Matter & Substance
  August 18, 2022

Business Clients Can Benefit from the Inflation Reduction Act

On August 16, 2022, President Biden signed the Inflation Reduction Act. The effects of this bill are aimed at reducing some of the burden of inflation in the longer-term, supporting small businesses, and impacting climate change.
Below is a closer look at the final tax changes, many of which benefit small businesses but cost more for larger corporations.

R&D Payroll Tax Credit Expansion

The new law improves the R&D Tax Credit, making it more significant and accessible to small and mid-sized businesses.

The R&D Tax Credit is a federal benefit that provides companies with savings for performing activities related to development, design or improvement of products, processes, formulas, or software. This credit often provides capital or relief for those in some of our largest supported industries including manufacturing, technology, construction, and architecture. You can read more about the four-part test used to identify “qualified research activities” in our prior articles.

With the passage of the Inflation Reduction Act, the maximum R&D Tax Credit a business may apply against payroll taxes is doubled to $500,000 for tax years beginning after December 31, 2022. Taxpayers that have more credit than liability can carry forward unused amounts—meaning the research work your company performs when cash flows are good, can support future tax liabilities.

Eligible small businesses are those with less than $5 million in annual revenues and having revenues for no more than five years.

Green Tax Credits for Builders

For those in the building and construction industries, the expansion of 45L and 179D tax deductions may provide significant savings as well.

The 179D tax deduction has been increased from the current maximum of $1.88 per square foot in 2022 to $5 per square foot to enable and reward building owners to claim a tax deduction for installing qualifying systems in buildings 4 stories or taller. In addition to energy efficient ground up construction, energy efficient retrofits of older buildings will also be eligible. Additionally, real estate investment trusts will now have the ability to utilize 179D tax deductions for purposes of computing earnings and profits.

Previously, only government building owners could allocate the 179D to their designers, but that has been expanded to include architects, engineers, and designers responsible for designing a building’s energy efficient systems.

For 2022, the existing energy efficiency criteria and the $2,000 tax credit per dwelling unit will remain unchanged, but starting in 2023, it will be expanded. The maximum tax credit increases to $5,000 per dwelling unit for both single-family and multifamily developments, with all types of residential developments now eligible.

1% Tax on Stock Buybacks

Beginning on January 1, 2023, publicly traded US corporations will be subject to a 1% excise tax on the repurchase of their stock. With this tax, lawmakers are hoping to slow the practice of corporate stock buybacks and encourage the use of dividends.

Companies will now have to report buybacks on the next business day and be required to disclose whether executives bought or sold stock within 10 business days of a buyback program being announced.

There are several situations where the excise tax does not apply, including:

  • If the total value of the stock repurchased in the taxable year does not exceed $1 million

  • If repurchase is part of certain forms of tax-free and tax-deferred reorganization transactions when no gain or loss is recognized on the repurchase

  • If the stock repurchased (or an amount of stock of equivalent value) is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or other such plan

  • Under regulations, if the repurchase is by a dealer in securities acting in the ordinary course of business

  • If the covered corporation is a regulated investment company (RIC) or real estate investment trust (REIT)

  • If the repurchase is treated as a dividend for U.S. federal income tax purposes

Corporate Minimum Tax

The corporate alternative minimum tax (AMT) imposes a tentative minimum tax of 15% of “adjusted financial statement income” for covered corporations with over $1 billion in profits for any 3-year period ending prior to the current tax year.

The AMT is intended to impact large corporations with financial accounting profits exceeding $1 billion that have significantly reduced, or even eliminated, cash taxes. It is estimated only 150 of the largest corporations would be subject to the new corporate minimum tax.

If any U.S. corporations have foreign parents, the AMT would apply only to income earned in the United States of $100 million or more of average annual earnings in the previous three years and would apply when the international financial reporting group has income of $1 billion or more.

This new AMT does not apply to S-corporations, regulated investment companies, or real estate investment trusts.

We’re Here to Help

If you need assistance understanding or preparing for any changes brought forward by the Inflation Reduction Act, or if you have questions on any of the tax credits, contact your trusted advisor at Mowery & Schoenfeld.