Inflation Reduction Act passes the Senate

Introduction

After the surprise announcement at the end of July, the Inflation Reduction Act (the Act) has passed the Senate. Estimated to raise $740 billion with $306 billion earmarked toward deficit reduction, the Act includes provisions to control price increases on prescription drugs, promote climate change remediation along with clean energy provisions and reduce the deficit through targeted tax increases.

The most notable change since it advanced from the Senate Finance Committee to the floor is that the carried interest provision was dropped following negotiations to ensure the support of Sen. Kyrsten Sinema (D-Ariz.). Other changes include modifications to the computation of the corporate minimum tax, the addition of an excise tax on stock buyouts, and an extension of the excess business loss limitation rule for noncorporate taxpayers.

The Act now heads to the House, where potential opposition from the SALT caucus appears to have gone away. The Act does not address the $10,000 state and location tax deduction limitation, but on Sunday, two key Democratic representatives from New Jersey, Mikie Sherrill and Josh Gottheimer, who previously said “no SALT, no deal,” indicated they would support the Act. While not assured, we anticipate the need for a political victory in an election year will result in any opposing House members conceding to the Senate version. If and when the Act passes both chambers of Congress, it is expected to be signed into law by President Joe Biden.

Key provisions

15% corporate minimum tax

Estimated to be the largest revenue raiser in the Act, the 15% corporate minimum tax generally is computed on applicable corporations averaging over $1 billion in adjusted financial statement (AFS) income for three consecutive years. Certain foreign-owned corporations with book income over $100 million are also subject to the minimum tax. While aggregation rules could pull more entities into these thresholds, S corporations, regulated investment companies (RICs) and real estate investment trusts (REITs) are not considered applicable corporations.

Essentially, the tax is calculated at 15% of adjusted financial statement income (AFSI) less any corporate alternative minimum foreign tax credit and net operating losses for the tax year. AFSI is defined to be net income or loss as reported on the AFS with certain modifications, including items related to controlled foreign corporations, disregarded entities, federal income taxes, non-reasonable compensation, covered benefit plan amounts and tax depreciation. Affected taxpayers pay the higher of regular tax or the computed corporate minimum tax.