The past two weeks have the potential to translate into significant changes for American businesses. In a turnaround that felt a bit like whiplash, Sen. Joe Manchin (D-WV) announced on July 15 that he wouldn’t support the Build Back Better Act before reaching a deal with Senate Majority Leader Chuck Schumer (D-NY) on July 27 in the form of the Inflation Reduction Act of 2022 (I.R.A.). Since then, Sen. Krysten Simena (D-AZ) shaped the I.R.A., notably excluding a carried interest provision; the Senate passed the legislation over the weekend, with Vice President Kamala Harris casting a tie-breaking vote; and now, the bill heads to the House, where consideration is expected to begin on Friday, Aug. 12. All along, President Biden urged the process forward, and the bill will be a step closer to being signed into law if House Democrats vote along party lines on Friday, as many expect them to do.
With updates igniting the news cycle like wildfire, it can be hard to parse out what changes the bill, if passed into law, has in store for business leaders. Of course, the legislation has the potential for modification in its current leg of the journey. But, for now, here are five key insights about the current state of the Act—and what is means for businesses.
Corporate Alternative Minimum Tax Remains—With Changes
The I.R.A.’s original proposal in mid-July included a 15% corporate alternative minimum tax on companies with $1 billion or more in adjusted financial statement income (ASFI), averaged across three years. While the tax remains in the current proposed legislation, weekend negotiations resulted in a narrower scope. For example, funds or partnerships whose combined ASFI would have reached the $1 billion figure won’t be required to pool their income for the purpose of the tax threshold.
Carried Interest Provisions Swapped for Stock Buyback Excise Tax
When unveiled on July 15, the I.R.A. included proposed changes to carried interest rules. The proposal would have changed the holding period for applicable partnership interests (API) from three to five years, accelerated gain recognition on the transfer of an API, and allowed the Treasury to further limit avoidance transactions. The industries most affected under the now-scratched changes would have included private equity and venture capital firms.
Sen. Krysten Simena pushed to eliminate the carried interest changes, which were replaced by a stock buyback excise tax during the Senate’s weekend negotiations. A new 1% excise tax on the fair market value of stock repurchases would apply to covered corporations; those corporations are ones with stock traded on established market securities, meaning an officially recognized and regulated exchange, such as the New York Stock Exchange. The tax also applies to acquisitions by affiliates (domestic and foreign partnerships or corporate affiliates) owning 50% or more of the covered corporation’s stock.
Some investors now predict a rush for corporate stock buybacks before the proposed tax would go into effect—for taxable years starting after Dec. 31, 2022.
IRS Enhancements Take Aim at the Tax Gap
The I.R.A. slots $80 billion to bolster Internal Revenue Service (IRS) enforcement, customer service, systems, and operational support; over half of that total will go toward enforcement. This is meant in part to chip away at the tax gap—the difference between taxes owed and taxed paid. Individuals and businesses alike contribute to the gap, and some predict that, if passed, the enhancements will translate to increased IRS-audit scrutiny, meaning that it will be important to take defensible tax positions.
Climate Concerns Translate to Potential Credits
The I.R.A. includes a number of provisions aimed at boosting clean energy and environmental justice. This includes credits for energy-efficient commercial building systems (like heating, cooling, and ventilation) and energy-efficient retrofits; renewable energy sources; and clean vehicles. With an eye toward supporting U.S. manufacturing of renewable energy sources, the I.R.A. also contains production credits for wind turbines, solar panels, wind turbines, batteries and critical minerals.
The I.R.A.’s climate-centered legislation reflects concerns that touch the business landscape. Investors and consumers alike echo environmental-consciousness as a primary concern—and they share the desire to see American companies implement environmentally friendly programs and frameworks.
Excess Business Loss Limitation
The I.R.A. will prolong the cap on deductions for excess business losses by two years, extending the deductions through 2028. Right now, deductions for excess business losses can’t exceed $270,000 (for single filers) or $540,000 (for married spouses filing jointly). Although this is technically an individual tax provision, it affects owners of closely-held businesses, too. Those owners who are impacted by the limitation have to integrate investment and financing decisions involving their closely-held businesses with their own effective tax liabilities.
Also, by including this change in the I.R.A., it will no longer be available as a “pay-for” to offset the cost of future legislation needed to extend the Qualified Business Income Deduction (QBID) beyond 2025. Some had viewed the Excess Business Loss Limitation as the informal counterpart to the QBID; that means that now the fate of the QBID beyond 2025 might require more complicated negotiations.
We’re on It, and You’re in the Loop
We’re keeping a close eye on breaking news and developments that affect you and your business. You can find more of our coverage on the Act on our website. If you have any questions about how the Inflation Reduction Act might affect your business, contact us.
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