5 Important Tax Provisions You Should Know About

By Eric L. Ciazza, Esq. & Brittany N. Oravec, Esq.
Selzer Gurvitch Rabin Wertheimer & Polott, P.C.

February 1, 2023

As we enter the 2023 tax filing season, we are revisiting the Inflation Reduction Act (the “Act”) signed into law by President Biden on August 8, 2022, and the provisions are effective beginning in 2023. The Act impacts both business and individual taxation. This article focuses on five important tax provisions that significantly impact businesses and individuals:

1. 15% Corporate Alternative Minimum Tax Rate

Effective for tax years beginning after December 31, 2022 (in other words, effective for tax years beginning in 2023), the Act imposes a fifteen percent (15%) federal corporate alternative minimum tax on the “adjusted financial statement income” of an “applicable corporation.” The adjusted financial statement income (“AFSI”) of a corporation is generally the corporation’s income determined for financial statements, with some adjustments, including adding back federal income tax and adjusting depreciation expense. An applicable corporation is any corporation with an average AFSI of $1 billion over three years.  

For this new alternative income tax, an applicable corporation will calculate taxable income under two regimes: income subject to the 21% rate under the pre-Act rules, and AFSI subject to the 15% rate. The applicable corporation will pay the higher calculated tax. At the end of December, the IRS issued Notice 2023-27 to provide guidance on the calculation of this alternative minimum tax, which will apply until proposed treasury regulations are issued.

The stated purpose of this provision is to ensure corporations pay their “fair share” of taxes regardless of the particular tax deductions and credits that are otherwise allowed to them under the Internal Revenue Code. The Joint Committee on Taxation has estimated that only 150 companies will actually be subject to this alternative minimum tax.

2. Excise Tax on Stock Buybacks

Effective in 2023, the Act provides for a one percent (1%) excise tax on stock buybacks by certain corporations—those corporations whose stock is traded on established securities markets, such as the New York Stock Exchange.  Stock buybacks have recently been a commonly used alternative for corporations to distribute funds to their stockholders in place of dividends. For the excise tax calculation, stock repurchased during a year is offset by the fair market value of stock issued that year.  The IRS also issued Notice 2023-2 at the end of December to provide guidance on the calculation and administration of this excise tax. 

3. Increased IRS Funding

The Act provides almost $80 billion of additional funding over the next 10 years for the Internal Revenue Service.  This includes close to $46 billion of funding for additional enforcement activities, such as employing additional IRS tax examiners. The stated purpose of the enforcement funding is to close the “tax gap,” which is the difference between the amount the IRS has calculated should be collected based upon taxpayers properly following tax law in the calculation of and payment of federal taxes, and the amount actually paid.  Based on its most recent estimate (from earlier last decade), the IRS calculated the average annual tax gap is approximately $381 billion. The Congressional Budget Office estimated that the Act’s enforcement funding would generate additional tax revenue of $204 billion through fiscal year 2027. The Commissioner of the IRS has asserted that the enforcement funding is not intended to increase audits of small businesses or middle class taxpayers; however, various politicians and commentators have raised the concern that enforcement activities will unduly burden taxpayers.   

To provide better services to taxpayers, the Act does provide significant funding for the IRS’s taxpayer services, including reducing the backlog of unprocessed tax returns and increasing the responsiveness of IRS customer service representatives to taxpayers’ calls (less than 20% of calls were answered in 2021 and 2022, compared to nearly 60% in 2019).

4. Affordable Care Act (“ACA”) Subsidy Extension

The ACA provided for federal government subsidies of certain individual taxpayer’s medical insurance premiums, but the subsidies were scheduled to expire at the end of 2022.  The Act extends the subsidies through the end of 2025.

5. Energy Security and Climate Change Investments

The Act includes various provisions to offset high energy costs. These include consumer home energy rebate programs, consumer tax credits for energy efficient homes and the purchase of clean vehicles, and grants to make affordable housing more energy efficient. The Act also provides tax credits to businesses to build lean technology manufacturing facilities, and funds for energy research programs. Some projections estimate that these provisions of the Act will help the United States reduce emissions by almost 40% by 2030, from 2005 levels.

As the provisions discussed above demonstrate, the Inflation Reduction Act, like many provisions of federal law, uses tax provisions to impact taxpayers across a range of their activities.