Proposed Inflation Reduction Act Would Impose Corporate Minimum Tax, Carried Interest Changes

Proposed Inflation Reduction Act Would Impose Corporate Minimum Tax, Carried Interest Changes

In what many see as an unexpected development, Senator Joe Manchin (D-W.VA.) on July 27 announced that he had reached an agreement with Senate Majority Leader Chuck Schumer (D-NY) on new legislation - the Inflation Reduction Act of 2022 - which is intended to address inflation by paying down the national debt, lower consumer energy costs while providing incentives for the production of clean energy, and reduce healthcare costs. The bill would raise roughly $450 billion through new tax provisions, including a 15% minimum tax on large corporations, and boost funding for the IRS which should result increased tax collections over the next ten years.

The Senate is expected to vote on the 725-page bill next week. It is not clear at this time whether all Democrats in the 50-50 Senate support the bill. If the bill passes in the Senate, it would then go to the Democrat-controlled House of Representatives, where it may face opposition from some Democrats, who in past negotiations have insisted on expansion of the $10,000 cap on the state and local tax (SALT) deduction.

If there is sufficient support in the House, the bill would need to go through the reconciliation process, which initially requires approval by the Senate parliamentarian that all items in the bill qualify for reconciliation; once cleared, it must achieve a 51-vote threshold to clear the Senate. Following clearance, it would make its way to President Biden, who has already expressed support for the package, for his signature.


Tax Measures

The bill would raise approximately $450 billion to pay for deficit reduction, clean energy, and climate investments. The proposal’s two main components would invest $80 billion over the next 10 years in the IRS for tax enforcement and compliance and impose a 15% corporate minimum tax on the approximately 200 largest corporations. The tax measures in the proposed legislation are discussed below.

Corporate Taxes

The bill’s tax provisions include a 15% “corporate alternative minimum tax” (AMT) that would be imposed on a corporation’s adjusted financial statement income. The entities subject to this tax would be corporations with an average annual adjusted financial statement income of more than $1 billion for the preceding three taxable years.

Corporations would generally be eligible to claim net operating losses and tax credits against the minimum tax, as they were able to before the 2017 Tax Cuts and Jobs Act (TCJA) eliminated the corporate AMT. To the extent an AMT is incurred under this new provision, a corporation would be eligible to claim the AMT as a tax credit against the regular corporate tax for amounts paid in future years. The credit would be limited to an amount equal to the excess of the regular tax liability in any year over the tentative AMT in that same year, so it effectively would bring down the regular tax to an amount that would not otherwise exceed the tentative AMT in the carryforward tax year. The provisions in this bill parallel to a large extent a similar provision that was included in the “Build Back Better Act” passed by the House in late 2021.

The legislation would not adversely impact most corporate taxpayer because the flat 21% corporate tax rate introduced in 2017 as part of the TCJA would be retained.
This provision would be effective for taxable years beginning after December 31, 2022.


Carried Interest

The proposed legislation would modify the current carried interest provisions, enacted under the Tax Cuts and Jobs Act, which generally impose a three-year holding period requirement in order for gains arising with respect to a "carried interest" in an applicable partnership interest (API) to qualify as long-term capital gain. An API generally is an interest in a partnership transferred to or held by the taxpayer in connection with the performance of "substantial services" by the taxpayer, which generally encompasses a range of financial services activities. Under the proposed rules, partnership interests held in connection with the performance of services generally would not receive long-term capital gain treatment until a partner’s holding period exceeds five years, rather than the current three-year period.

The proposed five-year holding period would apply to all APIs except in the case of taxpayers with less than $400,000 of taxable income or income with respect to an API that is attributable to a real property trade or business (as defined under IRC Section 469(c)(7)(C)).

Proposed Section 1061(d) would provide that the transfer of an API triggers immediate taxable income recognition regardless of general nontaxable transfer rules. This would presumably result in taxability of transfers to trusts, estates and family partnerships, a potentially significant change given that fund managers often transfer parts of their fund interests to various estate planning vehicles. Note that this proposed amendment is consistent with originally proposed Treasury regulations that would have immediately taxed otherwise nontaxable transfers of APIs.

The proposed rules would apply for tax years beginning after Dec. 31, 2022. For a more detailed discussion of the carried interest proposal, see BDO’s alert, Carried Interest Taxation Changes Proposed in Inflation Reduction Act of 2022 (


IRS Funding

The proposed legislation includes an additional $79 billion over 10 years in funding for the IRS for taxpayer services, tax enforcement activities, modernization efforts and operations support. Of that total, $45 billion would be dedicated to tax enforcement activities such as providing legal and litigation support, conducting criminal investigations (including investing in investigative technology), providing digital asset monitoring and compliance activities, and enforcing criminal statutes related to violations of internal revenue laws and other financial crimes.

The Congressional Budget Office estimates this provision would bring in an additional $203 billion in tax revenue.

The bill includes a provision that would require the IRS to provide, within nine months following the date of enactment of the bill, a report on the cost of developing and running a free direct e-file tax return system, with a focus on multilingual and mobile-friendly features and safeguards for taxpayer data.


Environmental Credits

While the proposed legislation’s tax title includes only the three measures described above, the bill also contains numerous provisions to address climate change through tax credits for businesses and individuals. In fact, the bulk of the proposal focuses on these environmental measures. The incentives for businesses include the following:

  • Extension and modification of credit for electricity produced from certain renewable resources.
  • Extension and modification of energy credit.
  • Increase in energy credit for solar and wind facilities placed in service in connection with low-income communities
  • Extension and modification of credit for carbon oxide sequestration.
  • Zero-emission nuclear power production credit.
  • Credit for advanced energy manufacturing.
  • Extension of incentives for biodiesel, renewable diesel, and alternative fuels.
  • Extension of second-generation biofuel incentives.
  • Sustainable aviation fuel credit.
  • Credit for production of clean hydrogen.

Notably, the bill includes provisions allowing the transfer of certain credits to unrelated parties for cash beginning in 2023.  Additionally, tax exempt and government entities may elect direct payments of certain tax credits in the form of a tax refund.

The clean energy and efficiency incentives for individuals include:

  • Extension, increase, and modifications of nonbusiness energy property credit.
  • Residential clean energy credit.
  • Energy efficient commercial buildings deduction.
  • Extension, increase, and modifications of new energy efficient home credit.

In addition, the bill proposes clean vehicle credits, incentives for clean electricity and clean transportation, and a residential clean energy credit.


Research Credit Increase Against Payroll Tax For Small Businesses

A qualified small business (QSB) can elect, for any tax year, to apply a portion of the research credit (i.e., the payroll tax credit portion of the research credit) to offset its payroll taxes. The election is currently limited to $250,000 in each tax year and can only be made in five tax years. Under the bill, for taxable years beginning after December 31, 2022, the maximum credit would be increased by $250,000 for a total limitation of $500,000.


Non-tax Provisions

The bill features a provision that would allow Medicare to negotiate some prescription drug prices directly and would cap out-of-pocket drug costs at $2,000 per year. The proposed legislation also would extend through 2025 Affordable Care Act subsidies for taxpayers whose household income exceeds 400% of the poverty line, which were currently set to expire at the end of 2022.


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