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On August 7, 2022, the Senate passed the budget reconciliation bill known as the Inflation Reduction Act. The legislation includes several key tax provisions, and addresses health insurance and prescription drug affordability, climate change, and taxation through a variety of measures. To review the full text of the Act, view here.

The Act implements a 15% corporate alternative minimum tax that applies to U.S.-owned corporations (other than an S corporation, a regulated investment company, or a real estate investment trust) with more than $1 billion in applicable financial statement income and US corporations with more than $100 million in applicable financial statement income when such U.S. corporation is a member of a foreign-owned multinational group with more than $1 billion in applicable financial statement income. In calculating the minimum tax, corporations would be able to take into account any applicable financial statement net operating losses and any base erosion and anti-abuse tax paid.

When this provision takes effect after Dec. 31, 2022, these corporations will be required to pay a 15% tax on their “book income,” the amount they report to shareholders on financial statements, if it is greater than what they would have paid under the current 21% corporate tax rate after applying tax credits and deductions. As a result, corporations reporting high income to their shareholders will not be able to avoid taxation by reporting little to no income for tax purposes.

The Joint Committee on Taxation estimates that only approximately 150 taxpayers will be required to pay the 15% minimum tax. Additionally, their analysis shows that the provision targets manufacturers in pharmaceuticals, technology, apparel, and other industries known for avoiding taxes by manufacturing their products overseas while selling primarily to American customers. Moreover, Secretary of Treasury Janet Yellen emphasizes that the tax will have no effect on families with income below $400,000.

Excise Tax on Stock Buybacks

Although previous versions of the Act included a provision to close the carried interest tax loophole, it was ultimately swapped out in favor of a 1% excise tax on stock buybacks at the behest of Senator Sinema. This tax provision will help correct a tax policy inefficiency stemming from the differential tax treatment of dividends and stock buybacks. When corporations distribute profits, they do so by either issuing dividends or by buying back a portion of their own shares. The effect of a stock buyback is that the value of the remaining stocks held by shareholders increases. While dividends are generally taxable when received by shareholders, an increase in stock value as the result of a stock buyback is not taxable until a shareholder sells. The 1% excise tax on stock buybacks purportedly results in more even tax treatment of the two payout methods, which have similar economic effects.

Other Tax Provisions of the Act

In addition to the two provisions discussed above, the Act provides $80 million in additional IRS funding to improve its enforcement capabilities, establishes an excise tax on drug manufacturers who fail to enter into drug pricing agreements, temporarily extends the American Rescue Plan’s expansion of premium tax credits, and modifies or extends tax credits related to renewable energy.

IRS Funding — The Act appropriates 10-year funding for the IRS as follows: $3,181,500,000 for taxpayer services, $45,637,400,000 for enforcement, $25,326,400,000 for operations support, and $4,750,700,000 for business systems modernization. In addition, $15 million is allocated to the IRS with funding for a report to Congress on the potential creation and maintenance of an IRS-run e-file system.

Drug Pricing — Excise Tax on Selected Drugs During Nonenforcement Period. In order to facilitate Medicare in negotiating prescription drug costs, the Act imposes a nondeductible excise tax on the sale by the manufacturer, producer, or importer of certain drugs during a “noncompliance period,” applicable to sales after the date of enactment. This covers drugs that are designated as Medicare high-spend and negotiation eligible. Noncompliance periods include certain periods not covered by pricing agreements between the manufacturer and the Health and Human Services (HHS) Department and periods in which information due to the HHS is overdue. An exemption is provided for export of the drug or for resale to a second purchaser for export. The tax may not be appealed to the IRS. The Act requires payment in full before any judicial action to recover amounts tax.

Expansion of ACA Premium Tax Credits. The Act extends through 2025 the reduced percentage of household income that is used to calculate the premium contribution for an individual claiming the premium tax credit. Also through 2025, allows a taxpayer with household income for the year of 400% or more of the federal poverty line to qualify for the premium tax credit. This provision applies to taxable years beginning after 2022.

This provision applies to taxable years beginning after 2022.

Transfer of Eligible Credits. The Act permits a taxpayer to elect to transfer all or a portion of an eligible credit to an unrelated eligible taxpayer for cash, but the recipient taxpayer may not transfer any portion of the transferred credit. The consideration received by the transferor of the credit is not includible in gross income, and the recipient may not deduct the amount. Credits eligible for transfer include:

Eligible credits cannot be transferred to a tax-exempt entity, a state and local government, political subdivision, the Tennessee Valley Authority, tribal government, or Alaska Native Corporation. This provision applies to taxable years beginning after 2022.

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