On August 16th, President Biden signed into law the Inflation Reduction Act (IRA). Among the many provisions within the IRA, the act establishes a new corporate minimum tax, an excise tax on corporate stock repurchases and an increase in research credit. The act also extends the limitation on excess business losses of noncorporate taxpayers.
Here’s what you need to know…
Alternative Minimum Tax (AMT)
The new alternative minimum tax of 15% applies to corporations with $1 billion or more in average earnings over the previous 3 years.
Subchapter S corporations, regulated investment companies and real estate investment trusts are excluded, but large equity firms organized as partnerships are not.
The AMT applies to taxable years beginning after December 31, 2022.
Excise Tax on Corporate Stock Repurchases
Beginning on January 1, 2023, publicly traded companies that repurchase their shares will be taxed 1% of the fair market value of the shares repurchased. The amount that is subject to tax is reduced by new issues to the public or stock issued to employees.
This tax is imposed on net stock buy-backs which is the total shares repurchased less the number of shares issued during the year. The shares issued during a year include stock used for stock-based compensation or stock issued to employees that exercise their stock options.
The tax does not apply if repurchases are less than $1 million or if the repurchased stock is contributed to an employee pension plan, an employee stock ownership plan or other similar plans.
The research credit allows qualified businesses to deduct dollar-for-dollar costs of qualified research from their taxable income.
A business may be eligible if they’re considered a small business (less than $5 million in gross receipts and is under 5 years old) and if it:
• Devotes time and resources to creating a new or innovative product
• Improves an existing product
• Develops a process, patent, prototype or software
• Hires designers, engineers or scientists
Prior to the Inflation Reduction Act, qualified businesses could apply up to $250,000 of the research credit toward its Social Security payroll tax liability. The IRA allows an additional credit of up to $250,000 to be applied against the Medicare Hospital Insurance tax for taxable years beginning after December 31, 2022.
While the IRA credit can’t exceed the tax imposed for any calendar quarter, unused research credits can be carried forward.
Excess Business Losses Under Section 461(l)
The IRA extends the limitation on excess business losses of non-corporate taxpayers under Section 461(l) until December 28, 2028.
An excess business loss is the amount that a business’s deductions exceed its gross income. Non-corporate taxpayers are limited to offsetting net business losses to $250,000 (single filer) or $500,000 (joint filer), adjusted for inflation.
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