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Inflation Reduction Act – Key Tax Provisions

on Tuesday, 9 August 2022 in The Closer - M&A, Securities & Corporate Counsel: Kevin P. Tracy, Editor

Unanticipated support from a key legislator expands the likelihood of the recently proposed Inflation Reduction Act (the “Act”) passing through the Senate.  Among other goals, the Act aims to increase tax revenue by targeting particularly wealthy individuals and entities.  The Act’s advocates argue that increased tax revenue can be used to reduce the national debt, with the effect of combating inflation.  On the other hand, the Act’s opponents claim that by reducing long-run economic growth, the Act may actually worsen inflation by constraining the economy’s productive capacity. 

The recent support by Senator Sinema, which was conditioned on certain changes to the original proposal’s tax changes, was enough to push the Act through the Senate, passing on August 7th with a 51-50 vote. Below is an overview of the Act’s key tax provisions, along with estimates of each provision’s financial impact.

Minimum Tax for Large Corporations. 

The Act imposes a 15% minimum tax rate on any corporation whose average annual adjusted financial statement income exceeds $1 billion for three consecutive tax years, sometimes referred to as the “minimum book tax.”  To obtain Senator Sinema’s support, the provision was narrowed to benefit companies that use accelerated depreciation, such as manufacturers, and small businesses that are subsidiaries of large private equity firms. It is estimated that this provision would apply to roughly 200 U.S. corporations.  The Joint Committee on Taxation estimates that this provision would raise more than $300 billion for the Treasury over the next decade.

Additional Internal Revenue Service Funding.

The Act appropriates roughly $80 billion in additional funding to the IRS over the next decade.  More than half of that sum is dedicated to improving the IRS’s enforcement activities, such as determining and collecting taxes, conducting investigations, and enforcing criminal statutes related to violations of internal revenue laws.  However, taxpayers earning less than $400,000 annually are expressly excluded from the enforcement activities stemming from the Act’s increased IRS funding.  The Congressional Budget Office estimates that this provision would raise more than $120 billion for the Treasury over the next decade.

1% Excise Tax on Stock Buybacks.

As was originally included in the Build Back Better Act proposed last fall, the Act includes a 1% excise tax on the value of stock repurchases for publicly traded U.S. corporations. This is estimated to raise $73 billion for the Treasury.

Holding Requirements for Carried Interest in a Partnership.

The original version of the Act narrowed what is sometimes referred to as the “carried interest loophole,” which allows managers of hedge, private equity, and real estate funds to pay a lower tax rate on portions of their compensation than other people typically pay on their regular income.  This provision was removed to gain Senator Sinema’s support.

The Act’s tax provisions are substantially less comprehensive than those of earlier proposals.  For example, a harsher international tax structure and a contentious “millionaire’s” tax—both promoted by the Biden administration’s Build Back Better plan—are missing from the Act.  But the Act, if and when it becomes law, will still have a significant impact on federal taxation, especially for high-wealth taxpayers.  The House is predicted to vote on the Act later this week and is subject to further modification in the House.

If you have any questions regarding this proposal or other aspects of federal tax law, please contact a Baird Holm LLP attorney.

Andy McLandsborough, Summer Associate

Hannah Fischer Frey

Emily Tosoni

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