The 2022 calendar tax year is quickly coming to a close. What looked like a relatively quiet second half of the year has been disquieted by the Inflation Reduction Act (IRA) and a provision from the Tax Cuts and Jobs Act (TCJA) of 2017 that went into effect January 1, 2022.
Corporate Alternative Minimum Tax
The IRA imposes a 15% minimum tax on adjusted financial statement income (AFSI) for taxable years beginning after December 31, 2022. The tax applies to corporations with average annual AFSI in the previous three years of $1 billion or more. In the case of U.S. corporations with a foreign parent, in addition to the $1 billion threshold, there must be $100 million or more of income from only the U.S. corporation(s) in the previous three years. The rule applies on a controlled group basis.
Insurance companies filing financial statements pursuant to Statutory Accounting Principles (SAP) were initially concerned that this provision would require the preparation of GAAP financial statements to determine if the book alternative minimum tax applies. However, the provision references Internal Revenue Code (IRC) Section 451 and “applicable financial statements.” This definition provides an accommodation for financial statements filed with regulatory authorities [IRC §451(b)(3)(C)]. The general consensus is that SAP financial statements fit within this regulatory exception. Consequently, we believe insurance companies can rely upon SAP financial statements in applying the corporate alternative minimum tax.
Excise Tax on Repurchase of Corporate Stock
The IRA also imposes an excise tax on corporate stock repurchases for tax years beginning after December 31, 2022. New IRC §4501 imposes a 1% excise tax on the value of stock repurchased by the issuer. The measure is expected to generate $74 billion of tax revenue over 10 years.
The provision only applies to “covered corporations,” which are defined as domestic corporations with securities listed on an established securities market. There are a few exceptions to the tax, including stock contributed to retirement accounts, pension plans, and employee stock ownership plans (ESOP). In addition to the cost of the excise tax, corporations should be aware that the excise tax is not deductible in the determination of federal taxable income.
Deductibility of Research & Experimentation Expenditures
Arguably, one of the most overlooked provisions of the TCJA is the five-year amortization period for research and experimentation expenditures. Before the TCJA change, such expenses were immediately deductible. The amortization requirement applies to expenditures incurred in taxable years beginning after December 31, 2021. Thus, this provision applies to expenditures incurred in the 2022 calendar tax year. Note that a 15-year amortization period applies to foreign research and experimentation expenditures.
Summary
Companies should consider the book minimum tax and 1% excise tax in planning for 2023. However, more immediate attention should be paid to the new five-year amortization period for research and experimentation expenditures as that provision impacts remaining estimated tax payments and the overall tax liability for calendar-year 2022.
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Read more articles from FORVIS' 2022 tax guide here.