US Inflation Reduction Act ' Corporate Minimum Tax And Stock Repurchase Excise Tax

• Published date: 31 August 2022
• Subject Matter: Corporate/Commercial Law, Tax, M&A/Private Equity, Corporate and Company Law, Income Tax, Shareholders
• Law Firm: Mayer Brown
• Author: Mayer Brown

If you thought the recent price increase at your neighborhood store was inflation's last flop, think again. The Inflation Reduction Act ('IRA'), which was signed into law by President Biden on August 16, 2022, is estimated to raise $739 billion over the decade. The IRA is financed primarily by several targeted tax increases. Revenues will go toward initiatives designed to combat climate change, reduce the nation's debt, and, hopefully, reduce inflation. The IRA is a starkly diminished version of the proposed 'Build Back Better Act,' which passed the House in 2021 but never received a vote in the Senate. Most of the tax proposals in the Build Back Better Act didn't make it into the new bill, but a few did.

As discussed in more detail below, among the significant tax law changes in the IRA¹ are:

1. A 15% minimum tax rate ('corporate minimum tax') on the adjusted financial statement income ('AFSI' or 'adjusted book income') of corporations with average annual adjusted book income of $1 billion; and
2. A 1% excise tax on certain corporate stock repurchases.

15% Corporate Minimum Tax on Adjusted Book Income

A corporate alternative minimum tax was imposed in various forms beginning in 1969'and repealed in 2017. For most of that period, the tax base was not financial statement income but the regular income tax base with various preferences added back.

The new corporate minimum tax will apply to 'applicable corporations,' defined as those with $1 billion or more in annual adjusted book income (as opposed to adjusted taxable income), calculated over a three-year period average. Corporations connected through greater than 50% ownership are generally aggregated to calculate the $1 billion adjusted book income threshold. A US corporation that is a member of a foreign-parented group will only be an applicable corporation if the group's average AFSI is $1 billion or more and the average adjusted book income of the US corporations of the group, together with any effectively connected income of the foreign corporations (as reflected for AFSI purposes), is $100 million or more. Once a corporation becomes an applicable corporation subject to the corporate minimum tax, it remains an applicable corporation (subject to certain exceptions) even if the income test is no longer met in subsequent years. For corporations in existence for less than three years, the minimum tax will be based on the earnings in the years of existence. The corporate minimum tax excludes Subchapter S corporations, RICs, and REITs. It has been estimated that the new provisions will apply to about 150 companies and are expected to raise $313 billion in taxes over 10 years.²

When applicable, the corporate minimum tax for a particular year would be the greater of the amounts computed under the regular US corporate federal income tax or the corporate minimum tax. The corporate minimum tax is generally equal to 15% of the corporation's AFSI. Book profits are the profits that corporations are required to report publicly to shareholders and potential investors and are often much larger than the profits they report to the IRS for tax purposes. Taxpayers are generally allowed to credit the corporate minimum tax paid in a prior year against their regular tax liability in a future year to the extent the regular tax liability exceeds the amount of its minimum tax for the future year.

Because the corporate minimum tax effectively focuses on book income (subject to several adjustments) rather than...