On August 16, President Joe Biden signed the Inflation Reduction Act amid a ton of fanfare. A $700 billion, three-pronged bill that addresses health care, climate, and tax policy, the act is poised to shake up the tax landscape for years to come.
The law is set to raise $300 billion over the next decade, largely by creating two new taxes on corporations and beefing up tax enforcement by the Internal Revenue Service. What’s new, and what will the role of the IRS be? Here are the key takeaways tax professionals need to be ready to address in the coming months.
It’s Here: A Corporate Minimum Tax
Since 2021 the Biden administration has grappled with how to improve corporate tax compliance. US Treasury Secretary Janet Yellen has led the charge to help the Organisation for Economic Co-operation and Development (OECD) enact a global minimum tax (GMT). An international deal has proven elusive thus far, but the Inflation Reduction Act does levy a minimum corporate tax here at home, although this differs from the GMT, which targets foreign profits to reduce the incentive to move the location of profits to low-tax jurisdictions.
The GMT applies to corporations with $1 billion or more in average annual earnings, calculated over a three-year period on income shown on a company’s financial statement. This tax is projected to impact 150 companies (or roughly thirty percent of Fortune 500 firms), with the most affected industries being manufacturing, information technology, and holding companies.
Given the significant tax implications as well as the tight turnaround time—the tax is applicable for tax years beginning after December 31, 2022—the largest corporations in the United States need to quickly understand the financial impact and compliance measures needed to address these regulations, which are just a few months away.
Running It (Buy) Back
When a profitable public company has excess cash, it can purchase shares of its own stock on the public market or make an offer to shareholders, a process known as a stock buyback. It’s a way of returning cash to shareholders, Amy Arnott, a portfolio strategist at Morningstar, told CNBC,1 and more widely used than dividends, a portion of company profits regularly sent back to investors. Critics argue that buybacks often come with the new issuance of stock options for executives and other employees, which can negate some, or all, of the share reduction benefits for regular investors.
Wherever one lands on the issue, buybacks are a common corporate strategy, and the Inflation Reduction Act levies a one percent excise tax on the fair market value of stock repurchased by publicly traded corporations. Given how widespread the practice is, tax professionals that work with large corporations or their employees need to be hyperaware.
The Return of the Superfund Tax (Part 2)
Last year, the reinstated components of the Superfund Excise Tax had a significant primary impact on the chemicals industry.
The Inflation Reduction Act affects the entire oil and gas industry, including chemicals, as a familiar tax returns to the scene. The law reinstates and increases Superfund taxes—which expired back in 1995—on crude oil and petroleum products. The tax will now be 16.4 cents per barrel. Add to that the current nine-cents-per-barrel oil spill tax, and, as of January 1, 2023, oil and gas industry companies are looking at a total tax of 25.4 cents per barrel of petroleum products such as crude oil.
The tax not only aims to clean up hazardous Superfund sites but also highlights the need for corporate vigilance. Many companies will not be ready to automate their systems to include this tax in just a few months’ time, so firms will have to rely on manual updates. If tax pros at oil and gas companies or their advisors aren’t exhaustive in their updates, the tax could cause a huge storm of volatility as these companies scramble to get up to speed.
IRS Tax Enforcement
While the revenue projections for these new and revisited taxes certainly seem to add up to a windfall for the federal coffers, everything hinges on the IRS’ ability to enforce these new taxes. In its current state, that would be virtually impossible. The IRS has seen budget cutbacks for years, and enforcement and compliance have fallen correspondingly. That is why the act calls for $79.6 billion over ten years in additional funding for the IRS.
The enforcement provision has been one of the most contentious parts of the bill, and the commentary has been rife with speculation about which groups or entities will be the focus of additional audits. To that end it is worth noting that Yellen’s August 10 letter to Charles P. Rettig, the IRS commissioner, concerning the Inflation Reduction Act makes a commitment that audit rates will not increase relative to recent years for households making under $400,000 annually and that enforcement focus will be on high-net-worth individuals, large corporations, and complex pass-throughs. But the money is not just for enforcement. It also covers taxpayer services, operations support, business systems modernization, and a task force to design a free direct e-file tax return system for the IRS.
The Path Ahead
With a short timetable remaining until the Inflation Reduction Act takes effect, tax professionals have their work cut out for them. These changes to corporate taxation, and the increase in the number of watchful eyes that will ensure compliance, are significant. It won’t be an easy lift, but tax pros can even the playing field by ensuring their systems are up-to-date and completely aligned with these significant changes, lest they encounter a whole new world of additional tax compliance challenges.
Senay Redda is vice president of business development, indirect tax, at Thomson Reuters.
- Kate Dore, “There’s a New 1% Tax on Stock Buybacks—Here’s What It Means for Your Portfolio,” CNBC, August 19, 2022, www.cnbc.com/2022/08/19/what-stock-buybacks-are-and-how-a-new-tax-affects-your-portfolio.html.