The Inflation Reduction Act of 2022—A Few New Taxes and a Lot of Credits!

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “Act”), a legislative package intended to address taxes, prescription drug costs, climate change and inflation. Specifically, the Act includes the following changes, among others, which will be discussed more fully below:

• a one percent excise tax on repurchases of certain corporate stock;
• revisions to the corporate alternative minimum tax;
• a new excise tax on drug manufacturers who fail to comply with new pricing agreement rules;
• an extension of the premium tax credit rules previously enhanced by the American Rescue Plan Act of 2021;
• an extension and modification of the renewable electricity production credit;
• an extension and modification of energy credits under Section 48 of the Internal Revenue Code of 1986, as amended (“Code”);
• an extension and modification of the credit for carbon oxide sequestration under Code section 45Q;
• a new credit for zero-emission nuclear power production under new Code Section 45U;
• a new income or excise tax credit for sustainable aviation fuel under new Code Section 40B;
• a new clean hydrogen production credit under new Code Section 45V;
• an extension, increase, and substantial modification of nonbusiness energy property credit under Code Section 25C;
• an extension and modification of the residential clean energy credit under Code Section 25D; and
• a new clean vehicle credit under Code Section 30D.

One Percent Excise Tax on Repurchase of Corporate Stock

Act Section 10201 enacts new Code Section 4501, which imposes a nondeductible excise tax on each “covered corporation” equal to one percent of the fair market value of any stock of the corporation that is either repurchased by, or acquired by certain affiliates of, the corporation during the taxable year. The value of stock treated as repurchased during the taxable year for purposes of computing the tax is reduced by the value of any new issuances of stock by the corporation during the same taxable year.

The term “covered corporation” means any domestic corporation the stock of which is traded on an established securities market (e.g., NYSE or NASDAQ).

A “repurchase” means a redemption within the meaning of Code Section 317(b) with regard to the stock of a covered corporation, and any transaction determined by the Secretary of Treasury to be economically similar to a repurchase.

Exceptions to the new tax include, among others, qualifying reorganization transactions, ESOP transactions, repurchases in which the total value of the stock repurchased during the taxable year does not exceed $1,000,000, and repurchases treated as a dividend under Code section 301.

The new 1 percent tax applies to repurchases of stock after December 31, 2022.

Dykema Observations: There is no minimum “market cap” requirement applicable to “covered corporations.” Additionally, as many commenters have pointed out, the tax would likely apply to a redemption by a special purpose acquisition company (“SPAC”) that is a covered corporation (i.e., a Delaware SPAC as opposed to a Cayman Islands SPAC), including in connection with its initial business combination or “de-SPAC” transaction.

Revisions to the Corporate Alternative Minimum Tax

Act Section 10101 amends Code Section 55(b) to impose a tentative minimum tax on the excess of 15 percent of the adjusted financial statement income for the taxable year, over the corporate alternative minimum tax foreign tax credit for the taxable year. Importantly, the new alternative minimum tax applies only to corporations (other than S corporations, RICs, and REITs) that generally have average annual adjusted financial statement income exceeding $1,000,000,000.

Dykema Observations: According to an analysis prepared by Martin A. Sullivan and appearing in Tax Notes Federal, August 22, 2022, p. 1185 (2022 TNTF 161-2), approximately 90 corporations are likely to be subject to the corporate alternative minimum tax in calendar year 2023 (an earlier analysis by Mr. Sullivan had identified 114 corporations most likely to be subject to the new corporate alternative minimum tax). Given Mr. Sullivan’s observations, it is unlikely that the new corporate alternative minimum tax will apply to many taxpayers.

New Excise Tax on Drug Manufacturers who Fail to Comply with New Pricing Agreement Rules

Act Section 10101 enacts new Code Section 5000D, which imposes a new tax on the sale by the manufacturer, producer, or importer of any “designated drug” during the period when such person has failed to enter into a drug pricing agreement under Section 1193 of the Social Security Act. The soonest that a taxpayer can be in noncompliance is October 2, 2026.

Extension of the ACA Premium Tax Credit Rules

Act Section 12001 extends the sunset date of the refundable premium tax credit under the Affordable Care Act for taxpayers whose household income exceeds 400 percent of the poverty line. The extension is through the 2025 tax year.

Extension and Modification of the Renewable Electricity Production Credit

Act Section 13101 extends and modifies the tax credit for electricity produced from certain renewable resources. By way of background, for purposes of Code Section 45(d), the term “qualified facility” has different meanings depending on the type of facility, but, in each case, construction of such a facility qualifies for the renewable electricity production credit only if construction commenced prior to January 1, 2022.

The Act extends the construction start deadline to January 1, 2025, including for facilities using solar energy (for which a 2006 placed-in-service deadline had previously applied).

Importantly, Act Section 13101(f) requires as a pre-condition to receiving the renewable electricity production credit both a wage and apprenticeship requirement. Specifically, in constructing a qualified facility, the taxpayer must ensure that laborers and mechanics employed by the taxpayer or any contractor or subcontractor are paid wages at rates not less than the prevailing rates for construction, alteration, or repair of a similar character in the locality in which such facility is located as most recently determined by the Secretary of Labor. Additionally, each taxpayer, contractor, or subcontractor who employs four or more individuals to perform construction, alteration, or repair work with respect to the construction of a qualified facility must employ one or more qualified apprentices to perform such work. The term “qualified apprentice” means an individual who is employed by the taxpayer or by any contractor or subcontractor and who is participating in a registered apprenticeship program. The term “registered apprenticeship program” is defined in Code Section 3131(e)(3)(B) as an apprenticeship registered under the National Apprenticeship Act.

Act Section 13101 also adds a new domestic content bonus. Specifically, the amount of the credit is increased by 10 percent if the taxpayer certifies to the Secretary of Treasury that any steel, iron, or manufactured product which is a component of such facility (upon completion of construction) was produced in the United States. The manufactured products that are components of a qualified facility upon completion of construction shall be deemed to have been produced in the United States if not less than 40 percent (or 20 percent in the case of an offshore wind facility) of the total costs of all manufactured products used in such facility are attributable to manufactured products (including components) that are mined, produced, or manufactured in the United States.

The amendments made by this section of the Act apply to qualifying facilities placed in service after December 31, 2021. The amendments related to the bonus for domestic content apply to qualifying facilities placed in service after December 31, 2022.

Extension and Modification of Energy Credits under Code Section 48

Code Section 48 provides for an energy tax credit, but only for construction which commences before January 1, 2024 (with exceptions for Type 1 solar property and geothermal deposit energy property). Section 13102 of the Act extends the start of construction time period from January 1, 2024, to January 1, 2035.

The Act also amends Code Section 48(a)(2)(A)(i) by adding energy storage technology, qualified biogas property, microgrid controllers, combined heat and power system property, and equipment that uses the ground or ground water as a thermal energy source to heat a structure or as a thermal energy sink to cool a structure to the list of qualifying energy properties for which the energy percentage is 30 percent.

Importantly, the Act changes the existing phasedown or phaseout rules for property placed in service before 2022. Also, among other changes, the Act provides that in the case of any energy project that is placed in service within an energy community that the energy percentage is increased by the applicable credit rate increase. In the case of any energy project that does not satisfy the Act’s project requirements, the increase is two percentage points, and in the case of any energy project that satisfies the Act’s project requirements, the increase is ten percentage points.

A project meets the requirements of the Act if it is one of the following:

(i) A project with a maximum net output of less than one megawatt of electrical (as measured in alternating current) or thermal energy.

(ii) A project the construction of which begins before the date that is 60 days after the Secretary publishes guidance with respect to the applicable requirements.

(iii) A project that satisfies the prevailing wage and apprenticeship requirements.

Extension and Modification of the Credit for Carbon Oxide Sequestration Under Code Section 45Q

Act Section 13104 makes several changes to Code Section 45Q. Among other things, the Act modifies the term “qualified facility” to include any industrial facility or direct air capture facility the construction of which begins before January 1, 2033 (and meets additional requirements).

The Act also modifies the appliable dollar amount in Code Section 45Q(b)(1)(A) as follows:

Code Section 45Q(a) sets the value of carbon sequestration credits for any taxable year. For carbon capture equipment originally placed in service at a qualified facility on or after the date of the enactment of the Bipartisan Budget Act of 2018, an applicable dollar amount is used that varies on whether the captured carbon oxide is disposed of in secure geological storage or used as a tertiary injectant in a qualified enhanced oil or natural gas recovery project and disposed of by the taxpayer in secure geological storage or utilized in an authorized manner. The applicable dollar amounts set out in Code Section 45Q(b)(1)(A) have been modified as follows:

(i) for any taxable year beginning in a calendar year after 2016 and before 2027—

(I) for purposes of paragraph (3) of subsection (a), $17, and

(II) for purposes of paragraph (4) of such subsection, $12, and

(ii) for any taxable year beginning in a calendar year after 2026—

(I) for purposes of paragraph (3) of subsection (a), an amount equal to the product of $17 and the inflation adjustment factor for such calendar year determined under section 43(b)(3)(B) for such calendar year, determined by substituting "2025" for "1990", and

(II) for purposes of paragraph (4) of such subsection, an amount equal to the product of $12 and the inflation adjustment factor for such calendar year determined under section 43(b)(3)(B) for such calendar year, determined by substituting "2025" for "1990".

New Credit for Zero-Emission Nuclear Power Production Under New Code Section 45U

Act Section 13105 adds new Code Section 45U, which allows for a zero emission nuclear power production credit. The credit amount is 0.3 cents multiplied by the kilowatt hours of electricity produced by the taxpayer at a qualified nuclear power facility and sold by the taxpayer during the tax year, to the extent this amount exceeds the "reduction amount," which is based on the price of electricity.

The new zero emission nuclear power production credit applies to electricity produced and sold after December 31, 2023, in taxable years beginning after that date.

New Income or Excise Tax Credit for Sustainable Aviation Fuel Under New Code Section 40B

Act Section 13203 adds new Code Section 40B providing for a Sustainable Aviation Fuel Credit.

The new fuel credit applies to fuel sold or used after December 31, 2022.

New Clean Hydrogen Production Credit Under New Code Section 45V

Act Section 13204 adds new Code Section 45V providing for a clean hydrogen production credit for any taxable year in an amount equal to the product of (A) the kilograms of qualified clean hydrogen produced by the taxpayer during such taxable year at a qualified clean hydrogen production facility during the 10-year period beginning on the date such facility was originally placed in service, multiplied by (B) the applicable amount with respect to such hydrogen.

The new clean hydrogen production credit applies to hydrogen produced after December 31, 2022.

Extension, Increase, and Substantial Modification of Nonbusiness Energy Property Credit Under Code Section 25C

Act Section 13301 amends Code Section 25C(g)(2) by extending the expiration of the placed in service date for nonbusiness qualified energy efficiency improvements and residential energy property expenditures from December 31, 2021, to December 31, 2032. The Act also revises the energy efficiency certification requirements for building envelope components, eliminates treatment of roofs as building envelope components, and adds air sealing insulation to the definition of a building envelope component. The Act further revises the definition of residential energy property expenditures, including repeal of the requirement that residential energy property expenditures must be made with respect to the taxpayer's principal residence.

In the case of an individual, there is allowed as a credit against income tax an amount equal to 30 percent of the sum of:

(1) the amount paid or incurred by the taxpayer for qualified energy efficiency improvements installed during such taxable year, and

(2) the amount of the residential energy property expenditures paid or incurred by the taxpayer during such taxable year.

The annual cap on the credit allowed with respect to any taxpayer for any taxable year is $1,200, with reduced caps for certain types of energy-related property.

The nonbusiness energy property credit applies to property placed in service after December 31, 2022.

Extension and Modification of the Residential Clean Energy Credit under Code Section 25D

Act Section 13302 extends the expiration of the residential energy efficient property credit from December 31, 2023, to December 31, 2034. The Act also changes the title of Code Section 25D from ‘‘Residential Energy Efficient Property’’ to ‘‘Residential Clean Energy Credit.”

The primary change made by the Act concerns the addition of “qualified battery storage technology expenditures” to the list of expenditures for which a credit is allowed.

The term “qualified battery storage technology expenditure” means an expenditure for battery storage technology which—

(A) is installed in connection with a dwelling unit located in the United States and used as a residence by the taxpayer, and

(B) has a capacity of not less than three kilowatt hours.

Under the Act, the applicable rate is 26 percent for property placed in service before January 1, 2022, 30 percent for property placed in service after December 31, 2021, and before January 1, 2033, 26 percent for property placed in service after December 31, 2032, and before January 1, 2034, and 22 percent for property placed in service after December 31, 2033, and before January 1, 2035

New Clean Vehicle Credit Under Code Section 30D.

Act Section 13401 renames the Code Section 30D credit for new qualified plug-in electric drive motor vehicles and significantly changes the rules for claiming the credit. Most significantly, the Act imposes an adjusted gross income threshold above which no credit may be claimed. In the case of a joint return or a surviving spouse, the adjusted gross income threshold is $300,000; for a head of household, the threshold is $225,000 and for all other individual taxpayers the threshold is $150,000.

The Act also imposes a ceiling on the manufacturer’s suggested retail price of qualifying vehicles. The ceiling is $80,000 for vans, sport utility vehicles, and pickup trucks. For all other vehicles, the ceiling is $55,000.

Lastly, among many other changes, the Act requires final assembly of qualifying vehicles to occur in North America, effective for vehicles sold after the date of enactment of the Act.

The Internal Revenue Service has provided guidance on the new final assembly requirement (located here), including a link to a list of qualifying vehicles.

Note that different provisions go into effect on different dates. As a result, some vehicles that qualify for tax credits in 2022 may not qualify starting in 2023, and other vehicles may have their tax credit reduced or eliminated starting in 2023 based on further restrictions, such as the vehicle price cap.

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The Act’s clean energy-related provisions in particular are voluminous and complex, a full discussion of which is well beyond the scope of this Tax Alert. For more information, please contact Michael Cumming (MCumming@dykema.com or 248-203-0740), Scott Kocienski (SKocienski@dykema.com or 248-203-0868), Richard Lieberman (RLieberman@dykema.com or 312-627-2250), Asel Lindsey (ALindsey@dykema.com or 210-554-5298), Nardeen Dalli (NDalli@dykema.com or 248-203-0793) or your local Dykema relationship attorney.