How the Inflation Reduction Act (Barely) Impacts Your Provision04 September 2022
On August 16, 2022, President Biden signed into law H.R. 5376, known as the Inflation Reduction Act of 2022 (“IRA”). And while the law may not have as much to do with combatting inflation as one may have thought, it does have quite a bit to do with health care, energy, climate change – and, of course, tax.
We will focus on this last element for purposes of this piece, and cover not only what the tax law changes included in the legislation are, but, also, how they impact your tax provision under ASC 740.
The law includes several tax elements, but, from a corporate tax perspective, two seem to stand out the most:
- 15% Minimum Tax on Large Corporations
Congress taketh and now Congress giveth back. The Tax Cuts and Jobs Act of 2017 (TCJA) repealed the corporate alternative minimum tax – however, the IRA brings it back with a vengeance, albeit in a much different form.
This alternative minimum tax applies a 15% tax rate on the “adjusted financial statement income” (AFSI) of certain “large corporations”. These large corporations are those reporting at least $1 billion average adjusted pre-tax net income on their consolidated financial statements for tax years beginning after December 31, 2022.
Thankfully, unlike the TCJA, the IRA will have a much simpler impact on companies’ tax provisions. First, this law change will only impact the very biggest companies (estimates are around 200 companies may be impacted by this change). Second, even for those few companies it does impact, since this represents an alternative minimum tax, and not a rate change on the overall US statutory rate, companies will handle this just as they handled alternative taxes in the past – as a period item. Further, companies will not have to worry about re-valuing their deferred tax assets/liabilities as these items are not to be tax effected by an alternative tax structure, be it old or new.
- 1% Excise Tax on Stock Repurchases
The IRA imposes a 1% excise tax on repurchases of stock by certain publicly traded companies. The excise tax is levied against the fair market value of the stock repurchased, and this tax is not deductible for income tax purposes.
For purposes of tax provisions, as this is an excise tax, and not an income tax, it is not under the scope of ASC 740, and, therefore, its impact would not be included within the tax provision (it would be an “above-the-line” tax). However, companies that are subject to this will need to mind the fact that this expense would be included in their pre-tax book income, and as a non-deductible expense for income tax purposes, would need to be added back when calculating taxable income. This addback would be permanent in nature and would drive companies’ effective tax rates up as a non-deductible expense.
Perhaps one of the most notable observations surrounding this law is what is not included – particularly when comparing it to the House’s much broader Build Back Better (BBB) bill. The following items are notably absent from the Inflation Reduction Act:
- Modifications to the corporate income tax rate (it remains at 21%)
- Changes to the international tax regime (including GILTI and BEAT)
With all this in mind, while companies – particularly large, publicly traded ones – need to understand and analyze these tax law changes closely and assess their impact on their facts, the IRA is not going to sting nearly as much as the BBB would have. And your provision is only going to feel some of these reverberations, as opposed to completely being flipped on its side.