On July 27, 2022, Senator Joe Manchin and Senate Majority Leader Chuck Schumer announced that they had reached agreement on a fiscal reconciliation bill (the Inflation Reduction Act of 2022, the law “). While the law isn’t as ambitious as the earlier $3.5 trillion “Build Back Better” plan that didn’t garner enough support to pass the Senate, the law would bolster the clean energy initiatives of the President Biden by increasing tax revenue to pay for a generous package of clean energy tax incentives. Specifically, the law would, among other things: (i) establish a minimum corporate tax of 15%, (ii) modify the deferred interest rules to apply short-term capital gains rates, unless a increased holding period requirement is satisfied, and (iii) provide extensive tax benefits for the clean energy sector, including the extension of the investment tax credit (“ITC”) of the 48 and Section 45 Production Tax Credit (“CIP”), allowing stand-alone storage to qualify as an ITC-eligible property and adding a new clean hydrogen tax credit.
Importantly, the law does not include any relief from the $10,000 cap on individual itemized federal deductions for state and local taxes, which could create hurdles for legislation in the House, where some Democratic Representatives have promised to block any proposal that does not address the limitation of state and local tax deduction.
The law estimates that $739 billion in revenue would be generated from (i) the addition of a minimum corporate tax and deferred interest rule changes, (ii) savings from federal policy changes on prescription drugs and (iii) increased enforcement of the IRS.
Here are some highlights of the important tax provisions included in the Act:
Establish a minimum corporate tax of 15%
- The law creates an Alternative Minimum Corporate Tax (“AMT”) equal to a minimum tax of 15% on adjusted financial statement income for corporations with earnings exceeding $1 billion.
- Corporations would generally be eligible to claim net operating losses and tax credits against AMT, and would be eligible to claim a tax credit against normal corporation tax for AMT paid during previous years, to the extent that the normal tax payable in a year exceeds 15 percent of the company’s adjusted financial statement income.
- This provision would apply to taxation years beginning after December 31, 2022.
Changes to deferred interest rules
- Under current law, a three-year holding period is required to realize a long-term capital gain for deferred interest payable to managers of certain investment partnerships.
- Subject to certain limited exceptions, the law would replace the three-year holding period with a five-year holding period requirement that would have to be satisfied for taxpayers with adjusted gross income of $400,000 or more to qualify for the long-term preferential holding period. the treatment of forward capital gains with respect to interests held in certain partnerships.
- The law changes the wording of Section 1061 to clarify that these rules will apply to an interest held by an “S corporation.”
- Under current law, certain types of income subject to tax at the long-term capital gains rate are excluded from the scope of Section 1061, including amounts treated as capital gains. long-term capital with respect to regulated futures contracts marked to market under section 1256, – forward capital gain under section 1231, and qualified dividend income from domestic corporations and of certain foreign companies. The law would expand the scope of Section 1061 to apply to all items of income that are subject to tax at the rates applicable to capital gains.
- By statute, the Treasury is authorized to issue Treasury regulations or other directives “to prevent the avoidance of the purpose of Section 1061, including by the distribution of property by a partnership and by waivers of portage”.
- This provision would apply to taxation years beginning after December 31, 2022.
Expand, extend and add new energy tax credits
- Extends the ITC and PTC for eligible projects (e.g., wind, solar, biomass, and hydro) whose construction begins before January 1, 2025 and for geothermal projects whose construction begins before January 1, 2035. Other changes of the ITC and the PTC include: (i) a PTC for solar; (ii) expansion of ITC-eligible property to include stand-alone energy storage, qualified biogas and micro-grid controllers; (iii) implementing a two-tier rate structure that requires meeting prevailing salary and apprenticeship requirements to earn the full rate; and (iv) the addition of a bonus credit limited to 10%.
- A new tax credit for the production of clean hydrogen after December 31, 2022 at an eligible facility whose construction begins before January 1, 2033.
- New technology-neutral tax credits effective January 1, 2025 for zero-emission installations. There are also zero-emission tax credits for (i) clean energy or nuclear power generation and (ii) power generation or energy storage facilities.
- The Section 45Q carbon capture and sequestration credit is extended for projects that begin construction before January 1, 2033. Additionally, the minimum carbon capture requirement is lower and there is an enhanced credit for certain facilities direct air capture.
- There is a new alternative manufacturing production credit available to taxpayers who produce and sell certain components (generally including a portion of clean energy facilities) that are produced in the United States and sold to unrelated persons.
- Other positive changes are (i) the portability of most energy tax credits; (ii) a limited direct payment option; and (iii) a 3-year carry-back period for energy credits.
Senator Schumer announced in a July 27 statement that the text of the law would be submitted to the Senate for consideration, and that he expects the Senate to “vote on this transformative legislation next week.” The Senate is currently scheduled to begin its August recess at the end of this week, and the House’s scheduled recess began this week; however, if the bill passes the Senate, it would not be surprising to see the House seize the bill soon after.
In a statement by President Biden on July 27, the president voiced his support for the legislation, saying, “I urge the Senate to move forward on this bill as soon as possible, and the House to follow suit as well.” Although much work remains to be done before the law can be laid on President Biden’s desk for signature, to meet the complex requirements of the reconciliation process, which will allow the law to pass by a simple majority in Senate, Democrats should push aggressively to have this legislation passed and ready for the president’s signature by Sept. 30.
Mintz’s tax group will closely monitor the development of this legislation.
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