Inflation Reduction Act Becomes Law

Alerts / August 8, 2022
Key Takeaways:
  • The Senate voted 51-50 on Aug. 7 to pass the Inflation Reduction Act.
  • The legislation passed the House without changes and was signed by President Biden on Aug. 16.
  • The legislation raises more than $700 billion from numerous sources, including from novel corporate taxes on adjusted book income and on stock repurchases, through Medicare prescription drug pricing reforms, and by strengthening the IRS with $80 billion in new funding.
  • The legislation spends more than $400 billion on climate initiatives and healthcare.

The Senate passed tax, climate and healthcare legislation called the Inflation Reduction Act (IRA2022) along party lines, with Vice President Kamala Harris casting the tie-breaking vote. The House, which allows proxy voting, voted to approve IRA2022 along party lines on Aug. 12 without making any changes. President Joe Biden signed the bill on Aug. 16.

IRA2022 is part of President Biden’s previously announced economic agenda. It raises approximately $740 billion in revenue, including more than $300 billion from new types of corporate taxes and approximately $25 billion by reinstating long-expired Superfund taxes on crude oil and petroleum products, and it spends approximately $437 billion on climate initiatives and healthcare. IRA2022 includes billions of dollars in tax credits for climate and clean-energy initiatives, directs Medicare to negotiate certain drug prices, extends Affordable Care Act premium subsidies, caps Medicare Part D out-of-pocket expenses for seniors at $2,000, and caps insulin costs for Medicare beneficiaries.

IRA2022 includes a number of provisions of interest to BakerHostetler tax clients, including:

  • A 15 percent corporate minimum tax on adjusted book income.
  • A 1 percent excise tax on corporate stock repurchases.
  • Increased IRS funding of approximately $80 billion over 10 years.
  • A two-year extension of the Section 461(l) loss limitation rules for noncorporate taxpayers.
  • Hundreds of billions of dollars of tax credits and federal support for solar and green energy industries.
  • Availability of new types of monetization of certain credits by certain taxpayers, including through tax refunds and credit transfers.
  • Superfund excise taxes on crude oil and certain imported petroleum products.
  • Funding for nonprofit programs and impact investments.
15 Percent Corporate Minimum Tax on Adjusted Book Income

A key provision of IRA2022 is the revival of an alternative U.S. corporate minimum tax (Corporate AMT), which generally is intended to subject certain targeted U.S. corporations to a minimum tax of 15 percent on “adjusted financial statement income” (as opposed to adjusted taxable income) for tax years beginning after Dec. 31, 2022. This is a major new development in U.S. tax policy that is expected to significantly muddy the waters between financial statements, which are intended to clearly reflect corporate earnings for shareholders, and tax returns, which measure net taxable income.

As proposed, the Corporate AMT would apply to U.S. corporations – other than S corporations, regulated investment companies (RICs) or real estate investment trusts (REITs) – that have average annual adjusted financial statement income greater than $1 billion for any applicable three-year period. In addition, U.S. subsidiaries of a foreign multinational enterprise would be subject to Corporate AMT if the foreign-parented group has adjusted financial statement income greater than $1 billion and the U.S. corporate group has average annual adjusted financial statement income greater than $100 million. Last-minute changes made before Senate passage mitigate the likelihood that the Corporate AMT will apply to investment fund portfolio companies not otherwise within the purview of the tax on a stand-alone basis. When applicable, a corporation’s U.S. tax liability for a particular year would be either the amount computed under the regular U.S. corporate tax or the amount computed under the Corporate AMT, whichever is greater. The tax does not apply to nonprofit organizations, even those with $1 billion of income, unless they have $1 billion of unrelated business taxable income.

Because the Corporate AMT effectively focuses on book income (subject to several adjustments) rather than taxable income, deductions that may otherwise be available in computing a corporation’s regular U.S. federal tax liability risk being neutralized, thereby potentially resulting in higher overall U.S. corporate federal tax liabilities. This is precisely what the Corporate AMT sponsors intended, since the provision as originally drafted sought to ensure that large corporations that report profits to the financial markets pay some level of U.S. federal income tax even if they act in ways that Congress has otherwise sought to incentivize through the tax code. Fortunately, the bill as passed by the Senate recognizes that rules that neutralize tax benefits may also thwart incentives Congress enacted to encourage capital investments in U.S. assets and manufacturing facilities. As a result, last-minute changes to the Corporate AMT effectively adjust the relevant definition of book income to account for investment-related tax incentives such as deductions for accelerated depreciation and amortization (which support investments in capital-intensive businesses such as manufacturing or deployment of modern communications networks).

Opponents of the Corporate AMT point out that a tax based on book income will make the tax code more complicated and has been tried and repealed in the past. Observers have also noted that a minimum tax based on book income may in fact damage the quality of information that public companies report to shareholders by incentivizing companies to adjust their financial accounting to help mitigate U.S. tax liabilities. Indeed, in November 2021, the Congressional Research Service noted that empirical evidence shows that prior U.S. efforts to levy taxes based on book income drove taxpayers to manage their earnings and adjust book income to reduce taxes. See Congressional Research Service, Report 46887, Minimum Taxes on Business Income: Background and Policy Options (Nov. 16, 2021) at page 27.

One particularly interesting aspect of IRA2022 is what was left out. Notably absent from IRA2022 are provisions intended to bring the United States’ global intangible low-tax income (GILTI) and foreign tax credit (FTC) rules into alignment with the so-called Pillar Two approach championed by the Organization for Economic Cooperation and Development (OECD). Pillar Two seeks to encourage the global adoption of a minimum tax of 15 percent on the book earnings of corporations (as determined on a country-by-country basis), and the predecessor to IRA2022 (known as the Build Back Better Act) had proposed changes to the GILTI and FTC rules in an effort to qualify GILTI as an “income inclusion regime” (IIR) to avoid the possibility that other countries might adopt and apply an “undertaxed payments rule” (UTPR) in order to claim taxes on the U.S. and foreign income of a U.S. multinational enterprise that are not otherwise taxed by the U.S. at an effective rate of 15 percent or more. Although IRA2022’s Corporate AMT would result in certain corporations paying a minimum tax of 15 percent on book earnings, it does not otherwise cause GILTI to be an IIR within the meaning of Pillar Two.

The fact that IRA2022 includes the Corporate AMT but does not modify GILTI presents interesting questions regarding the fate of Pillar Two on a global level and the attendant consequences for multinational enterprises. On the one hand, the failure of IRA2022 to align GILTI and other U.S. federal income tax rules with Pillar Two standards (such as making tax determinations on a country-by-country basis) could mean U.S. multinationals may be disadvantaged or even subjected to double taxation if other countries in fact adopt and can defend Pillar Two rules such as a UTPR.

On the other hand, the failure of IRA2022 to engage on Pillar Two could serve as an ominous sign to other countries now contemplating adopting Pillar Two-type rules. Pillar Two has already experienced headwinds in the EU, and a recent study prepared for the European Parliament indicates that adoption of Pillar Two measures within the EU could place member states at a competitive disadvantage relative to countries like the U.S. and the United Kingdom. Given the U.S. legislative calendar and looming midterm elections, IRA2022 may signal to other countries that the U.S. will not adopt Pillar Two measures in the near term; that fact would be expected to further slow the momentum of Pillar Two adoption elsewhere.

IRA2022 may also signal to other countries contemplating Pillar Two measures that there may not be much left to tax under their Pillar Two rules. While the Corporate AMT technically does not appear to be a “qualified domestic minimum top-up tax” (QDMTT), in operation it may leave less U.S.-relevant book income to be taxed under Pillar Two rules implemented in other countries. One can imagine that another country’s attempt to apply its Pillar Two rules to U.S. book income of a U.S. multinational enterprise otherwise subject to the Corporate AMT may be met with diplomatic enmity (for instance, because Pillar Two standards do not honor Congressional incentives such as deductions for accelerated depreciation) or could rally bipartisan support for QDMTT adoption. Finally, the U.S. undoubtedly will continue to demand that any IIR or UTPR applied by another country respect GILTI as a controlled foreign corporation regime. As a result, IRA2022 could signal to other countries that there may be much less tax to collect under their new and highly complex Pillar Two rules.

One Percent Excise Tax on Certain Corporate Stock Repurchases

IRA2022 creates a new Chapter 37 and corresponding Section 4501 in the Internal Revenue Code that imposes a new excise tax on “Covered Corporations” repurchasing their shares themselves or through a “Specified Affiliate” after Dec. 31, 2022. The tax is equal to 1 percent of the fair market value of the stock repurchased by the Covered Corporation or the Specified Affiliate. The tax is not deductible for federal income tax purposes. The Covered Corporation (not the stockholder or the Specified Affiliate) pays the tax. A Covered Corporation is any U.S. corporation publicly traded on an established securities market. A Specified Affiliate is (a) any corporation whose stock, as determined by vote or value, is directly or indirectly owned more than 50 percent by the Covered Corporation or (b) a partnership whose partnership interest or profits interest is directly or indirectly owned more than 50 percent by the Covered Corporation.

The value of the repurchased stock subject to tax is reduced by the value of any stock issued by the Covered Corporation in the same taxable year, including stock issued to employees of the Covered Corporation or to employees of a Specified Affiliate. The tax does not apply (a) if the stock buyback is part of a nontaxable corporate reorganization qualifying under Internal Revenue Code Section 368(a); (b) if the repurchased stock, or any amount equal to the repurchased stock, is contributed to an employer-sponsored retirement plan, employee stock ownership plan or similar plan; (c) if the total value of the repurchased stock in a taxable year does not exceed $1 million; (d) if the repurchase is by a securities dealer in its ordinary course of business; (e) if the repurchase is by a regulated investment company, i.e., a RIC or a REIT; or (f) if the repurchase qualifies as a dividend.

There are special rules for the acquisition of stock of an “Applicable Foreign Corporation” and a “Surrogate Foreign Corporation.” An Applicable Foreign Corporation is any foreign corporation whose stock is publicly traded on an established securities market. The 1 percent excise tax applies where a U.S.-organized Specified Affiliate acquires the stock of the Applicable Foreign Corporation. In this situation, the U.S.-organized Specified Affiliate is treated as a Covered Corporation and pays the 1 percent excise tax on the Applicable Foreign Corporation stock acquired by the U.S.-organized Specified Affiliate. The value of the stock acquired by the Specified Affiliate is reduced by the value of the stock issued by the Specified Affiliate or stock issued to the employees of the Specified Affiliate. The adjustment does not apply to stock issued by the Applicable Foreign Corporation. Similar rules apply to a Surrogate Foreign Corporation, which is any domestic corporation or partnership that was acquired by a foreign corporation after Sept. 20, 2021, subject to other special requirements set forth in Internal Revenue Code Section 7874(a)(2)(B).

Extension of Section 461(l) Loss Limitation Rule for Noncorporate Taxpayers

IRA2022 extends for two years, through tax year 2028, the limitation on the deduction of pass-through losses for noncorporate taxpayers. The maximum deductible loss, which is indexed to inflation, is $540,000 in 2022 for married taxpayers.

Solar Credits and Support for Green Energy

IRA2022 includes hundreds of billions of dollars to boost the U.S. solar and green energy industries. The bill targets $30.6 billion in tax credits to accelerate U.S. manufacturing of solar panels in addition to batteries and critical minerals processing. Incentives aim to promote U.S. production of solar cells, photovoltaic wafers, solar grade polysilicon, polymeric backsheets and solar panel support structures.

Under IRA2022, the production tax credit (PTC) would be renewed for five years for facilities that begin construction before Jan. 1, 2025. The PTC expired at the end of 2021. To qualify for the full PTC, projects generally must comport with prevailing wage standards for workers in the area where the facility is located; if not, the PTC would drop to 20 percent of the full benefit.

For residential solar, IRA2022 extends for 10 years the investment tax credit (ITC), including for solar products such as rooftop panels. Until 2032, consumers could claim a tax credit of 30 percent of their solar costs, dropping to 26 percent in 2033 and 22 percent in 2034. Overall, the 30 percent tax credit could save homeowners, on average, $7,000 on a typical rooftop system. Home-use batteries connected to solar systems would see tax incentives effectively reducing their costs by 30 percent too.

Beginning in 2023, the ITC includes an enhanced incentive for “environment justice solar facilities” located in a low-income community or on Native American land, or if the facility is installed on a residential building that participates in a covered federal housing assistance program.

IRA2022 overturns the current-law phaseout for both the PTC and ITC, but the existing phaseout would continue to apply to renewable projects that entered service before 2022.

IRA2022 extends (and in certain cases expands) a number of existing tax incentives, including those relating to carbon capture facilities, energy-efficient commercial buildings, energy-efficiency improvements to residential property, and credits for biodiesel and renewable and alternative fuels. Specifically, IRA2022 expands and extends through 2024 various existing credits, including the Section 45 PTC and the Section 48 ITC. The ITC generally also is expanded to include stand-alone energy storage (previous eligibility requirement limited the credit to situations of solar energy charging). Bonus amounts of ITC and PTC are available in certain situations; full credit amounts are available in certain cases only to taxpayers satisfying prevailing wage rates, utilizing certain apprenticeship programs with respect to certain facilities, etc. After Dec. 31, 2024, IRA2022 converts current ITC and PTC into technology-neutral incentives and allows any power facility the ability to qualify for either ITC or PTC if the facility’s carbon emissions are zero or less. Tax credits phase down in certain situations.

Monetization of Certain Credits – Refundability and Transferability

IRA2022 significantly changes the monetization of tax credits by adding refundability and transferability for certain taxpayers in certain situations. These options are expected to significantly reduce the complexity of clean energy financing in many cases.


IRA2022 Section 13801 includes “Elective Payment” (generally referred to in the market as “Direct Pay”) provisions to allow certain taxpayers to treat certain credits as refundable overpayments of tax. Specifically, IRA2022 Section 13801 adds new Section 6417(a), Elective Payment of Applicable Credits, which generally provides as follows:

the case of an applicable entity making an election (at such time and in such manner as the Secretary may provide) under this section with respect to any applicable credit determined with respect to such entity, such entity shall be treated as making a payment against the tax imposed by subtitle A (for the taxable year with respect to which such credit was determined) equal to the amount of such credit.

Section 6417(b)(7) generally defines “applicable credits” to include, for certain taxpayers, certain credit amounts under Sections, 30C, 45(a), 45Q, 45U, 45V, 45W, 45X, 45Y, 45Z, 48 and 48C, and the clean electricity investment credit under Section 48E. Section 48E(d)(5) requires any taxpayer making an elective payment election under Section 6417 with respect to credits available under Section 48E to comply with domestic content “rules similar to the rules of Section 45Y(g)(12).”

Section 6417(d) provides additional special rules for purposes of Section 6417 and generally defines “applicable entity” for purposes of Section 6417 as entities described in Section 6417(d)(1)(A) (generally “any organization exempt from the tax imposed by subtitle A, any State or political subdivision thereof, the Tennessee Valley Authority, an Indian Tribal government, any Alaska Native Corporation, or any corporation operating on a cooperative basis which is engaged in furnishing electric energy to persons in rural areas”) (Specialized Entities). The Direct Pay election is available more broadly to all taxpayers with respect to certain credits, including Section 45V clean hydrogen, Section 45Q carbon sequestration and Section 45X advanced manufacturing (solar), but generally for only the first five years, after which the credits become nonrefundable for such taxpayers.

The Direct Pay provisions are complex, and special rules apply with respect to certain credits. For example, Section 6417(d)(1)(D)(ii)(I) provides that if a taxpayer makes an election under Section 6417(d)(1)(D) with respect to the Section 45X advanced manufacturing credit for any taxable year, such taxpayer generally shall be treated as having made the same election for each of the four succeeding taxable years ending before Jan. 1, 2033. Section 6417(d)(1)(D)(ii)(II) provides an exception that allows a taxpayer to revoke an election made under Section 6417(d)(1)(D)(ii)(I), except that any such revocation shall apply to the applicable year specified in the election and each subsequent taxable year within the four-year period described in Section 6417(d)(1)(D)(ii)(I), and Section 6417(d)(1)(D)(ii)(II) further provides that any election revocation may not be subsequently revoked. Section 6417(d)(1)(D)(iii) generally provides that, for any taxable year described in Section 6417(d)(1)(D)(ii)(I) (i.e., Direct Pay election with respect to the Section 45X credit), no election may be made by the taxpayer under Section 6418(a) for such taxable year. In other words, any taxpayer who elects Direct Pay with respect to eligible components for purposes of the credit under Section 45X may not elect under Section 6418(a) (regarding transferability) with respect to eligible components for purposes of the credit under Section 45X.


IRA2022 includes a transferability provision to generally allow certain taxpayers in taxable years beginning after Dec. 31, 2022, who do not elect the Direct Pay provisions of Section 6417 to transfer certain credits. Specifically, IRA2022 Section 13801 adds new Section 6418, Transfer of Certain Credits, which provides, in part, as follows:

In General.— In the case of an eligible taxpayer which elects to transfer all (or any portion specified in the election) of an eligible credit determined with respect to such taxpayer for any taxable year to a taxpayer (referred to in this section as the ‘transferee taxpayer’) which is not related (within the meaning of section 267(b) or 707(b)(1)) to the eligible taxpayer, the transferee taxpayer specified in such election (and not the eligible taxpayer) shall be treated as the taxpayer for purposes of this title with respect to such credit (or such portion thereof).

TREATMENT OF PAYMENTS MADE IN CONNECTION WITH TRANSFER.—With respect to any amount paid by a transferee taxpayer to an eligible taxpayer as consideration for a transfer described in subsection (a), such consideration—

(1) shall be required to be paid in cash,

(2) shall not be includible in gross income of the eligible taxpayer, and

(3) with respect to the transferee taxpayer, shall not be deductible under this title.

Section 6418(e)(1) provides that “[a]n election under [Section 6418(a)] to transfer any portion of an eligible credit shall be made not later than the due date (including extensions of time) for the return of tax for the taxable year for which the credit is determined, but in no event earlier than 180 days after the date of the enactment of [Section 6418].” Any such election, once made, is irrevocable.

Section 6418(e)(2) provides that additional transfers are not permitted, i.e., that “No election may be made under Section 6418(a) by a transferee taxpayer with respect to any portion of an eligible credit which has been previously transferred to such taxpayer pursuant to [Section 6418].”

Section 6418(f)(2) generally defines the transferring “eligible taxpayer” (Transferor) as “any taxpayer which is not described in Section 6417(d)(1)(A).”  As noted above, Section 6417(d)(1)(A) defines “applicable entity” generally as “any organization exempt from the tax imposed by subtitle A, any State or political subdivision thereof, the Tennessee Valley Authority, an Indian Tribal government, any Alaska Native Corporation, or any corporation operating on a cooperative basis which is engaged in furnishing electric energy to persons in rural areas.”

Section 6418(g)(1) provides, “As a condition of, and prior to, any transfer of any portion of an eligible credit pursuant to [Section 6418(a)], the Secretary may require such information (including, in such form or manner as is determined appropriate by the Secretary, such information returns) or registration as the Secretary deems necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments under this section.” Section 6418(g)(2) provides that if the IRS determines an excessive payment has been claimed by a taxpayer, such excessive payment shall be disallowed and a 20 percent penalty shall apply (absent a reasonable cause defense).

Section 6418(g)(3) provides, generally, that certain rules in Section 50 regarding such items as basis reduction and credit recapture shall apply for purposes of Section 6418. IRA2022 provisions generally require a transferor/seller of credits to reduce tax basis in connection with certain credits that are transferred. Note that Section 6418 transferability does not extend to depreciation deductions that often are allocated along with tax credits in tax-equity partnership transactions. There also would be no step-up to fair market value as it relates to ITCs in the absence of a partnership equity investor.

IRA2022 Section 13801(d) amends Section 39(a) in several ways and generally allows, for taxable years beginning after Dec. 31, 2022, a three-year carryback (instead of a one-year carryback) “in the case of any applicable credit (as defined in section 6417(b)”). Credits generally may be carried forward for up to 22 years (instead of 20 years). Credits that have been carried back or carried forward generally may not be transferred.

Superfund Excise Taxes on Crude Oil and Certain Petroleum Products

IRA2022 raises approximately $25 billion of revenue over the 10-year budget window by reinstating Superfund excise taxes on crude oil received at a U.S. refinery and on petroleum products imported into the U.S. for consumption, use or warehousing. The excise tax on crude oil is 16.4 cents per barrel and is indexed for inflation. The new Superfund taxes will take effect Jan. 1, 2023. The previous Superfund tax on crude oil was 9.7 cents per barrel and expired in 1995.

Funding for Nonprofit Programs and Impact Investments

In an effort to maximize Congress’ bang for the buck, IRA2022 implements numerous federal environmental policy initiatives through direct funding programs rather than tax deductions or tax credits. Nonprofits are eligible to apply for several of these programs for use in program-related activities and impact investments. Among these direct funding opportunities are:

(1) $1.5 billion for multiyear, programmatic, competitive grants for tree planting and related activities.

(2) $2.6 billion for the conservation, restoration and protection of coastal and marine habitats, resources, Pacific salmon and other marine fisheries; to enable coastal communities to prepare for extreme storms and other changing climate conditions; and for projects that support natural resources that sustain coastal and marine-resource-dependent communities, marine fishery and marine mammal stock assessments, and for related administrative expenses.

(3) $297 million for alternative fuel and low-emission aviation technology to carry out projects located in the United States that produce, transport, blend or store sustainable aviation fuel or that develop, demonstrate or apply low-emission aviation technologies.

(4) $200 million for training and education to contractors involved in the installation of home energy efficiency and electrification improvements, including improvements eligible for rebates under a Home Energy Savings Retrofit Rebate Program (HOMES) or a high-efficiency electric home rebate program as part of an approved state energy conservation plan under the State Energy Program.

(5) $1 billion (a) to replace non-energy-efficient heavy-duty vehicles with zero-emission vehicles; (b) to purchase, install, operate and maintain infrastructure needed to charge, fuel or maintain zero-emission vehicles; (c) for workforce development and training to support the maintenance, charging, fueling and operation of zero-emission vehicles; and (d) for planning and technical activities to support the adoption and deployment of zero-emission vehicles.

(6) $7 billion to a greenhouse gas reduction fund to enable low-income and disadvantaged communities to deploy or benefit from zero-emission technologies, including distributed technologies on residential rooftops, and to carry out other greenhouse gas emission reduction activities, plus $11.97 billion to provide financial assistance and technical assistance for such projects.

(7) $250 million for environmental product declaration assistance to support the development, enhanced standardization and transparency, and reporting criteria for environmental product declarations that include measurements of the embodied greenhouse gas emissions of the material or product associated with all relevant stages of production, use and disposal and that conform with international standards for construction materials and products.

(8) $3 billion for environmental and climate justice block grants for (a) community-led air and other pollution monitoring, prevention and remediation, and investments in low- and zero-emission and resilient technologies and related infrastructure and workforce development that help reduce greenhouse gas emissions and other air pollutants; (b) mitigating climate and health risks from urban heat islands, extreme heat, wood heater emissions and wildfire events; (c) climate resiliency and adaptation; (d) reducing indoor toxins and indoor air pollution; or (e) facilitating engagement of disadvantaged communities in state and federal advisory groups, workshops, rulemakings and other public processes.

(9) $1.893 billion for neighborhood access and equity grants to improve walkability, safety and affordable transportation access; to mitigate or remediate negative impacts on the human or natural environment resulting from certain surface transportation facilities that burden disadvantaged or underserved communities; and for planning and capacity-building activities in disadvantaged or underserved communities.

Authorship credit: Jeffrey H. Paravano, Paul M. Schmidt, J. Brian Davis, The Honorable Michael A. Ferguson, Alexander L. Reid, Morgan W. Holtman, Keith C. Durkin, Christian B. Jones, Kevin R. Edgar, Adam J. Higgins and Nicholas C. Mowbray

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