Special Edition | Episode 056: The Inflation Reduction Act: Takeaways from Tax Experts

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On August 16, 2022, President Biden signed The Inflation Reduction Act of 2022 into law with the goals of helping lower costs for families, combating the climate crisis and reducing the deficit to help inflation. What do business owners need to know about The Act, and how does it affect everything from tax to the environment to healthcare?

In this episode of The Wrap, Warren Averett’s own William Dow, CPA, and Lisa Billings, CPA, join our hosts to discuss the sprawling Inflation Reduction Act of 2022, how the act impacts large corporations, stock repurchases and energy credits, and how the act could affect individuals (both directly and indirectly).

After listening to this episode, you’ll be able to:

  • Understand the changes in the corporate minimum tax, who it affects and how it is assessed on both a U.S. and foreign scale.
  • Know what the stock repurchases provision is, who is exempt and what it means for public companies.
  • Better understand the latest changes to the Electronic Vehicle Tax Credit and other credits designed to impact the environment.

Additional Resources:

(00:00:00) Commentators: Hey, I’m Paul Perry. I’m Kim Hartsock, and you are listening to The Wrap, a Warren Averett podcast for business leaders designed to help you access vital business information and trends when you need it. So, you can listen, learn and then get on with your day. Now let’s get down to business.

(00:00:17) Kim Hartsock: Hi everyone, and welcome to The Wrap. Today, we’re talking about what you should know about The Inflation Reduction Act and taxes. We are very excited to have our guests back with us for a record fifth time, our Tax Members: Lisa Billings and William Dow.

(00:00:40) Lisa Billings and William Dow: Thank you. Glad to be here.

(00:00:42) Kim Hartsock: Lisa and William are going to share with us today what we need to know about the Inflation Reduction Act of 2022, which President Biden signed into law on Tuesday, August 16.

This Act is a sprawling climate tax and healthcare act that covers a lot of different things. So, welcome Lisa and William to help us understand this.

(00:01:05) Lisa Billings: Hey there. I’m Lisa Billings. I’m with Warren Averett’s Tax Division in Birmingham. I work primarily with private equity and real estate clients across the U.S.

(00:01:16) William Dow: Hi, I’m William Dow, a Member in the Tax Division in the Birmingham office. I work with a lot of private equity groups, a lot of large corporations in the M&A area.

(00:01:28) Paul Perry: So, the good news for most taxpayers is that this act is not designed to increase taxes on small businesses or families making $400,000 or less.

I know that there are different areas of this tax act that we really want to talk about today. So, let’s, let’s jump to the first one. Lisa, William, I think there was something in there about corporate minimum tax. Can you give us an update on that?

(00:01:49) William Dow: It’s interesting, Paul, that you mentioned that it’s not designed to increase tax on families making less than $400,000. Because what you’re going to see is this goes on both ends of the spectrum. The first couple items we’re going to talk about really apply to very large corporations. They don’t apply to a lot of individuals. Some of the tax ramifications could affect individuals all over the spectrum – even those making less than $400,000.

So, although there’s no specific tax directly impacting families making less than $400,000, we’re about to talk about some of these taxes hitting corporations that could indirectly affect these families. The first thing you mentioned is the corporate minimum tax, which they also refer to as the business minimum tax.

This is one they’ve been lobbying around for years and wanting to go after corporations that show a lot of profit on their financial statements but pay very little tax on their tax returns. That’s something that the press has loved over the years to get hold of tax information on these large public companies where they’re reporting billions of dollars in profits, but maybe show very little tax because of just some tax planning and timing differences.

This tax imposes a 15% minimum tax on corporations that basically have over a billion dollars in revenue. We can go into a little more detail about that, but basically you have some steps you have to first determine who’s an applicable corporation, how do you measure this tax and when do they have to pay this tax?

The first one we’ll touch on is really what is an applicable corporation that this applies to.

(00:03:30) Lisa Billings: One of the things to know, this is really set to get these big corporations that are out there.

It’s a three-year average of a billion dollars of applicable financial statements. We have created a new definition for what is financial statement income. So, everybody’s still trying to wrap their heads around that piece.

It is a billion dollars of income, three-year average. So, if you were foreign owned, there’s a lower threshold that would make you subject to this. For U.S.-owned corporations, it’s only going to affect a handful of entities.

(00:04:23) William Dow: That’s a good point to touch on, Lisa, because when you get into these foreign-owned corporations – there’s a lot of that in the press as well.

It talks about that the U.S. members only have to have a hundred million dollars of income, as long as the overall group meets the billion-dollar test. Some of the most complicated things in this bill are: what is a group determining the test and who is this tax assessed on?

There are two different items really because the group test is a larger test, but the tax then is only assessed on the smaller and possibly U.S.-based entity.

(00:05:00) Kim Hartsock: I foresee that to be something that will impact financial statements perhaps. There might be a reconciling schedule in the back of audited financial statements.

As you know, audited financial statements have to disclose uncertain tax positions. This could factor into auditors understanding the risk of how a client has defined themselves in a group or taken a position on that. So, this does have far-reaching impact outside of just simply preparing a tax return.

(00:05:37) William Dow: Exactly. Because, you know, when you start looking at the testing, you look at the group and the group can include partnerships that the corporation controls and items like that. So, it is very far reaching. This is an area that there are a lot of questions that are still out there.

You know, one thing, as Lisa touched on is, you look at the test for the last three years internally preceding the current year. What if you’ve only been in existence less than three years? Well, you just look at the number of years you’ve been in existence, so it can still apply to a newly established corporation.

But again, the billion-dollar test – that’s going to be a company that’s been around for a while to meet that test.

(00:06:15) Paul Perry: So, William, what about companies that maybe had a dip in their revenue because of COVID-19 in 2020 and using that as part of your three year look back. Is this a test you have to do every year?

(00:06:28) William Dow: Yeah, you do it basically every year. Again, you look at the past three years. So, it’s looking at 2023. You’ll look at your financial statements for 2021 and 2022. Now once a taxpayer is what they call an applicable corporation and this applies to you, it remains applicable for all future years.

Think about a corporation that could have a big jump one year and hit over the three-year average then even though they have a dip because of the recession, things fall down or another COVID-19 scare. They’re still going to be subject to that tax even on their lower earnings. That’s interesting. It’s going to hit them.

There’s a parenthetical that says unless the Treasury provides an exemption, so that’s going to be an area where there’s going to be a lot of lobbying about trying to get exemptions for that. And what happens when you split up a corporation, you know, how do you determine that?

You can see all the questions that are there. Because you allocate it out to all the members. So, look at some of these spinoffs that have happened over the last year or two. How do you determine who that tax would follow? There are a lot of questions that are still out there that people are really going to be struggling with.

(00:07:41) Kim Hartsock: Another point that is in the Act is around stock repurchases and companies oftentimes use that as a tax strategy. It appeared that loophole was caught in this act. Can Lisa and William talk to us a little bit about how that is brought into the Act and what our listeners need to know about that?

(00:08:03) Lisa Billings: So, the stock repurchases provision is a 1% tax on stock repurchases of public securities. There’s some new definitions and a lot of questions around what this will apply to, but they’ve released some statistics. And in 2021, the U.S. set a record for stock repurchases of almost $900 billion. That’s really what they’re going after is these large public companies that are repurchasing stock to possibly inflate stock prices. They’re just using this as another revenue raiser that they can go after corporations.

(00:08:47) William Dow: You know, the stock buybacks are only a 1% tax and it’s on public companies.

There has to be more than a million dollars in buyback. That’s a small threshold for a large public company. Now it doesn’t apply to reorganizations or items like that. Those can be exempted now on this repurchase, you reduce it by stock issuances. So, you look at it throughout the year: what were your buybacks, your issuances? Issuances can be your normal stock issuances.

It can also be stocks that are issued in regard to employee plans like stock option exercises, restricted stock items like that. Also, any repurchases that are used to go into like an ESOP are exempted, but there are a lot of questions out there and you know a lot of law firms have reached out to the Treasury saying: We need guidance on this before the end of the year on how this is going to apply when it comes into effect, because it does say there that this applies to any that are economically similar. – Very specific.

It’s like that final catchall of “it’s up to their discretion”: what it applies to. You can have a lot of M&A transactions where it could look like a buyback. There’s a lot of concern about preferred stock cause a lot of times that’s the first stock that’s repurchased. A lot of people look at preferred stock. Basically, it’s more like a fixed income instrument, you know? So, it generally has a set buyback price. What about when you have call features or mandatorily redeemable preferred stock – issues like that?

There’s a lot of uncertainty out there and a final thing just to touch on… These two items (the business minimum tax and the stock buyback tax), there’s been some confusion out there about who it applies to. We touched on that the business minimum tax is on those with the billion-dollar threshold.

The buyback is only on those that are public companies. There’s some confusion because the minimum tax. You just have to meet this income test. Also, there’s a lot of lobbying about who this applies to in private equity groups. There’s been some exemption from that because a lot of private equity groups may be combined, may meet this test. It’s going to be interesting to see how all this comes together.

(00:11:26) Lisa Billings: One thing to remember in both of these provisions is they don’t take effect until 2023. There may be some activity towards the end of the year, just trying to push buybacks and do some transactions before the end of 2022, so that we don’t have to worry about these.

(00:11:48) Commentators: Want to receive a monthly newsletter with Wrap topics? Head on over to warrenaverett.com/thewrap/ and subscribe to our email list to have it delivered right to your inbox. Now, back to the show.

(00:12:02) Paul Perry: Interesting stuff there on that. So, let’s switch gears to how this bill impacts individuals. I think I saw some credits for electric vehicles or more green energy tax provisions. Can you talk about that for a second?

(00:12:14) Lisa Billings: Sure! They extended the electric vehicle tax credit, but they made some modifications that are interesting first in order to get the credit. Now, individual taxpayers have to have an adjusted gross income of $300,000 or less. If they’re joint filers or have $150,000 or less, if they’re a single filer… It really limits. We do have the credit, but it does limit who can take them.

Also, they limited how much the car could cost: it’s limited to electric vehicles that are under $55,000 MSRP for a car and $80,000 MSRP for a van, pickup or an SUV. So, so it does cut out a lot of the higher end electric vehicles out of this credit. The other thing is all the vehicles have to have final assembly occurring in the U.S.

If you’re buying a car, not only do you have to meet the MSRP requirements now, but you actually have to make sure that the car was finally assembled in the U.S.

(00:13:21) William Dow: Lisa, you know, there’s some interesting provisions in there as well about the battery makeup and where the components came in from the battery.

There’s certainly a lot of tests there. It can’t come from China, and they call what they call foreign entities of concern. They look at final assembly in the U.S. So that’s going to really fall on the manufacturers to be able to attest to that. That’s not going to fall on taxpayers to look at that.

It’ll just be in their sales literature, whether it qualifies. A couple of other interesting things that came out of the Act… Currently there’s a limit on companies of 200,000 vehicles that once they meet that, they no longer qualify for any credit. There’s been some lobbying, so they got rid of that vehicle limit.

It’s going to be unlimited now for the manufacturers, which is good. You can transfer the credit back to the dealer. So, if you have a taxpayer that’s maybe in a lower income bracket, wherever they really can’t use the credit, they can sell it back to the dealer. You know, basically if the dealer can use it. They also bring it into—starting in 2023—used electric vehicles.

The word electric is now gone. You have to refer to them as “clean” vehicles. That’s what it’s called. They don’t like the word electric. So, it’s now just going to be called “clean.”

Used ones will come into play. Starting in 2023, it has to be at least two years old, and it must be the first transfer of the vehicle. There’s also lower qualifying dollar amounts of the car. It’s supposed to be $7,500 for new vehicles.

This is $4,000 or 30% of the sales price. I said earlier that there’s a $25,000 limit on the sales price anyway. So, you know, a lot of issues there. As Lisa mentioned, there’s also AGI limits. There are lower limits now on even used vehicle purchases again. What should be simple, as you can see just from this limited discussion, is fairly complex when you start looking at who it applies to when it applies, etc. So expect a lot more literature out there, a lot more advertising. This will fall on the person selling it. The companies have to have this information to be able to attest to the buyers that they qualify for this credit.

(00:15:49) Kim Hartsock: There were some other green energy credits in there around more home ownership type credits.

(00:15:56) Lisa Billings: There are some home energy credits for doing energy efficient improvements in your home. You know, they’ve had some of these around, they’ve been kept at $500 per taxpayer. Now there’s a lifetime credit of $1,200 per taxpayer.

They do have them for putting energy efficient windows, doors, HVAC, those types of things. There are some solar credits, things like that that they do have out there. But for residential and for an individual taxpayer looking to get a tax credit, it does cap out at $1,200 over the lifetime. It is a credit and it’s out there. It’s not going to be huge dollars.

(00:16:37) William Dow: Something to note, talking about these credits, they’ve expanded those for residential, they’ve expanded them a lot in the business arena, but another area they’ve done is the transfer of credits.

It allows taxpayers to transfer a portion or all of the credits as long as it’s to an unrelated party. A lot of them are the business credits. I mean, here’s some exciting ones: the carbon oxide sequestration credit. I have no idea what that even means. The clean hydrogen production credit, clean electric production credit.

It goes on and on, but it’s a lot of these credits you see applied to businesses. I think what you’re going to see is a rise in the industry of brokers that are selling credits. You can have a lot of these industries maybe that don’t need the credit. They’ll package them up and sell them.

So, it’ll be a way for businesses to get money and some taxpayers to get some tax credits out of it.

(00:17:34) Paul Perry: Any other expected credits for individuals from the Act?

(00:17:37) Lisa Billings: No, not really. Like William said, there’s a ton of business credits that are very specific credits out there, but there’s not a lot for individuals. This is really a business credit-heavy bill.

(00:17:50) Paul Perry: I think I saw something on there about funding for the IRS. Can y’all talk a little bit about what that relates to?

(00:17:57) William Dow: You know, that’s one of the—not the funniest things—but it’s gotten a lot of press lately, they basically allocated $80 billion dollars to go to the IRS for IRS enforcement.

What’s funny is before this hit someone found an ad by the IRS that was sent out and that was looking for criminal investigation division agents. You know, trying to get candidates. It says you must be willing to use deadly force. You know, I mean, that just was kind of comical.

It’s like, you know, how often does an IRS agent do that? Plus, you know, imagine being a taxpayer and knowing that that’s out there.

(00:18:36) Kim Hartsock: Listen, William, accountants are very threatening. We’re very threatening people. Yeah. We’re a danger.

(00:18:43) William Dow: Very scared. Yeah. If anybody saw the movie, The Accountant, they’ll know that. They break that down by a lot of things they’re supposed to do with that. They’ve allocated $15 million of that for the IRS to come up with their own e-file system. That can be interesting because that’s a very complicated thing to do.

It’d be interesting to see how that comes out. But right now, the IRS is in such a bad place as far as PR and where they are just because… a lot of it’s because of COVID-19. They just got so behind on processing returns. There are long waits, you know, a couple hours if you call. To the extent they can use this to work in those areas, I think that will go a long way.

(00:19:27) Paul Perry: What are some of the other provisions that were discussed in there that we haven’t touched on yet, that you want the listeners to know about?

(00:19:34) Lisa Billings: One thing that they did do at the last minute was they added in this extension on the limitation for excess business losses, which affects non-corporate taxpayers.

This is really one of the few business provisions that affects a non-corporate entity. You know, you have S-corps and partnerships that pass their income on to their owners. This limitation came into effect back with the Tax Cuts and Jobs Act in 2017 and it was set to expire in 2026.

They actually extended it two more years. If an individual taxpayer gets a business loss greater than $500,000, it actually gets suspended like a net operating loss and carried forward. So that provision is extended for two years now until 2028.

(00:20:31) William Dow: I think that’s an interesting one to point out because you know, that can impact taxpayers under the $400,000 threshold.

They were very clear. They’re saying this will not impact taxpayers that make less than $100,000. Well, this right here is one that definitely can come into play. Another thing is there was a lot of lobbying and a lot of discussion out there about the carried interest legislation, meaning that they would impose tax on these carried interests.

Supposedly, it’s compensation, but they get the favorable tax treatment on it. That was basically a lot of lobbying that went on right at the end of the bill being finalized and that got pulled. So that was not in the final act, but they had to do some tradeoffs for it.

There was discussion about doing away with with the SALT cap, the $10,000 limit on tax reduction for individuals that was pulled to help pay for it. So, it’s interesting. We could almost do a whole podcast just on the lobbying and issues that went on behind the scenes and some of this legislation that may be more interesting to some of these listeners than what finally came out of it.

(00:21:45) Paul Perry: We may have to try to schedule that, and we’ll try to find somebody in Washington that wants to join us.

(00:21:51) Kim Hartsock: Yeah. So, as you know, William and Lisa… Here on The Wrap, we always wrap it up in 60 seconds or less. So, what would you like to leave listeners with in regard to what they need to know about the Inflation Reduction Act?

(00:22:03) William Dow: I would just say, it has a lot of implications. But a lot of it’s for large corporations, as far as the tax increases. You won’t see a lot of these tax credits that are going to really be beneficial to the individuals. And so, I think it’s just going to be kind of wait and see, there’ll be a lot more guidance that’s coming out. There are a lot more questions than answers right now. My view would just be patient and wait.

(00:22:28) Lisa Billings: I agree. I think that it is always good to look deeper into what you hear. Don’t just take the sound bite because chances are, there’s a lot more details behind it in this act.

(00:22:38) Paul Perry: William, Lisa, it’s a pleasure to have you on the podcast and we look forward to the next time you can join us.

(00:22:45) Kim Hartsock: Thank you, Lisa and William.

(00:22:48) Lisa Billings and William Dow: Thank you for having us. Thank you.

(00:22:50) Commentators: And that’s a wrap. If you’re enjoying the podcast, please leave a review on your streaming platform. To check out more episodes, subscribe to the podcast series or make a suggestion of other topics you want to hear, visit us at warrenaverett.com/thewrap.

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