The Inflation Reduction Act of 2022 (H.R. 5376), which the House of Representatives passed today and will soon be signed into law by President Joe Biden, has substantial implications for the tax credit development community. While there are many welcome provisions, including those for renewable and clean energy, there remain questions that need to be answered to protect the important work being done because of community development tax incentives.
How We Got Here
After the surprise announcement in late July by Sen. Joe Manchin, D-West Virginia, that he and Senate Majority Leader Chuck Schumer, D-New York, reached an agreement on a budget reconciliation proposal, the Inflation Reduction Act of 2022 was introduced. After a long weekend following the bill’s introduction that included concessions made to obtain the support of Sen. Kyrsten Sinema, D-Arizona, and an amendment vote-a-rama, the Senate passed the reconciliation bill along party lines, with Vice President Kamala Harris casting the deciding vote, 51-50. The House then made a special return from its August recess Friday to vote in favor of the bill by a narrow margin.
What’s in the Final Bill
The enacted version of the act remains similar to the version released in late July and summarized in a July 29 Novogradac blogpost. Specifically, the final bill still includes:
- a 15% corporate minimum tax on book income,
- clean and renewable energy provisions, including extensions of the production tax credit (PTC) and investment tax credit (ITC),
- increased tax enforcement resources,
- an extension of the Affordable Care Act premium tax incentives, and
- prescription drug reform.
The major change made to ensure Sen. Sinema’s support was the removal of a carried interest provision that would have extended from three to five years the required holding period on investments needed to get preferential tax treatment for income that could otherwise be taxed as ordinary income.
Because the renewable energy provisions in the act are unchanged from the descriptions in a previous blogpost, this discussion will focus on the new 15% corporate minimum tax on book income and its potential impact on the tax credit equity markets.
What the 15% Minimum Tax on Book Income Could Mean for Tax Credit Equity Markets
The law establishes a 15% minimum tax on book income applicable to corporations with average adjusted financial statement income for a three-taxable-year period ending with the current taxable year of more than $1 billion. This is often referred to as a tax on book income, because it is applied to a corporation’s financial statement net income before taxes, rather than the taxable income calculation traditionally used for tax purposes. To determine the minimum tax, a corporation starts with its adjusted financial …….