Financial Statement Implications of The Inflation Reduction Act: What CFOs Should Know

The Inflation Reduction Act of 2022 (the “Act”) (H.R. 5376), signed into law by President Biden on August 16, 2022, has various key tax provisions that may affect financial statements of a public or private company. Below we discuss some of the tax law changes that may have potential financial statement accounting impact and also provide preliminary views which are subject to change as we expect there to be further discussion and debate within the accounting profession.

Please see our prior Tax Alerts which describe these two provisions in more detail.

Book Minimum Tax (“BMT”)

The new corporate minimum tax will operate much like the pre-2018 corporate alternative minimum tax (“AMT”), requiring corporations to calculate taxes first on taxable income and then again on book income based on adjusted financial statements, and pay the higher of the two. Thus, the BMT will increase a taxpayer’s tax only to the extent that tentative minimum tax exceeds regular tax plus any base erosion and anti-abuse tax (BEAT). In turn, any AMT paid will generate a credit carryforward, which can be applied to reduce the regular tax in any future year to the amount of the tentative minimum tax computed for that year. The BMT is effective for taxable years beginning after December 31, 2022.

While we continue to analyze the impact of the BMT on financial statements, we currently anticipate that it will be accounted for like the corporate AMT regime that existed prior to the Tax Cuts and Jobs Act of 2017. Pre-2018 corporate AMT obligations generally did not impact the effective tax rate as a deferred tax asset could be established for the indefinite-lived AMT credit carryover that would be created when subject to the AMT. This deferred tax asset, however, was subject to valuation allowance considerations. The new BMT also creates an AMT credit which similarly can be indefinitely carried forward to reduce regular future tax.

ASC 740 also provides that “the applicable tax rate for measuring U.S. federal deferred taxes is the regular tax rate.” Therefore, companies will not have to remeasure deferred taxes in the quarterly period of enactment.

Excise Tax on Stock Repurchases

Effective for stock repurchases occurring on or after January 1, 2023, the Act will impose a 1% excise tax on such “repurchases” of a “covered corporation’s” stock during the taxable year (“Stock Repurchase Excise Tax”).

Two certainties are that this excise tax will not be deductible for federal tax purposes, and it will not be considered to be a tax under ASC 740. ASC 740 indicates that “an income tax is based on a company’s revenues, expenses, gains, or losses that are included in its taxable income.” The stock buyback excise tax is not based on a measure of income, and therefore is not within the scope of ASC 740.

U.S. GAAP, however, does not address the accounting treatment of taxes paid in connection with the repurchase of stock. The question that arises is whether the excise tax will be accounted for as an expense recognized within pre-tax income or as an adjustment to the cost of the repurchased shares recognized as an adjustment to equity. Further discussion on how to account for this tax is expected.

CFOs and others with responsibility for financial statement tax impacts should continue to monitor these provisions for guidance expected to be forthcoming from the IRS and Treasury and should consult with their accounting advisors about the proper accounting treatment.