U.S. tax alert: Inflation Reduction Act, CHIPS Act & Private Capital

Clean Energy Incentives

One pillar of the IRA is its provision of $369 billion in "energy security and climate change" investments over the next 10 years. Among these, the IRA extends the timeline of both the preexisting clean energy investment tax credits (ITCs) and production tax credits (PTCs), generally at full value of these credits in the past (for clean electricity production, 30% ITC and 2.6 cent kWh PTC), as long as prevailing wage and apprenticeship requirements are met (although taxpayers cannot receive both tax credits for the same project). Credit levels can be higher if domestic content thresholds are met, and/or for projects in former coal mining, coal power plant communities.  Additionally, new credits were introduced for, among other things,  investments in energy storage technology with zero (or less) greenhouse gas emissions, the production of clean hydrogen, and US manufacturing of certain clean tech components like EV or energy storage battery cells and modules, solar cells and wafers, and critical minerals (mined or processed in the United States). Importantly, the IRA also allows for the monetization of tax credits through their sale to unrelated third parties, and, for municipal or tax-exempt entities, refundability.

Comment - The option to sell these certain tax credits will provide valuable flexibility in the structuring of transactions aimed at investment in renewable energy.  These new and extended credits increase the importance of the location and generation capacity of renewable energy projects. More generally, these credits (and their transferability) provide tax incentives that may align with ESG goals. Additionally, the wide availability of these credits may spur investment in other ESG-aligned asset classes as well, boosting interest and investment in ESG-focused funds.

You can find additional commentary on these clean energy incentives including:

• The IRA’s electric vehicle and battery credits: More complexity and more benefit for US manufacturing,
• The IRA: Incentives for development and use of clean fuels in transportation,
• The IRA: what’s in It for manufacturers?,
• The IRA’s transformative tax incentives for solar energy projects and manufacturing operations.

15% Corporate Alternative Minimum Tax

The IRA imposes a corporate alternative minimum tax (“New AMT”) equal to 15% of an applicable corporations’ excess of (a) their adjusted financial statement income (“AFSI”) for the taxable year, over (b) their corporate AMT foreign tax credit for the taxable year. An “applicable corporation” is defined as any corporation (other than an S corporation, a regulated investment company, or a real estate investment trust) whose average annual AFSI for the 3-year-taxable-year period ending with such taxable year exceeds $1 billion.  Additionally, if a corporation is a member of a foreign-parented multinational group, such corporation can become subject to the New AMT if the 3-year average annual AFSI is (i) over $1 billion from all members of the foreign parented multi-national group and (ii) $100 million or more of income from only the US corporations in the multi-national group, a US shareholder's pro rata share of CFC AFSI, effectively connected income and certain partnership income. Notably, these calculations allow accelerated depreciation to be taken into consideration. The New AMT is effective for tax years beginning after December 31, 2022.

Comment - Although the New AMT introduces a new paradigm for corporate taxation, it is not expected to drastically affect private investment funds in the United States, in part due to its passage without an amendment that would combine the income of private equity funds and their portfolio companies for AFSI calculation purposes. As passed, based on calculations from the Joint Committee on Taxation, only about 150 of the largest US corporations are expected to be subject to the New AMT. In most cases, private equity and venture capital funds are not likely to hold investments in corporations whose annual AFSI exceeds $1 billion. However, careful consideration should be given to the application of aggregation rules for the purpose of the application of the New AMT to foreign-parent multinational groups.

It is important to note that the New AMT is not an implementation of the Organization for Economic Cooperation and Development’s (OECD) Pillar Two, which similarly imposes a 15% minimum tax on multi-national groups meeting a certain revenue threshold. To comply with Pillar Two, at a minimum the US tax rate on “GILTI” would need to be raised from 10.5% to 15%. 

Carried Interest

In early versions of the bill, the IRA contained a provision that would have required fund managers to hold portfolio assets for five years or longer to receive capital gains treatment on their carried interest. The IRA ultimately did not contain any such provision due to opposition from Senator Kyrsten Sinema (D-AZ), whose vote was critical to the bill’s passage in the Senate.

Comment - While efforts to prolong the holding requirement for capital gains treatment of carried interest are not dead, such efforts are unlikely to succeed in the near term.

Stock Repurchases

To make-up for revenue lost upon the last-minute down-voting of the above-mentioned carried interest provisions, Congress added an excise tax on stock repurchases. The IRA imposes a 1% excise tax on the value of certain net stock repurchases by publicly traded corporations or their affiliates occurring after December 31, 2022 (with several exceptions, e.g. when repurchased stock is contributed to employee stock ownership plans, or when the total value of stock repurchased during the year does not exceed $1 million). A “repurchase” is defined as a redemption of the stock of a corporation (as defined in Section 317(b) of the Internal Revenue Code of 1986), or any other economically similar transaction (to be defined in future Treasury Regulations). Given the breadth of this definition, the 1% excise tax may apply to a number of different transactions where there are payments to shareholders of cash or property other than the corporation’s own stock.

Comment - Given that this new 1% excise tax applies only to stock buybacks of publicly traded corporations and their affiliates, is not expected to have a large effect on private equity and venture capital funds that hold primarily private investments.

Increased IRS Funding

Among other funding commitments, the IRA provides for an additional $80 billion in funding for the IRS. Approximately $45 million of that amount is allocated to enforcement, and the remainder is allocated to various operational improvements and modernization. The additional funding is expected to generate $124 billion in revenue, net of expenses, through improved enforcement efforts.

CHIPS and Science Act Tax Incentives

In addition to the IRA, on August 9, 2022, the CHIPS and Science Act, legislation aimed at promoting semiconductor manufacturing, was enacted into law. The CHIPS Act provides a tax credit, via new Section 48D, of 25% of an eligible taxpayer’s qualified investment in an advanced manufacturing facility (to manufacture semiconductors in the United States), available for facilities for which construction begins on or before December 31, 2026. Unlike certain tax credits introduced in the IRA, the Section 48D tax credit can either be received as a “payment against tax”, which reduces the eligible taxpayer’s amount of tax due, or claimed on the eligible taxpayer’s federal income tax return. The “payment against tax” option can benefit taxpayers making estimated payments, allowing them to claim the benefit of the tax credit in sooner than the filing of their federal income tax returns by using the credit to reduce the amount of estimated payments.

Should you have any question, feel free to liaise with Nancy O’Neil, Caitlin Piper or Maral Clay

Authored by Nancy O’Neil, Caitlin Piper, and Maral Clay.