueling property, advanced manufacturing production, clean electricity investment, nonbusiness energy property, residential clean energy, etc. Some of these credits include income limitations. For example, the previously-owned clean vehicle credit is not allowed if modified adjusted gross income exceeds $150,000 for the year of purchase or the preceding year for a married couple filing jointly.
For the existing credits, most have been extended until sometime in the 2030s. For the new credits, such as the previously owned clean vehicle credit, the effective date is after December 31, 2022 with the credits ending sometime in the 2030s.
If you have questions about these provisions or the potential impact, please reach out to your Somerset advisor. If you don’t work with Somerset, now is a great time to get acquainted!
Please reach out to us at 317.472.2200 or with any questions.