On August 16, 2022, President Joe Biden signed into law the Inflation Reduction Act of 2022. This stripped-down version of last year’s Build Back Better proposal aims to reduce the federal deficit, lower the cost of prescription drugs, extend certain healthcare subsidies, provide funding for environmental projects, and increase energy security. The new law is funded by various tax increases and potential improvements to existing tax enforcement.
The most significant tax increase is the creation—or, more properly, the reintroduction—of a corporate minimum tax. This new provision imposes a 15% minimum tax on the annual “adjusted financial statement income” (aka, “book income”) of corporations with profits over $1 billion. While the existing corporate tax rate is a flat 21%, many corporations are able to effectively defer paying tax through various jurisdictional and structural maneuvers. This new minimum tax is intended to cut through such corporate financial maneuvers and tax the total income shown on a corporation’s annual “applicable financial statement” as developed according to the generally accepted accounting principles at a minimum rate of 15%. This new tax applies to C Corporations only and has no impact on other entity structures.
The new legislation also creates a new 1% excise tax on corporations buying back their stock. This new tax applies to any stock repurchase by a domestic corporation with stock traded on an established market, like the New York Stock Exchange. This excise tax is levied against the value of the stock repurchased during the tax year, but reduced by the value of any stock issued during the same year. The excise tax includes several exceptions, notably: repurchases that are part of a reorganization for tax purposes, repurchases associated with an employer’s retirement plan or employee stock ownership plan, and repurchases that are otherwise treated as dividends for tax purposes.
The law also substantially increases funds available to the Internal Revenue Service for more stringent enforcement of existing tax laws. The new spending for the IRS is an extra $80 billion over the next ten years. This will allow the hiring and training of an estimated 87,000 new IRS employees. A major portion of these new employees will be directed at review, audit, and enforcement to increase compliance with existing tax laws. The general expectation is that such new spending and hiring will allow the IRS to increase total tax revenue by more than $200 billion over the coming decade. Instructions from Treasury Secretary Janet Yellen to the IRS tend to indicate that such additional revenue will come from increasing numbers of audits to detect “high-end noncompliance” and not from additional audits to individuals making less than $400,000 per year.
If you have questions or would like additional information, please contact David Frederick, Senior Manager of Tax at firstname.lastname@example.org.
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