Federal Tax Update.

• Author: Josephs, Stuart R.

2022 Inflation Reduction Act

On Aug. 12, 2022, Congress passed the 2022 Inflation Reduction Act (the "Act") which the President subsequently signed into law. Selected highlights follow.

Corporate Alternative Minimum Tax (AMT)

For tax years beginning after 2022, this tax equals 15 percent of a corporation's "adjusted financial statement income" for the tax year, reduced by the corporation's AMT foreign tax credit.

However, the lax only applies to corporations with average annual adjusted financial statement income exceeding $1 billion for the three preceding tax years. This threshold is reduced to $100 million for certain foreign-owned corporations. Some exceptions also apply in determining an applicable corporation if ownership changes or there is a consistent reduction in income.

"Adjusted financial statement income" is the net income (or loss) a corporation discloses in its applicable financial statement to determine when to include income for tax purposes, with various adjustments, such as for consolidated returns or certain foreign income.

Corporations engaged in specified manufacturing activities and corporate subsidiaries of private equity companies arc exempt from this AMT.

Stock Repurchases

A 1 percent excise tax is imposed on stock repurchases after 2022 by domestic corporations whose stock is traded on an established securities market. A repurchase is a redemption--or any other transaction that is determined to be economically similar to a redemption.

This tax also applies to the purchase of stock of a specified domestic affiliated corporation--which is a corporation more than 50 percent of the capital owned (by voting power or value) by the purchasing corporation, or a partnership where the purchasing corporation owns more than 50 percent of the capital or profits interest.

The tax also applies to certain purchases of stock of a foreign affiliate.

Excess Business Losses

The Act extends the excess business loss limitations for partnerships and S corps, through 2028.

Research Credits

For tax years beginning after 2015, certain qualified small businesses can claim a limited amount of the research credit against their payroll taxes. For tax years beginning after 2022, the Act increases this limitation from $250,00 to $500,000.

Renewable Electricity Credit

The Act extends the credit for electricity produced from certain renewable resources through 2024.

An increased credit can be claimed if an entity satisfies certain workforce and wage requirements in the construction or operation of the pertinent facility.

Energy Investment Credit

This credit is extended through 2024, with workforce and wage requirements similar to renewable electricity credit.

An enhanced credit is available for solar facilities placed in service in low-income communities.

Elective Direct Payments

Instead of a tax credit, entities can elect to claim a direct payment for specified energy projects. The credits eligible for direct payment include:

* Alternative fuel refueling property;

* Renewable electricity production;

* Carbon oxide sequestration;

* Energy investment; and

* Qualifying advanced energy project.

A penalty applies if the taxpayer receives a greater direct payment than the credit which the taxpayer is entitled to.

Residential Energy Credits

The nonbusiness energy property credit, which expired Dec. 31, 2021, is modified and extended through 2032. This credit applies to:

* Energy efficient windows and doors; and

* Certain HVAC systems and heat pumps

The credit's lifetime maximum is replaced with a $1,200 annual limit.

The residential energy efficient property credit, renamed the clean energy credit, is extended through 2034.

Clean Vehicles

The credit for the purchase of clean vehicles, is extended through 2032, with modifications. Clean vehicles include:

* Plug-in electric vehicles; and

* Fuel cell vehicles.

The Act eliminates the current credit's limitation on the number of vehicles produced by a specific manufacturer. However, the Act imposes sourcing requirements on the critical components of the vehicle and battery systems. The maximum credit continues to be $7,500, but includes limitations on income and on the manufacturer's suggested retail price.

A new credit, up to $4,000, is available through 2032 for the purchase of a previously-owned clean vehicle--subject to income limitations.

The Act also provides a new credit up to 30 percent of the basis of a qualified commercial clean vehicle acquired after 2022 and before 2033.

Additional Energy Credits

Generally, the Act contains the following new credits to encourage the green energy industry's growth:

* A credit for sustainable aviation fuel sold or used after 2022; and

* A credit for the production of clean hydrogen after 2022.

Other Modified & Extended Energy Incentives

The Act modifies and extends the following existing credits and deduction:

* The carbon oxide sequestration credit is modified and extended through 2032;

* Credits for the following fuels are modified and extended through 2024:

* Biodiesel;

* Renewable diesel;

* Alternative fuel; and

* Alternative fuel mixtures;

* The second generation biofuels credit is extended through 2025;

* The new energy efficient home credit is modified and extended through 2032;

* The alternative fuel refueling property credit is increased and extended through 2032; and

* The energy efficient commercial buildings deduction is modified for tax years beginning after 2022.

Required Minimum Distributions (RMDs)

IRS notice 2022-53 (IRB2022-44, Oct. 31, 2022, released Oct. 7, 2022), announced that the Treasury Department and the IRS intend to issue final regulations regarding RMDs under IRC Sec. 401(a)(9) that will apply not earlier than the 2023 distribution calendar year.

This Notice also provides favorable guidance on certain Sec. 401(a)(9) provisions that apply for 2021 and 2022.

For more information, sec this month's Fed 'Fax Column, Page 29.

Standard Mileage Rates

The standard mileage rates for travel from July 1, 2022, through Dec. 31, 2022, has been increased as follows

New Rate Per Mile * Business use of an automobile $.625 * Deductible medical travel $.22 * Deductible travel for moving by active-duty members of the U.S. Armed Forces $.22 The standard mileage rate for automobile use for deductible charitable purposes continues to be $.14 per mile

Social Security Tax

The maximum amount of earnings subject to the Social Security tax will increase from S147.000 for 2022 to $160,200 for 2023

Other 2023 Inflation Adjustments

In Rev. Proc. 2022-38 (IRB 2022-45, Nov. 7, 2022), the IRS has adjusted the following items for inflation for 2023. (Figure 1)

More 2023 Inflation Adjustments: Retirement Accounts

IRS Notice 2022-53 (IR-2022-188, Oct. 21, 2022) prescribes the following 2023 inflation adjustments regarding retirement accounts:

2023 2022 Maximum limit on employee contributions to Sec. 401 (k) and similar retirement plans $22,500 $20,500 Maximum additional "catch-up" contributions to Sec.401 (k) and similar retirement plans for employees age 50 and over $7,500 $6,500 Maximum limit on IRA contributions $6,500 $6,000 Maximum additional "catch-up" contribution to IRAs for individuals age 50 or older $1,000 $1,000 The income thresholds are increased for 2023, which determine whether individuals are eligible to make deductible IRA contributions, Roth IRA contributions or claim the retirement savings contributions credit (under Sec 25B). Notice 22-55 also contains additional rctircment-relalcd inflation adjustments.

S Corps

Rev. Proc. 2022-19 (IRB 2022-41, Oct. 11, 2022) provides corrective relief procedures allowing taxpayers, in some situations, to retroactively preserve S elections that are invalid or terminated solely because of certain non-identical...