On Aug. 7, the Senate passed H.R. 5376, the Inflation Reduction Act of 2022 (the Act). If approved by the House of Representatives, as expected, the bill will be sent to President Joe Biden for signature. The bill passed by the Senate includes three revisions to the Internal Revenue Code of 1986, as amended (the Code) that merit attention:1

1. 15% corporate minimum tax

The Act adds a minimum tax on "applicable corporations" equal to 15% of the corporation's "adjusted financial statement income" (AFSI). The minimum tax would apply only to the extent that it exceeds the regular corporate income tax plus the base erosion and anti-abuse tax (BEAT).

An applicable corporation is a corporation (other than an S corporation, regulated investment company or real estate investment trust) whose average AFSI for any taxable year ending after Dec. 31, 2021, and the two immediately preceding taxable years exceeds $1 billion.

AFSI is the net income or loss on the taxpayer's applicable financial statements (as defined in Section 451(b)(3) or as specified by the Treasury Secretary), computed by applying, inter alia, the following rules:

  • A corporation's AFSI includes AFSI of disregarded entities and, if applicable and without duplication, other members of the consolidated group that includes such corporation.
  • AFSI attributable to a corporate subsidiary that is not part of the corporation's consolidated group is only included to the extent of dividends received from, and other amounts includable in gross income (other than Subpart F and GILTI inclusions) or deductible as a loss by the corporation with respect to, such subsidiary.
  • AFSI of a partnership or controlled foreign corporation in which the corporation owns an interest is only taken into account to the extent of the corporation's allocable share of such AFSI (with AFSI losses of controlled foreign corporations applied as a carryover to reduce AFSI of such controlled foreign corporations in subsequent years).
  • Financial statement depreciation is replaced with tax depreciation.
  • Up to 80% of AFSI is decreased by financial statement net operating loss carryovers generated in taxable years beginning after Dec. 31, 2019 (which is similar to the limitation on the use of net operating losses for regular federal income tax purposes).
  • In the case of a foreign corporation, only AFSI that consists of income that is effectively connected to a U.S. trade or business is subject to the minimum tax. In addition, presumably only such effectively connected income is taken into account in computing the $1 billion threshold for nonmembers of a foreign-parented group (described below) and the $100 million threshold for members of a foreign-parented group (also described below). It is less clear whether such ECI-based limitation applies when computing a corporation's share of AFSI of controlled foreign corporations.

To determine if a corporation is an applicable corporation (but not for purposes of computing the amount of AFSI that is subject to the tax), the corporation's AFSI is aggregated with the AFSI of all persons treated as a single employer under Sections 52(a) or 52(b). While a floor amendment to this provision was added that was intended to avoid or minimize application of the tax to portfolio investments held by investment funds, there remains uncertainty in this regard. (For a discussion of how these aggregation rules could apply to investment funds for purposes of the CARES Act retention credit, see here.)

The test differs for foreign-parented groups, which are groups (i) that include at least one domestic corporation or at least one foreign corporation engaged in a U.S. trade or business, (ii) that are included in the same applicable financial statements for such taxable year and (iii) whose common parent is a foreign corporation (or is treated by the Treasury Secretary as having such a parent for these purposes). A domestic corporation or a foreign corporation with a U.S. trade or business that is a member of a foreign-parented group must include the AFSI (with certain modifications) of all members of the group in applying the $1 billion test, including AFSI that is not effectively connected to a U.S. trade or business, but is an applicable corporation only if its three-year average AFSI computed under the otherwise applicable rules summarized above (including the ECI-based limitations) exceeds $100 million.

Once a corporation satisfies the income test for a taxable year, it is treated as an applicable corporation for all subsequent taxable years even if its average AFSI falls below the $1 billion threshold. However, a corporation would no longer be treated as an applicable corporation where (a) either (i) there is a change in ownership or (ii) such corporation does not satisfy the income test for a certain number of consecutive taxable years (to be determined by the Treasury Secretary) and (b) the Treasury Secretary determines that it would not be appropriate to continue to treat such corporation as an applicable corporation.

The bill allows as a credit against the corporate minimum tax direct foreign income taxes, the corporation's pro rata share of creditable foreign taxes from a foreign partnership, as well as foreign income taxes paid by controlled foreign corporations (subject to a cap of 15% of the corporation's pro rata share of the net income or loss of such controlled foreign corporations (computed on an aggregate basis), grossed up for foreign income taxes).

It is not yet clear how the corporate minimum tax may interact with the Organisation for Economic Co-operation and Development's (OECD) Pillar Two rules, although it is not expected that the corporate minimum tax will be a "Qualified Domestic Minimum Top-up Tax" (i.e., a domestic minimum tax that is computed using the same rules as the OECD's income inclusion rule (IIR) and undertaxed payments rule (UTPR)).

The corporate minimum tax would be effective for taxable years beginning after Dec. 31, 2022.

2. 1% excise tax on repurchases of corporate stock

The Act imposes a nondeductible excise tax equal to 1% of the fair market value of any stock "repurchased" by a "covered corporation" during the taxable year (in excess of the fair market value of stock issued by such corporation in such year). A covered corporation is a corporation whose stock is traded on an established securities market within the meaning of the publicly traded partnership rules set forth in Section 7704. (Corporations may consider imposing transfer restrictions similar to those that exist in many partnership agreements in order to avoid publicly traded status for these purposes, though a countervailing consideration is that shareholders often want maximum transferability of their shares.)

The term "repurchase" generally refers to both a redemption (within the meaning of Section 317(b)) of the stock of the covered corporation and to any transaction identified by the Treasury Secretary to be economically similar to such a transaction. The term also encompasses acquisitions of stock of a covered corporation by a "specified affiliate" thereof from a person that is neither the covered corporation nor such specified affiliate. The term "specified affiliate" refers to (i) any corporation, more than 50% of the voting power and value of which is owned, directly or indirectly, by the covered corporation, and (ii) any partnership more than 50% of the capital or profits interests of which is held, directly or indirectly, by the covered corporation.

Special rules would apply to acquisitions of stock by certain foreign corporations. If stock of a foreign covered corporation is acquired by a specified affiliate (other than a foreign corporation or a foreign partnership that does not have a domestic entity as a direct or indirect partner) from a person that is not the applicable foreign corporation or a specified affiliate thereof, then the specified affiliate will be treated as a covered corporation, the acquisition will be treated as a repurchase, and the reduction for stock issuances will only apply to stock issued or provided by such specified affiliate to employees thereof. These special rules would also apply to purchases of stock of certain publicly traded corporations that have expatriated after Sept. 20, 2021.

Exceptions to the excise tax include the following:

  • Repurchases that are part of a reorganization within the meaning of Section 368 with respect to which no gain or loss is recognized by the shareholders (note that, as written, this exception would not apply if even a small amount of gain or loss is recognized).

  • Repurchases where the repurchased stock (or an amount of stock equal to the value of the repurchased stock) is contributed to an employer-sponsored retirement, employee stock ownership or similar plan.

  • Repurchases where the total value of the stock repurchased during the taxable year does not exceed $1 million.

  • Repurchases by dealers in securities in the ordinary course of business (under regulations to be promulgated by the Treasury Secretary).

  • Repurchases by regulated investment companies and real estate investment trusts.

  • Repurchases treated as dividends for purposes of the Code. (While it is not clear why dividends are favored over redemptions as a policy matter, the effect of this rule is that corporations will be more inclined to pay dividends (perhaps coupled with a reverse stock split to reduce float) than engage in stock buybacks.)

The Treasury Secretary is authorized to promulgate regulations that prevent the avoidance of the new excise tax, including with respect to the exceptions noted above.

The excise tax would apply to repurchases occurring after Dec. 31, 2022.

3. Extension of limitation on use of excess business losses of noncorporate taxpayers

Section 461(l) prohibits a taxpayer from deducting any excess business loss (generally, a net loss attributable to a taxpayer's trades or businesses in excess of certain thresholds) and instead treats such loss as a net operating loss (NOL) for purposes of determining NOL carryovers to subsequent tax years. Such prohibition was set to expire for taxable years ending on or after Jan. 1, 2027. The Act would extend the prohibition to taxable years ending before Jan. 1, 2029.


1. Section references are to the Code.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.