The Senate passed the Inflation Reduction Act of 2022 early Sunday morning after Vice President Kamala Harris cast the tie breaking vote on a 50/50 split between Democrats and Republicans. The bill is anticipated to pass through the House without substantial changes and is then likely to be signed by the President.
The Inflation Reduction Act purports to raise more than $700 billion in revenue, including more than $300 billion from new corporate tax regimes and $25 billion from reinstated Superfund taxes on petroleum products. Certain large U.S. corporations will now be subjected to a 15% tax on “adjusted financial statement income” (different from traditional adjusted taxable income) beginning next year. This new tax on financial statement income is not applicable to S-corporations, RICs or REITs, but rather applies to traditional C corporations with earnings in excess of $1 billion over an applicable 3-year period. Additionally, because of differences in book and tax income computations, it is possible those corporations may lose other deductions they have historically benefitted from in calculating their tax liabilities.
This new tax regime essentially constitutes a rebirth of the corporate alternative minimum tax (“AMT”) on the largest of corporations. In addition to the AMT, the bill also creates a new Internal Revenue Code Chapter 37 and Section 4501, imposing a new excise tax on publicly traded corporations taking shares into treasury. The tax liability under these new laws will equal 1% of the repurchased stock’s fair market value and is not deductible to the corporation paying the tax. The tax is, however, offset by the issuance of new stock in the same tax year, and is subject to certain other exceptions that may reduce or eliminate the tax.
Beyond its stated revenue objectives, the bill also addresses climate change by establishing plans to cut greenhouse gas emissions by 40% from 2005 levels. This constitutes the largest investment in fighting climate change ever promoted in the United States. The bill makes billions of dollars available to boost green energy industries, including incentives to accelerate the domestic production of solar panels and provides other benefits to electric car producers in the United States.
Finally, the Inflation Reduction Act of 2022 will allow for price negotiations of Medicare prescription drugs. Under this bill, pharmaceutical manufacturers will negotiate with the federal government to determine the maximum price for certain prescription drugs and insulin products. Failure of a pharmaceutical manufacturer to participate in these negotiations will force the manufacturer to pay an excise tax rate which will be applied to all sales by the manufacturer, producer, or importer of products. The tax rate will be initially set at 65% and will increase incrementally up to 95% if there is a failure to meet compliance standards. In addition, the bill provides a $2,000 cap on out-of-pocket drug costs for seniors enrolled in Medicare Part D.
If you have any questions about how this bill may impact you, or your business, please contact Kimon Karas or one of our tax and corporate attorneys to discuss by requesting a consultation or giving us a call at 216-696-1422.
