Though increased funding for the IRS may increase audit risk for some high-net-worth taxpayers, thorough and risk-appropriate tax strategies should mitigate the impact to most.
On August 16, President Joe Biden signed into law the Inflation Reduction Act of 2022, the most significant climate package in recent history, along with several key tax changes. Following the announcement of a tentative deal between Senators Joe Manchin and Chuck Schumer on July 27, and since our previous Alert, Senator Kyrsten Sinema flexed her influence to negotiate further changes both to spending and collection provisions.
What’s Changed Since the First Draft of the Bill?
- The 15 percent alternative minimum tax (AMT) for corporations saw a few key changes:
- The AMT permits some bonus depreciation not permitted under the prior version.
- The final version uses a “one employer” model, which reduces the aggregated income from interrelated companies for purposes of the income thresholds for the imposition of the tax.
- The limitations to the carried interest rule, which would have limited the ability of private equity and hedge fund managers to classify some income as capital gains, were dropped from the bill.
- The limitation on excess business losses for noncorporate taxpayers was extended an additional two years, through 2028.
- The addition of a 1 percent excise tax on repurchases of U.S. publicly traded corporations. It is important to note that, as currently written, the application of the excise tax could apply to many mergers and redemptions in special purpose acquisition company transactions.
- The addition of $4 billion in drought relief and related infrastructure improvements focused on the Midwest.
These changes in collections and tax increases are offsetting, and the impact largely does not extend to the spending initiatives earmarked primarily towards drug pricing reform, insurance subsidies for the self-employed and environmental projects.
While economists’ analysis differs, the net impact of the stock buyback excise tax for most investors is likely to be minimal, as the potential added cost is likely to be offset by increased issuance of dividends to shareholders. While the impact of the corporate AMT is more difficult to gauge for investors, changes to the bonus depreciation structure may make it more friendly than the prior version, resulting in more short-term investment.
Similarly, economists differ on their analysis of the impact on the life sciences industry; while some fear a reduction in profits due to price negotiations, others anticipate more insurance coverages as a result of adding customers to the base.
The big winners are likely to be green energy manufacturers, as this will be an increasingly attractive sector for investment.
Though increased funding for the IRS may increase audit risk for some high-net-worth taxpayers, thorough and risk-appropriate tax strategies should mitigate the impact to most, as we wrote about in our previous Alert, with much of the funding directed at improving customer service and resolving IRS backlogs now extending through multiple tax years.
With a very positive jobs report issued earlier in August and inflation falling over the past month, the economic outlook may not be as dire as many feared earlier in the year.
Even with the passage of final legislation, there is much work for the IRS to perform in issuing regulations and providing clarification going forward, including how the 1 percent excise tax will be applied to many transactions, details regarding energy credit provisions and the approach taken toward the negotiation of prescription prices through Medicare. Investment in renewable energy may present advantageous investment opportunities in addition to the beneficial impact on the environment. However, we do anticipate that the corporate AMT imposed by the Inflation Reduction Act may make certain C corporations subject to this tax less likely to participate in qualified opportunity zone investments, and indeed, may even pull out of existing opportunity zones and qualified opportunity funds, absent additional congressional action. We will continue to assess the impacts of this law in its entirety and provide additional observations and tax planning techniques in due course.
While this legislation punted on closing the carried interest loophole, it is important to note that this issue has garnered bipartisan attention, and Senator Sinema has indicated that she may support future legislation aimed at addressing the loophole. This is likely not the last time we will be discussing the potential elimination of this controversial tax advantage. As this and other major economic or legislative opportunities develop or emerge, we are always available to discuss the impact of new or pending tax law on your personal or business situation.
For More Information
If you would like more information about this topic or your own unique situation, please contact Michael A. Gillen, John I. Frederick, Steven M. Packer, any of the practitioners in the Tax Accounting Group or the practitioner with whom you are regularly in contact. For information about other pertinent tax topics, please visit our publications page.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.