On August 7, 2022, the Senate passed the Inflation Reduction Act of 2022 (the “Act”), a reconciliation package designed to address climate change, taxes and health care. The Act passed with the evenly-split chamber voting along party lines and Vice-President Harris breaking the tie by casting her vote in favor. The Act now goes to the House which has announced it will meet on August 12th to consider the legislation.
The version of the Act passed by the Senate contains a number of amendments from its originally proposed form. We described the Act as originally proposed in our prior alerts found here (focused on climate-related tax) and here (focused on tax controversy). The salient changes in the Act as passed include the following:
Carried Interests: Deletion of the tightening of the taxation of carried interests, a proposal that would have increased the tax imposed on income or gains of asset managers in some cases.
Stock Buybacks: An excise tax of 1% on the fair market value of any stock which is repurchased by a corporation will be applied to repurchases after December 31, 2022. The tax only applies to domestic corporations the stock of which is traded on an established securities market.
Corporate Alternative Minimum Tax. As proposed, the Act imposed a corporate alternative minimum tax (AMT) of 15 percent on the adjusted financial statement income (i.e., “book” income) of corporations with adjusted financial statement income in excess of $1 billion.
Tax Depreciation Reduces AMT. In a significant change that will decrease exposure to the AMT, the Act as passed modified the calculation of adjusted financial statement income to allow it to be reduced by tax depreciation rather than book or GAAP depreciation. This change will allow developers to continue to monetize tax depreciation deductions along with tax credits under traditional tax equity “partnership flip” structures.
Reduced Exposure to AMT. Pursuant to an amendment from the floor during debate on the Act, determination of whether a group’s income exceeds $1 billion will be restricted to members of the group treated as a single employer under Section 52(a) or (b) of the Code, without the more expansive modifications in the Act as originally proposed.
Climate Tax-Related Provisions: The differences between the Act as proposed and as passed with respect to the climate tax-related provisions are relatively minor. Here are a few points to note:
Enhanced Credit Amounts. Climate-related credits are enhanced, generally in an amount equal to 10% of the credit amount, for facilities located in “energy communities.” For this purpose, energy communities include brownfield sites and areas which have had significant employment in traditional energy. The Act as passed provides more detail by specifying that such communities include communities for which the unemployment rate was at or above the national average in the preceding year and which has (or, at any time during the period beginning after December 31, 2009, had) 0.17% or greater direct employment or 25% or greater local tax revenues related to extraction, processing, transport or storage of coal, oil or natural gas as determined by the IRS. The separate credit enhancements for domestic content and low-income communities and projects are unchanged.
Nuclear Power Production Credit. The Act as passed fixes an error in the previous calculation of the credit rate to prevent the credit from being quickly phased out as the price of electricity increases.
Section 45Q Credit for Carbon Capture. Enhancements to this credit were passed as proposed, with a minor change removing a provision with respect to the installation of additional equipment on existing direct air capture facilities.
Direct Pay. The Act, as proposed, allows certain taxpayers to elect to have their eligible credit amounts treated as a payment of tax thereby generating a refund to the extent the credits exceed tax liability. The Act as passed makes electric cooperatives eligible to make the direct pay election in addition to the taxpayers eligible under the original version of the Act which included tax-exempts, governments and municipalities and those making the election with respect to section 45Q, 45V and 45X credits.
ABOUT BAKER BOTTS L.L.P.
Baker Botts is an international law firm whose lawyers practice throughout a network of offices around the globe. Based on our experience and knowledge of our clients' industries, we are recognized as a leading firm in the energy, technology and life sciences sectors. Since 1840, we have provided creative and effective legal solutions for our clients while demonstrating an unrelenting commitment to excellence. For more information, please visit bakerbotts.com.