President Biden signed the Inflation Reduction Act of 2022 (the “IRA”) into law on August 16, 2022, after passage with majority Democratic support in the Senate and the House. The new legislation contains significantly fewer revenue-generating tax proposals than the House-passed Build Back Better Act (“BBBA”) in November 2021, which we summarized here. Below is a summary of the tax provisions in the IRA likely to be of interest to U.S. corporate taxpayers, financial institutions, hedge funds, private equity funds, and their investors. 

The IRA’s tax provisions include:

• establishing a 15% corporate minimum tax based on book income;
• imposing a 1% excise tax on stock buybacks and similar transactions;
• extending the loss limitation rules for noncorporate taxpayers under Code section 461(l);
• adding, expanding, and extending clean energy tax incentives;
• providing approximately $80 billion of additional funding to the IRS (most of which is dedicated to enforcement efforts such as “digital asset monitoring”);
• increasing the research tax credit to offset the payroll taxes of qualified small businesses under Code section 41(h);
• imposing a new excise tax on drug manufacturers for non-compliance with new drug pricing rules; and
• reinstating a Superfund excise tax on crude oil and certain imported petroleum products.

Notably, the IRA does not include earlier proposals that would have:

• modified the carried interest rules under Code section 1061;
• modified several international provisions (e.g., global intangible low-taxed income (“GILTI”), base erosion and anti-abuse tax (“BEAT”), and interest limitation provisions);
• increased the tax rates on individuals and corporations; and
• repealed the limitations on state and local tax (“SALT”) deductions.

Key Tax Provisions

15% corporate minimum tax on adjusted book income.  

The IRA imposes a 15% minimum tax based on the financial statement (i.e., “book”) income of U.S. corporations with an average book income exceeding $1 billion (or $100 million for certain foreign-parented corporations) for any three consecutive tax years, beginning in 2023. The applicable financial statement for a corporation generally is its audited financial statements used for SEC reporting or other nontax purposes. A corporation’s book income may be reduced by book loss carryovers from tax years beginning after 2019, capped at 80%, general business credits and accelerated tax depreciation, among other adjustments. The corporate minimum tax applies if it exceeds the sum of the corporation’s regular tax (at the current 21% corporate tax rate), base erosion and anti-abuse tax. The IRA permits taxpayers to carry forward credits for minimum tax paid indefinitely to reduce future regular tax. The corporate minimum tax does not apply to S corporations, regulated investment companies (“RICs”), real estate investments trusts (“REITs”) or certain corporations whose income is combined with unrelated businesses under common ownership of an investment fund or partnership. The IRA also narrows the scope of a similar tax proposed in the House BBBA by removing a book income aggregation rule that would have captured more affiliated corporations.

1% excise tax on stock buybacks.  

Publicly traded U.S. corporations are now liable for a non-deductible 1% tax on the fair market value of stock repurchases, which includes stock redemptions and certain economically similar transactions as determined by the secretary of the Treasury. The new excise tax does not apply to certain repurchases in connection with tax-free reorganizations, repurchases treated as dividends, repurchases by a RIC or REIT, or repurchases for retirement or similar plans. However, it appears that the new excise tax could apply to transactions that are not typically viewed as stock repurchases, such as cash payments in lieu of fractional shares, payments to dissenters, divisive “split-off” reorganizations, and mergers or other reorganizations involving cash payments (possibly funded with the target corporation’s cash or debt incurred or assumed by such target) to the target shareholders. The excise tax applies to repurchases of stock after December 31, 2022, even if a corporation had authorized or approved a repurchase in a prior tax year.