In more detail
On 9 August 2022, President Biden signed the CHIPS Act into law. The CHIPS Act is a bipartisan bill that has been in development and subject to debate for more than a year. Intended to boost American semiconductor research, development, and production, the CHIPS Act includes an investment tax credit for manufacturing semiconductors and related equipment in new Code section 48D. The credit, which is effectively refundable, is 25% of the qualified investment made in a given taxable year in an advanced manufacturing facility of an eligible taxpayer. The credit applies to property placed in service after 31 December 2022, construction of which begins on or before 31 December 2026. For more information about the new credit, please see Baker's client alert: Giving tax credits where credit is due - Small chips causing big problems.
Additionally, on 16 August 2022, President Biden signed the Inflation Reduction Act of 2022. Passed with only Democratic votes using the reconciliation process, the Inflation Reduction Act is a significantly slimmed-down version of the Build Back Better Act that the House of Representatives passed in November 2021. While the Build Back Better Act contained a substantial number of tax provisions, including extensive changes to the international tax provisions, the Inflation Reduction Act contains a much more limited number of provisions. Notably, nothing in the Inflation Reduction Act implements Pillars One or Two in the US.
To raise revenue, the Inflation Reduction Act:
- Adds a new 15% minimum tax on book income of large corporations.
- Imposes a 1% excise tax on stock buybacks of domestic, publicly-traded corporations.
- Provides an additional USD 80 billion in IRS funding over a ten-year period.
The new minimum tax would apply to "large" corporations (those with average annual adjusted financial statement income of USD 1 billion or more), and is very similar to the minimum tax provision included in the December 2021 Senate Finance draft legislative text for the Build Back Better Act (For more information on the previous version of this provision, see Baker McKenzie's client alert: By the Book ― Bringing Back a Corporate AMT). New Code section 56A defines the term Adjusted Financial Statement Income (AFSI), provides a list of statutory adjustments to determine AFSI (including a reduction to AFSI for depreciation deductions), and provides Treasury and IRS with a fairly broad grant of regulatory authority to make further adjustments to AFSI. The minimum tax applies to taxable years beginning after 31 December 2022. While Treasury is expected to issue guidance on how to determine AFSI, it is unlikely that such guidance will be issued before year-end and it is likely that the statute will become effective before taxpayers have a full understanding of how to calculate AFSI.
The excise tax is a 1% excise tax on net buybacks made by a domestic, publicly- traded corporation. The Act provides a limited number of exemptions from the tax, including for stock repurchased in a tax-free reorganization, contributions of repurchased stock to employee retirement or stock ownership plans, and de minimis stock buybacks (which the Act defines as buybacks of USD 1 million or less). The excise tax is not deductible and applies to repurchases of stock made after 31 December 2022.
Approximately half of the additional IRS funding (USD 45.8 billion) is allocated to tax enforcement activities, USD 4.75 billion is allocated to business systems modernization and USD 3.2 billion is allocated to taxpayer services. On 10 August, Treasury Secretary Janet Yellen wrote to IRS Commissioner Rettig to "confirm . . . that audit rates will not rise relative to recent years for households making under USD 400,000 annually." Instead, Secretary Yellen instructed Commissioner Rettig that "enforcement resources will focus on high-end noncompliance". The day after President Biden signed the Inflation Reduction Act, Secretary Yellen sent Commissioner Rettig a memo instructing him to work with Deputy Secretary Wally Adeyemo on an "operational plan" to use the IRS's additional resources over the next ten years. A report describing the operational plan is due to Secretary Yellen in six months.
In addition, the Inflation Reduction Act contains other tax provisions that raise revenue, including reinstating the hazardous substance superfund tax on petroleum products (effective 1 January 2023) and extending section 461(l) for an additional two years.
On the spending side of the ledger, the Inflation Reduction Act extends the premium tax credits (initially enacted as part of the Affordable Care Act) until 2025 and includes a substantial number of provisions relating to green energy. The green energy provisions modify existing tax credits (such as the credit currently available to individuals who purchase electric vehicles), extend existing green energy incentives (including extending the production tax credit in certain circumstances) and add new credits (such as new production and investment tax credits for investments in clean electricity). These provisions are extensive and extraordinarily detailed and will be the subject of a separate Baker McKenzie client alert.
Members of Congress have now left Washington for the August recess and will not return until after Labor Day. The outlook for additional tax legislation in 2022 is uncertain, although Congress may consider a tax "extenders" bill at the end of the calendar year. The contents of an extenders bill are dependent upon several factors, including the outcome of the mid-term elections in November. However, taxpayers that are concerned about the change under section 174 requiring amortization of R&D expenses should watch the extenders process closely-- reinstating immediate expensing for R&D on a retroactive basis for the 2022 tax year is likely to be on the short list of items considered for inclusion in a year-end extenders bill.
On 25 August 2022, the White House issued an Executive Order implementing the semiconductor funding in the CHIPS and Science Act. It also released a Fact Sheet related to the Executive Order. The Commerce Department also launched CHIPS webpage, which the agency will use to communicate with the public about CHIPS Program initiatives.