Tax Provisions of the Cut Inflation Act 2022 – Corporation Tax

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On August 7, 2022, the Senate passed a major climate, health and tax bill as part of the budget reconciliation process. The bill, named the Inflation Reduction Act of 2022, is expected to be taken up by the House of Representatives later this week. The bill includes some significant tax changes, but notably not the proposed interest rate that was included in the bill as originally proposed by Senate Majority Leader Chuck Schumer (DN.Y.) and Sen. Joe Manchin (DW.Va.).

Minimum corporate tax of fifteen percent

The bill reintroduces a corporate minimum tax substantially similar to a provision included in the Build Back Better Act. US corporations are currently subject to US federal income tax at the rate of 21%, although some corporations pay a much lower effective rate. The bill would impose an alternative minimum tax (AMT) of 15% on adjusted financial statement income (AFSI) of companies whose average annual AFSI exceeds $1 billion, calculated over a three-year period. 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 regular corporate income tax for AMT paid over the years above, insofar as the regular tax to be paid during a year exceeds 15% of the AFSI of the company.

This provision would apply to taxation years beginning after December 31, 2022.

1% excise tax on redemptions of corporate shares

The bill also reintroduces a 1% excise tax on corporate share buybacks, virtually unchanged from what was previously included in the Build Back Better Act. Under the bill, publicly traded US companies would be subject to a non-deductible excise tax equal to 1% of the fair market value of any share redemptions. Excise tax would apply to any redemption by a target company (or certain affiliates) that constitutes a redemption within the meaning of section 317(b).1 The excise tax would also apply to redemptions of shares of publicly traded non-U.S. corporations by certain U.S. affiliates (in which case the U.S. affiliate would be liable for excise tax) and to redemptions of shares by corporations publicly traded non-U.S. corporations that are classified as surrogate foreign corporations under Section 7874 (generally, a non-U.S. corporation that replaces the U.S. parent of a multinational group in an inversion transaction).

The proposed rule excludes the following categories of redemptions:

  • Redemptions that are part of a tax-free reorganization under section 368(a) and the shareholder recognize neither gain nor loss.

  • When the redeemed shares (or an equivalent amount of shares) are paid into an employer-sponsored pension plan, employee stock ownership plan or similar plan.

  • If the fair market value of the shares redeemed during the tax year does not exceed $1 million.

  • Redemptions by Securities Dealers in the Ordinary Course of Business.

  • Redemptions by companies classified as Regulated Investment Companies (RICs) or Real Estate Investment Trusts (REITs) for US federal income tax purposes.

The bill directs the Treasury Department to issue regulations to administer the excise tax, including dealing with special classes of stock and preferred stock and preventing abuse of the above exceptions.

This provision would apply to share buybacks after December 31, 2022.

Footnote

1. All section references are to the US Internal Revenue Code of 1986, as amended.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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