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The Inflation Reduction Act Of 2022 – A Few New Taxes And A Lot Of Credits! – Tax Authorities



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On August 16, 2022, President Biden signed into law the Inflation Reduction
Act of 2022
 (the “Act”), a
legislative package intended to address taxes, prescription drug
costs, climate change and inflation. Specifically, the Act includes
the following changes, among others, which will be discussed more
fully below:

  • a one percent excise tax on repurchases of certain corporate
    stock;

  • revisions to the corporate alternative minimum tax;

  • a new excise tax on drug manufacturers who fail to comply with
    new pricing agreement rules;

  • an extension of the premium tax credit rules previously
    enhanced by the American Rescue Plan Act of 2021;

  • an extension and modification of the renewable electricity
    production credit;

  • an extension and modification of energy credits under Section
    48 of the Internal Revenue Code of 1986, as amended
    (“Code”);

  • an extension and modification of the credit for carbon oxide
    sequestration under Code section 45Q;

  • a new credit for zero-emission nuclear power production under
    new Code Section 45U;

  • a new income or excise tax credit for sustainable aviation fuel
    under new Code Section 40B;

  • a new clean hydrogen production credit under new Code Section
    45V;

  • an extension, increase, and substantial modification of
    nonbusiness energy property credit under Code Section 25C;

  • an extension and modification of the residential clean energy
    credit under Code Section 25D; and

  • a new clean vehicle credit under Code Section 30D.

One Percent Excise Tax on Repurchase of Corporate
Stock

Act Section 10201 enacts new Code Section 4501, which imposes a
nondeductible excise tax on each “covered corporation”
equal to one percent of the fair market value of any stock of the
corporation that is either repurchased by, or acquired by certain
affiliates of, the corporation during the taxable year. The value
of stock treated as repurchased during the taxable year for
purposes of computing the tax is reduced by the value of any new
issuances of stock by the corporation during the same taxable
year.

The term “covered corporation” means any domestic
corporation the stock of which is traded on an established
securities market (e.g., NYSE or NASDAQ).

A “repurchase” means a redemption within the meaning
of Code Section 317(b) with regard to the stock of a covered
corporation, and any transaction determined by the Secretary of
Treasury to be economically similar to a repurchase.

Exceptions to the new tax include, among others, qualifying
reorganization transactions, ESOP transactions, repurchases in
which the total value of the stock repurchased during the taxable
year does not exceed $1,000,000 and repurchases treated as a
dividend under Code section 301.

The new 1 % tax applies to repurchases of stock after December
31, 2022.

Dykema Observations: There is no
minimum “market cap” requirement applicable to
“covered corporations.” Additionally, as many commenters
have pointed out, the tax would likely apply to a redemption by a
special purpose acquisition company (“SPAC”) that is a
covered corporation (i.e., a Delaware SPAC as opposed to a
Cayman Islands SPAC), including in connection with its initial
business combination or “de-SPAC” transaction.

Revisions to the Corporate Alternative Minimum
Tax

Act Section 10101 amends Code Section 55(b) to impose a
tentative minimum tax on the excess of 15 percent of the adjusted
financial statement income for the taxable year, over the corporate
alternative minimum tax foreign tax credit for the taxable year.
Importantly, the new alternative minimum tax applies only to
corporations (other than S corporations, RICs and REITs) that
generally have average annual adjusted financial statement income
exceeding $1,000,000,000.

Dykema Observations: According to an
analysis prepared by Martin A. Sullivan and appearing in Tax Notes
Federal, August 22, 2022, p. 1185 (2022 TNTF 161-2), approximately
90 corporations are likely to be subject to the corporate
alternative minimum tax in calendar year 2023 (an earlier analysis
by Mr. Sullivan had identified 114 corporations most likely to be
subject to the new corporate alternative minimum tax). Given Mr.
Sullivan’s analysis, observations, it is unlikely that the new
corporate alternative minimum tax will apply to many taxpayers.

New Excise Tax on Drug Manufacturers who Fail to Comply
with New Pricing Agreement Rules

Act Section 10101 enacts new Code Section 5000D, which imposes a
new tax on the sale by the manufacturer, producer, or importer of
any “designated drug” during the period when such person
has failed to enter into a drug pricing agreement under Section
1193 of the Social Security Act. The soonest that a taxpayer can be
in noncompliance is October 2, 2026.

Extension of the ACA Premium Tax Credit Rules

Act Section 12001 extends the sunset date of the refundable
premium tax credit under the Affordable Care Act for taxpayers
whose household income exceeds 400 percent of the poverty line. The
extension is through the 2025 tax year.

Extension and Modification of the Renewable Electricity
Production Credit

Act Section 13101 extends and modifies the tax credit for
electricity produced from certain renewable resources. By way of
background, for purposes of Code Section 45(d), the term
“qualified facility” has different meanings depending on
the type of facility, but, in each case, construction of such a
facility qualifies for the renewable electricity production credit
only if construction commenced prior to January 1, 2022.

The Act extends the construction start deadline to January 1,
2025, including for facilities using solar energy (for which a 2006
placed-in-service deadline had previously applied).

Importantly, Act Section 13101(f) requires as a pre-condition to
receiving the renewable electricity production credit both a wage
and apprenticeship requirement. Specifically, in constructing a
qualified facility, the taxpayer must ensure that laborers and
mechanics employed by the taxpayer or any contractor or
subcontractor are paid wages at rates not less than the prevailing
rates for construction, alteration, or repair of a similar
character in the locality in which such facility is located as most
recently determined by the Secretary of Labor. Additionally, each
taxpayer, contractor, or subcontractor who employs four or more
individuals to perform construction, alteration, or repair work
with respect to the construction of a qualified facility must
employ one or more qualified apprentices to perform such work. The
term “qualified apprentice” means an individual who is
employed by the taxpayer or by any contractor or subcontractor and
who is participating in a registered apprenticeship program. The
term “registered apprenticeship program” is defined in
Code Section 3131((e)(3)(B) as an apprenticeship registered under
the National Apprenticeship Act.

Act Section 13101 also adds a new domestic content bonus.
Specifically, the amount of the credit determined is increased by
10 percent if the taxpayer certifies to the Secretary of Treasury
that any steel, iron or manufactured product which is a component
of such facility (upon completion of construction) was produced in
the United States. The manufactured products that are components of
a qualified facility upon completion of construction shall be
deemed to have been produced in the United States if not less than
40 percent (or 20 percent in the case of an offshore wind facility)
of the total costs of all manufactured products used in such
facility are attributable to manufactured products (including
components) that are mined, produced, or manufactured in the United
States.

The amendments made by this section of the Act apply to
qualifying facilities placed in service after December 31, 2021.
The amendments related to the bonus for domestic content apply to
qualifying facilities placed in service after December 31,
2022.

Extension and Modification of Energy Credits under Code
Section 48

Code Section 48 provides for an energy tax credit, but only for
construction which commences before January 1, 2024 (with
exceptions for Type 1 solar property and geothermal deposit energy
property). Section 13102 of the Act extends the start of
construction time period from January 1, 2024 to January 1,
2035.

The Act also amends Code Section 48(a)(2)(A)(i) by adding energy
storage technology, qualified biogas property, microgrid
controllers, combined heat and power system property, and equipment
that uses the ground or ground water as a thermal energy source to
heat a structure or as a thermal energy sink to cool a structure to
the list of qualifying energy properties for which the energy
percentage is 30%.

Importantly, the Act changes the existing phasedown or phaseout
rules for property placed in service before 2022. Also, among other
changes, the Act provides that in the case of any energy project
that is placed in service within an energy community that the
energy percentage is increased by the applicable credit rate
increase. In the case of any energy project that does not satisfy
the Act’s project requirements, the increase is two percentage
points, and in the case of any energy project that satisfies the
Act’s project requirements, the increase is ten percentage
points.

A project meets the requirements of the Act if it is one of the
following:

(i) A project with a maximum net output of less than one
megawatt of electrical (as measured in alternating current) or
thermal energy.

(ii) A project the construction of which begins before the date
that is 60 days after the Secretary publishes guidance with respect
to the applicable requirements.

(iii) A project that satisfies the prevailing wage and
apprenticeship requirements.

Extension and Modification of the Credit for Carbon Oxide
Sequestration Under Code Section 45Q

Act Section 13104 makes several changes to Code Section 45Q.
Among other things, the Act modifies the term “qualified
facility” to include any industrial facility or direct air
capture facility the construction of which begins before January 1,
2033 (and meets additional requirements).

The Act also modifies the appliable dollar amount in Code
Section 45Q(b)(1)(A) as follows:

Code Section 45Q(a) sets the value of carbon sequestration
credits for any taxable year. For carbon capture equipment
originally placed in service at a qualified facility on or after
the date of the enactment of the Bipartisan Budget Act of 2018, an
applicable dollar amount is used that varies on whether the
captured carbon oxide is disposed of in secure geological storage
or used as a tertiary injectant in a qualified enhanced oil or
natural gas recovery project and disposed of by the taxpayer in
secure geological storage or utilized in an authorized manner. The
applicable dollar amounts set out in Code Section 45Q(b)(1)(A) have
been modified as follows:

(i) for any taxable year beginning in a calendar year after 2016
and before 2027—

(I) for purposes of paragraph (3) of subsection (a), $17,
and

(II) for purposes of paragraph (4) of such subsection, $12,
and

(ii) for any taxable year beginning in a calendar year after
2026—

(I) for purposes of paragraph (3) of subsection (a), an amount
equal to the product of $17 and the inflation adjustment
factor for such calendar year determined under section 43(b)(3)(B)
for such calendar year, determined by substituting “2025”
for “1990”, and

(II) for purposes of paragraph (4) of such subsection, an amount
equal to the product of $12 and the inflation adjustment factor for
such calendar year determined under section 43(b)(3)(B) for such
calendar year, determined by substituting “2025” for
“1990”.

New Credit for Zero-Emission Nuclear Power Production Under
New Code Section 45U

Act Section 13105 adds new Code Section 45U, which allows for a
zero emission nuclear power production credit. The credit amount is
0.3 cents multiplied by the kilowatt hours of electricity produced
by the taxpayer at a qualified nuclear power facility and sold by
the taxpayer during the tax year, to the extent this amount exceeds
the “reduction amount,” which is based on the price of
electricity.

The new zero emission nuclear power production credit applies to
electricity produced and sold after December 31, 2023, in taxable
years beginning after that date.

New Income or Excise Tax Credit for Sustainable Aviation
Fuel Under New Code Section 40B

Act Section 13203 adds new Code Section 40B providing for a
Sustainable Aviation Fuel Credit.

The new fuel credit applies to fuel sold or used after December
31, 2022.

New Clean Hydrogen Production Credit Under New Code Section
45V

Act Section 13204 adds new Code Section 45V providing for clean
hydrogen production credit for any taxable year in an amount equal
to the product of (A) the kilograms of qualified clean hydrogen
produced by the taxpayer during such taxable year at a qualified
clean hydrogen production facility during the 10-year period
beginning on the date such facility was originally placed in
service, multiplied by (B) the applicable amount with respect to
such hydrogen.

The new clean hydrogen production credit applies to hydrogen
produced after December 31, 2022.

Extension, Increase, and Substantial Modification of
Nonbusiness Energy Property Credit Under Code Section 25C

Act Section 13301 amends Code Section 25C(g)(2) by extending the
expiration of the placed in service date for nonbusiness qualified
energy efficiency improvements and residential energy property
expenditures from December 31, 2021 to December 31, 2032. The Act
also revises the energy efficiency certification requirements for
building envelope components, eliminates treatment of roofs as
building envelope components, and adds air sealing insulation to
the definition of a building envelope component. The Act further
revises the definition of residential energy property expenditures,
including repeal of the requirement that residential energy
property expenditures must be made with respect to the
taxpayer’s principal residence.

In the case of an individual, there is allowed as a credit
against income tax an amount equal to 30 percent of the sum of:

(1) the amount paid or incurred by the taxpayer for qualified
energy efficiency improvements installed during such taxable year,
and

(2) the amount of the residential energy property expenditures
paid or incurred by the taxpayer during such taxable year.

The annual cap on the credit allowed with respect to any
taxpayer for any taxable year is $1,200, with reduced caps for
certain types of energy related property.

The nonbusiness energy property credit applies to property
placed in service after December 31, 2022.

Extension and Modification of the Residential Clean Energy
Credit under Code Section 25D

Act Section 13302 extends the expiration of the residential
energy efficient property credit from December 31, 2023 to December
31, 2034. The Act also changes the title of Code Section 25D from
”Residential Energy Efficient Property” to
”Residential Clean Energy Credit.”

The primary change made by the Act concerns the addition of
“qualified battery storage technology expenditures” to
the list of expenditures for which a credit is allowed.

The term “qualified battery storage technology
expenditure” means an expenditure for battery storage
technology which—

(A) is installed in connection with a dwelling unit located in
the United States and used as a residence by the taxpayer, and

(B) has a capacity of not less than 3 kilowatt hours.’

Under the Act, the applicable rate is 26% for property placed in
service before January 1, 2022, 30% for property placed in service
after December 31, 2021, and before January 1, 2033, 26% for
property placed in service after December 31, 2032, and before
January 1, 2034, and 22% for property placed in service after
December 31, 2033, and before January 1, 2035

New Clean Vehicle Credit Under Code Section 30D.

Act Section 13401 renames the Code Section 30D credit for new
qualified plug-in electric drive motor vehicles and significantly
changes the rules for claiming the credit. Most significantly the
Act imposes an adjusted gross income threshold above which no
credit may be claimed. In the case of a joint return or a surviving
spouse, the adjusted gross income threshold is $300,000; for a head
of household, the threshold is $225,000 and for all other
individual taxpayers the threshold is $150,000.

The Act also imposes a ceiling on the manufacturer’s
suggested retail price of qualifying vehicles.  The ceiling is
$80,000 for vans, sport utility vehicles and pickup trucks. For all
other vehicles, the ceiling is $55,000.

Lastly, among many other changes, the Act requires final
assembly of qualifying vehicles to occur in North America,
effective for vehicles sold after the date of enactment of the
Act.

The Internal Revenue Service has provided guidance on the new
final assembly requirement (located 
here
), including a link to a list of qualifying vehicles.

Note that different provisions go into effect on different
dates. As a result, some vehicles that qualify for tax credits in
2022 may not qualify starting in 2023, and other vehicles may have
their tax credit reduced or eliminated starting in 2023 based on
further restrictions, such as the vehicle price cap.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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