Congress has given final approval to the “Inflation Reduction Act” reconciliation bill, clearing the legislation to be signed by President Joe Biden. The House on August 12 voted 220 to 207 to pass without change a broad package of tax, energy, and healthcare provisions, which had been approved 51 to 50 on August 7 by the evenly divided Senate with the tie-breaking vote of Vice President Kamala Harris. White House officials have indicated that the President will sign the legislation in the coming days.
Key revenue-raising provisions that may affect the private equity sector include (1) a 15% book-income alternative minimum tax (AMT) on corporations with financial accounting profits over $1 billion, which is estimated by Joint Committee on Taxation (JCT) staff to raise $222 billion over 10 years; and (2) a 1% excise tax on the value of certain net stock repurchases by publicly traded corporations, which is estimated by JCT staff to raise $74 billion over 10 years.
Observation: Certain changes were made to secure the needed support of Senator Kyrsten Sinema (D-AZ), who had objected to the original July 27 version of the Inflation Reduction Act proposed by Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV).
The stock repurchase excise tax was added to a revised version of the bill that had been released on August 6:
The Senate adopted an amendment to drop a modification to an aggregation rule from the bill’s book-income AMT provision. The change was offset by a two-year extension of the limitation on Section 461(l) business loss deductions incurred by noncorporate taxpayers, which under current law is set to expire after 2026.
The bill features $370 billion in spending and tax incentives on energy and climate change provisions that are intended to spur investments not only by traditional energy companies but also by companies in the transportation, real estate, and manufacturing industries, and that include significant enhancements if the projects meet certain wage, domestic content, or location requirements.
See our Insight, Senate passes “Inflation Reduction Act” reconciliation bill, for more information.
A corporate AMT based on financial statement income (book minimum tax, or BMT) provision imposes a 15% minimum tax on adjusted financial statement income (AFSI) for corporations with average annual AFSI over a three-tax year period in excess of $1 billion. The provision imposes a minimum tax equal to the excess of 15% of an applicable corporation’s AFSI over the corporate AMT foreign tax credit (FTC) for the tax year. This provision is effective for tax years beginning after December 31, 2022.
An “applicable corporation” subject to the BMT is a corporation (other than an S corporation, regulated investment company, or real estate investment trust) that meets an AFSI test in one or more tax years prior to the tax year and ending after December 31, 2021. A corporation meets the AFSI test if its average AFSI (determined without regard to the adjustment for financial statement net operating loss carryovers) over the three tax years ending with the relevant tax year exceeds $1 billion. A corporation’s AFSI is aggregated with the AFSI of all persons treated as a single employer under Section 52(a) or Section 52(b) to determine if the corporation is an applicable corporation.
Observation: The “Build Back Better” reconciliation bill that the House approved in November 2021 had introduced a provision to amend Section 52(b) to expressly provide that the term “trade or business” includes any activity treated as a trade or business under Sections 469(c)(5) or (6). Such an amendment, if it had been enacted, would have increased the number of business entities treated as being under common control for purposes of Section 52(b). For example, lower-tier operating companies that are majority-owned by a private equity fund could have been deemed to be under common control for purposes of Section 52(b) and therefore treated as a single corporation when determining AFSI for purposes of the AMT. The reconciliation bill recently passed by the House and Senate did not include a similar provision; as a result, Section 52(a) and Section 52(b) are not amended.
The reconciliation bill imposes a 1% excise tax on the value of certain net stock repurchases by publicly traded corporations. A “repurchase” is defined as a redemption (within the meaning of Section 317(b)) of the stock of the corporation, and any other economically similar transaction as determined by Treasury. This provision applies to repurchases of stock after December 31, 2022.
Observation: The broad language of the provision potentially could impact a range of corporate transactions that do not appear to involve stock repurchases as that term commonly is understood. For example, in a merger involving cash consideration, payments of cash to the target’s shareholders might be viewed as repurchases to the extent those payments are funded out of the target’s existing cash resources or with the proceeds of debt that is incurred or assumed by the target in the transaction. Other transactions that potentially also could be impacted include (1) payments of cash or other “boot” to target shareholders in partially tax-free reorganizations, (2) similar payments in mergers of equals and other “double dummy” combination transactions, and (3) cash consideration in certain taxable stock acquisitions in which there is 50% or greater overlap in the shareholder bases of the acquirer and the target.
The bill reinstates and significantly expands current clean-energy tax incentives by providing an estimated $370 billion of new energy-related tax credits over the next 10 years. The bill also would have a significant impact for companies relying on financing arrangements for energy-related projects, permitting more flexibility with direct-pay and transferable credit options.
Taken as a whole, these incentives could be of significant interest not only for traditional energy companies but also for a wide range of “business-to-business” (B2B) and “business-to-consumer” (B2C) companies, including those in the transportation, real estate, and manufacturing industries.
The bill structures many new and existing clean-energy and energy-efficiency tax incentives as two-tiered incentives with a “base rate” and a “bonus rate.” The bonus rate equals five times the base rate and applies to projects that meet certain wage and apprenticeship requirements. A taxpayer must satisfy both requirements to receive the bonus credit rate; otherwise, the taxpayer may claim the relevant credit at the base rate. Some of the credits in the bill also include bonus rates based on the domestic content of the property to which the credit would apply.
Observations: These incentives are intended to encourage additional accelerated investment in lower-carbon technologies. That result would represent a significant step toward adoption and promotion of these technologies by businesses and individuals, by helping to bend their cost curve in light of various climate-related goals adopted by the Biden Administration for accelerating decarbonization of the US economy, including a goal to reduce emissions by 50% by 2030, against a 2005 baseline.
The revised structure of these credits makes it more important for companies to analyze not only what low-carbon investments they are making but also how and where those projects will be built. The bill adds a social benefit lens to environmental credits, and companies will want to consider the entire range of their environmental, social, and governance (ESG) goals and strategies when planning investments to take advantage of these credits.
Furthermore, companies should apply a tax lens in assessing their ESG goals and strategies for attaining them. These incentives could have a significant effect on the after-tax costs of capital investments or other innovations to achieve those goals.
Action item: Given the range of potentially significant consequences, businesses should analyze these provisions and model their impact in the broader context of their overall ESG goals. Businesses also should consider potential changes to their manufacturing or operating models to align with the specific tax incentives in the bill, also taking into account the perspective of active stakeholders — both shareholders and customers — increasingly interested in actions a business may be taking or considering in the environmental area.
Action item: Companies should evaluate whether extended incentives for renewable energy and expanded incentives for electric vehicles may help fund their transition toward cleaner energy and attainment of near-term ESG commitments. In the longer term, new incentives such as those for clean hydrogen, carbon capture, and electric transmission property could drive strategies for capital expenditures. Finally, the return of the Section 48C credit for advanced energy manufacturing property may incentivize companies to locate more such facilities in the United States.
See our Insight, Reconciliation bill includes numerous energy incentive tax proposals, for more information, including effective dates, on the incentives for clean, renewable, and traditional energy sources included in the bill.
Financial Services Tax Consulting Leader, PwC US