Several key provisions of the Inflation Reduction Act of 2022 may impact certain businesses and their owners. While there are a few provisions of note, the act does not include an increase to the corporate income tax rate, which remains at a flat 21%, and does not include any changes to the qualified small business stock exclusion.
15% Alternative Minimum Tax
Effective for tax years beginning after Dec. 31, 2022, the act requires certain corporations to pay the greater of their regular corporate tax or an alternative minimum tax equal to 15% of the corporation’s adjusted financial statement income each year. The tax applies to any corporation (other than an S-corporation, regulated investment company or real estate investment trust) whose average annual adjusted financial statement income exceeds $1 billion for any three consecutive tax years.
Corporations subject to the alternative minimum tax will be required to perform two separate tax return calculations to determine their corporate tax liability each year. Applicable corporations should review their overall corporate structure to determine any potential increase in corporate tax as a result of the act, taking into consideration special rules with respect to foreign-owned entities.
1% Excise Tax on Share Repurchases
Publicly traded U.S. corporations that repurchase more than $1 million of shares in any tax year will be required to pay a 1% excise tax on the total value of the share repurchases unless the share repurchases are taxed as a dividend (other exceptions may also apply). The tax is effective for share repurchases that occur after Dec. 31, 2022. The amount subject to tax would be reduced by any new issues of stock to employees or the public and does not apply to shares that are contributed to retirement accounts, pensions, and employee-stock ownership plans (ESOPs).
Companies that are publicly traded, or are intending to go public, should revisit their existing or planned stock repurchase programs with a view toward other alternatives for returning cash to shareholders and increasing shareholder value. It is unclear from the act whether the tax will be applicable to certain corporate transactions such as a reorganization or a “going private” buyout.
Extension of Limitation on Business Losses
The 2017 Tax Cuts and Jobs Act enacted a law which prohibited non-corporate taxpayers from using excess business losses to offset more than $250,000 of their non-business income ($500,000 for married couples), adjusted for inflation. This limitation was set to expire after 2025, however the act extends the limitation through 2028.
Business owners who are generating significant losses through pass-through entities should model the impact of the two-year extension on future cash flows and explore other strategies for offsetting non-business income.
To better understand how the Inflation Reduction Act may impact your business, please consult a Northern Trust advisor.