Herold Law Report on Inflation Reduction Act of 2022 Tax Changes
Not the Same as President Biden’s Build Back Better Act Tax Changes
Inflation Reduction Act of 2022 Legislative Process
On November 19, 2021, the House of Representatives passed the last version of three significant versions of H.R. 5376, President Biden’s Build Back Better Act (“BBB”). We wrote about the versions’ extensive, broad-based tax provisions not long after House passage. By logical deduction, the last House version would have been the Rules Committee Print 117-18, a text of 2,135 pages (November 3, 2021), as was shortly after supplemented, as the version of H.R. 5376 placed on the Senate Calendar on August 3, 2022, is a text of 2,140 pages. On August 7, 2022, the Senate resolved that this version of H.R. 5376 (as had been sent over from the House) does “…pass with the following AMENDMENT: Strike all after the enacting clause and insert the following:…” whereby the text of 2,140 pages is reduced to 730 pages. President Biden signed into law on August 16, 2022, a line-compacted version of 237 pages of the Senate’s greatly reduced and revised text of H.R. 5376 with the time-serving title of Inflation Reduction Act of 2022 (the “Act”).
Federal Tax Law Changes
TheAct tax changes are not broad-based, but they are dollar-wise substantial, and Congress expects them to be policy-wise impactful. For tax years beginning after December 31, 2022, in the case of any “applicable corporation,” the tentative corporate minimum tax for the taxable year shall be the excess of 15 percent of adjusted financial statement income for the taxable year over the corporate alternative minimum tax foreign credit for the taxable year. This formulation opens up a world of new or newer corporate income taxation conceptions and definitions. “Newer” because the Act is based in part on the Tax Reform Act of 1986’s corporate alternative minimum tax system, which later Congresses rendered largely toothless. As a mighty simplification, an “applicable corporation” is any federal corporate income taxable corporation having had at least $1 billion in average annual financial statement income for 3 consecutive years, before 2023.
The Act also imposes on each “covered corporation” a tax equal to 1 percent of the fair market value of any stock of the corporation which is repurchased by such corporation during the taxable year beginning after December 31, 2022. Technically, the term “covered corporation” means any domestic corporation the stock of which is traded on an “established securities market” (as defined) and the term “repurchase” means a stock redemption (as defined in the pre-Act Internal Revenue Code, or hereinafter “Code”) as well as “any other corporate transaction determined by the Secretary to be economically similar to a stock redemption.” Congress styles this first of its kind tax as an “excise tax.” Congress may follow up with others of this new ilk after 2022, such as by imposing a percentage excise tax on publicly traded stock sales or exchanges of such stock in merger and acquisition transactions. Interestingly, existing tax law allows a federal income tax deduction to a business paying a federal excise tax incurred in its business.
Section 4611 of the Code imposes an excise tax of 18.7 cents per 42 gallon drum of crude oil received at a U.S. refiner’s facility. The Act increases this excise tax by increasing the 9.7 cents per barrel hazardous substances fund portion of the tax to 16.4 cents, for a total tax of 25.4 cents per barrel, effective January 1, 2023. Thereafter, the Act builds in an increase pegged to the annual excess of the chained consumer price index for all urban consumers over the all urban consumer price index for 2022. The increases seem like the unfinished business of the Infrastructure Investment and Jobs Act (of 2021), which had resurrected and expanded the December 31, 1995-expired environmental excise taxes codified in sister Code sections 4661, 4462, 4671 and 4572, generally effective July 1, 2022, and about which we wrote earlier this summer.
Under the heading of “Energy Security,” Act Subpart D extends, amends and introduces all sorts of Code income tax credits for eligible taxpayers having in common the themes of energy production and energy use. Effective dates vary, and some of the credits automatically expire at the end of various tax years. It is a chore simply to muster them, but the titles are fairly descriptive of what is going on, as follows. All references are to the primary Code section in question and ignore others impacted, as well as other federal statues also changed to coordinate with the Code changes.
- Section 13101. Extension and Modification of Credit for Electricity Produced from Certain Renewable Resources. (Section 45)
- Section 13102. Extension and Modification of Energy Credit. (Section 48)
- Section 13103. Increase in Energy Credit for Solar and Wind Facilities Placed in Service in Connection with Low-Income Communities. (Section 48)
- Section 13104. Extension and Modification of Credit for Carbon Oxide Sequestration. (Section 45Q)
- Section 13105. (New) Zero-Emission Nuclear Power Production Credit. (Section 45U)
- Section 13201. Extension of Incentives for Biodiesel, Renewable Diesel and Alternative Fuels. (Sections 40A and 6426)
- Section 13202. Extension of Second Generation Biofuel Incentives. (Section 40)
- Section 13203. (New) Sustainable Aviation Fuel Credit. (Section 40B)
- Section 13204. (New) Credit for Production of Clean Hydrogen. (Section 40V)
- Section 13301. Extension, Increase, and Modifications of Nonbusiness Energy Property Credit. (Section 25C)
- Section 13302. Residential Clean Energy Credit. (Section 25D)
- Section 13303. Energy Efficient Commercial Buildings Deduction. (This change is in respect of an increased greater tax deduction, not a tax credit.) (Section 179D)
- Section 13304. Extension, Increase, and Modifications of New Energy Efficient Home Credit. (Section 45L)
- Section 13401. Clean Vehicle Credit. (Section 30D)
- Section 13402. (New) Credit for Previously-Owned Clean Vehicles. (Section 25E)
- Section 13403. (New) Qualified Commercial Clean Vehicles. (Section 45W)
- Section 13404. Alternative Fuel Refueling Property Credit. (Section 30C)
- Section 13501. Extension of the Advanced Energy Project Credit. (Section 48C)
- Section 13502. (New) Advanced Manufacturing Production Credit. (Section 45X)
- Section 13701. (New) Clean Electricity Production Credit. (Section 45Y)
- Section 13702. (New) Clean Electricity Investment Credit. (Section 48E)
- Section 13703. (New) Cost Recovery for Qualified Facilities, Qualified Property, and Energy Storage Technology. (This change allows a relatively fast, three-year tax deduction, not a tax credit, for the costs of either a “qualified facility” or a “qualified property investment” or for “energy storage technology” — all as particularly defined — beginning with the identifiable, appropriate year.) (Section 168)
- Section 13704. (New) Clean Fuel Production Credit. (Section 45Z)
- Section 13902. Increase in Research Credit Against Payroll Tax for Small Businesses. (Section 41)
Act Section 13801 adds two new, complex procedural Code sections to Chapter 65 Abatements, Credits and Refunds. These have to be unwelcome from an IRS tax administration responsibility viewpoint, and they will likely prove to be unwelcome from a viewpoint of taxpayers’ fouling up and being caught by IRS Revenue Agents in light of 20 percent tax penalties for over-stated credits. Fortunately for taxpayers both these provisions are elective. Additionally, many pages of official explanations and commentator articles will come to pass before too long. Below are thumbnail sketches.
New Code section 6417 provides, that in the case of an “applicable entity” making an election (at such time and in such manner as the Treasury Department may provide) with respect to “any applicable credit” determined with respect to such entity, the entity is treated as making a payment against the income tax imposed by the Code (for the taxable year with respect to which such credit was determined) equal to the amount of the credit. Section 6417 is incomplete and authorizes the Treasury to complete it. Congress’s concept seems to be, and depending on the credit type from among the above-listed credits, and the type of “applicable entity,” the election gets the electing entity money from the Treasury equal to the calculated credit amount faster than it would get an income tax refund and/or the electing entity gets the calculated amount of the credit as cash money paid by the Treasury despite it would not be due an income tax refund by application or use of a tax credit under pre-Act tax law because the electing entity does not pay federal income taxes, for example. If the calculated amount claimed or received proves to be too much at the conclusion of an IRS audit, the electing entity owes income tax on the overpayment amount, plus a 20 percent of the tax as an “additional tax,” viz., a 20 percent penalty.
We are not aware of Code precedent for this structure. It is somewhat analogous to the Code section 32 earned income credit, whereby working poor families get an annual payment from Treasury with respect to their wages and self-employment incomes that are not subject to federal income taxes or to less income taxes than the Treasury payment received post-tax return filing on account of other Code sections. It seems somewhat analogous to Code section 6427(e), which allows so-called “renewable” fuels producers to get the benefit of the renewable-fuel tax credit as a special, direct payment from Treasury. Such fuel producers cannot get Treasury payments in lieu of first reducing to zero, if possible, their typically greater annual Code sections 4041 or 4081 federal excise taxes for also dealing in gasoline, kerosene, and aviation or diesel fuel. The 20 percent penalty is partly analogous to the 20 percent penalty on deferred compensation income arising from deferred compensation plans and other deferred arrangements not meeting the strict rules of Code section 409A.
New Code Section 6418 provides that in the case of an “eligible taxpayer” which irrevocably elects to transfer all (or any portion specified in the election) of an “eligible credit” determined with respect to such a taxpayer to another taxpayer (referred to as the “transferee taxpayer”), which is not related to the eligible taxpayer (within the meaning of Code sections 267(b) or 707(b)(1)), the transferee taxpayer specified in the election shall be treated as the taxpayer with respect to the credit amount transferred. The credits in question are the credits among the above-listed credits, and for some of the transfer-eligible credits further section 6418 rules are unique. In all cases, section 6418 specifies the amount paid by a transferee to an eligible taxpayer as consideration for a credit transfer (1) shall be paid in cash, (2) shall not be includible in taxable income of the transfer-eligible taxpayer, and (3) with respect of the transferee taxpayer, shall not give rise to an income tax deduction by the transferee. Once sold, the transferee gets the benefit of the credits, presumably by rules like those in section 6417. Section 6418 is incomplete and authorizes the Treasury to complete it.
We are not aware of Code precedent for this structure. It is analogous to the Economic Recovery Tax Act (of 1981) safe-harbor leasing rules that were designed to create a market for the sale of tax credits and deductions from users of leased property, such as an airline’s use of jet planes, who didn’t need these tax benefits, to taxpayers who certainly could reduce their income taxes by these tax benefits. The Congressional goal is fortuitously strengthened against any future IRS attack by the August 5, 2022 decision of the Court of Appeals for District of Columbia in Cross Refined Coal, LLC et al. v. Commissioner, affirming U.S. Tax Court bench opinion (2019). The appeals court upheld the investors’ use of the Code section 45 refined coal tax credit to reduce their federal income taxes on income from other sources, notwithstanding the facts that the investors’ partnership projected pre-tax profit shares were not likely going to ever materialize. In addition, it came to light that the investors incurred only partnership investment losses when one does not take into account the tax benefits of their “profitable” use of the refined coal tax credit against their income tax liability. Finally, as written, section 6418 imposes a 20 percent penalty on the transferee when an IRS audit concludes, the transferee purchased and claimed credits that had been overstated by the transferor. Unless and until the Treasury reverses this rule in its regulations, obviously, buyers would want learn about such reductions as indemnification contact rights under applicable state law.
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