Fernway DiarySM

Sep 28, 2022

On August 16, President Biden signed the Inflation Reduction Act into law. While most of the tax proposals previously under discussion in the Build Back Better Act did not make it into the bill that finally passed the Senate, some significant tax law changes were enacted nonetheless. These include a new corporate minimum tax and a 1{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} excise tax on certain corporate stock repurchases.

Corporate Alternative Minimum Tax

The US has had various forms of a corporate Alternative Minimum Tax (AMT) since 1969, with the most recent having been repealed by the Tax Cuts and Jobs Act in 2017. The new corporate alternative minimum tax imposes a 15{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} minimum tax rate on the adjusted financial statement income (AFSI or adjusted book income) of applicable corporations. An “applicable corporation” is defined as one with $1 billion or more in adjusted book income calculated over a three-year period average. For US corporations that are part of a foreign-parented group, the AMT applies only if the group’s average AFSI is $1 billion or more and the average AFSI of the US corporations in the group is $100 million or more. The new corporate AMT excludes S corporations, regulated investment companies (RICs), and real estate investment trusts (REITs).

Note that AFSI is not the same as adjusted taxable income. Generally, adjusted financial statement information is a corporation’s net income as reported in the taxpayer’s financial statements (such as a SEC Form 10-K or other annual report), subject to certain adjustments. These include allowances for tax depreciation deductions and certain general business credits under Section 38, including the R&D credit. However, among additional complexities, AFSI does not take into account other provisions that apply in calculating regular income tax, such as Section 163(j) limitations on interest deductions or Section 382 limitations on loss carryforwards.

The US Joint Committee on Taxation estimates that the new corporate AMT will apply to about 150 companies. However, any company unclear if they will be affected by the provision is advised to consult a knowledgeable tax professional as soon as possible; the new corporate AMT is effective for tax years beginning after December 31, 2022.

Excise Tax on Repurchase of Corporate Stock

The Inflation Reduction Act also introduces a 1{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} excise tax on covered corporations repurchasing their shares directly or through a specified affiliate. A “covered corporation” is defined as any US corporation with stock publicly traded on an established securities market, while a “specified affiliate” is either a corporation or partnership directly or indirectly owned more than 50{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} by the covered corporation. The tax is generally equal to 1{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f} of the fair market value (FMV) of the stock repurchased by the covered corporation or specified affiliate. However, the FMV of the repurchased stock generally may be reduced by the FMV of any stock issued by the covered corporation during the same taxable year.

The excise tax does not apply under certain circumstances. These include:

• Buybacks that are part of a reorganization under Section 368(a) where no loss or gain is recognized by the shareholder
• Stock repurchases that are contributed to an employer-sponsored retirement plan, employee stock ownership plan, or similar plan
• Repurchased stock with a total value of $1 million or less in a taxable year
• Repurchases treated as dividends
• Repurchases by REITs or RICs
• Certain repurchases by securities dealers in the ordinary course of business

The tax is paid by the covered corporation and is not deductible for federal income tax purposes.

The new excise tax applies to stock repurchases occurring after December 31, 2022.

Seeking Guidance

Regulations and other guidance yet to be issued by the IRS and Treasury will be critical in determining the specifics of how the corporate minimum tax and excise tax will be implemented. However, it is not too soon for companies to consult a US tax professional to begin understanding the implications these regulatory changes may have on their business. For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

Disclaimer:
The above content is intended to support the marketing of professional services and should not be construed as written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular tax situation. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Fernway Solutions assumes no obligation to inform the reader of any such changes.