The Inflation Reduction Act passed by Congress was signed into law by President Joe Biden Aug. 16. The IRA is being pitched as a major legislative victory for the President heading into the interim elections, even though the legislation was passed out of both chambers of Congress on straight party lines, and even though it is a shadow of President’s original sweeping legislative proposal, the Build Back Better plan, which was derailed in the first half of the 117th Congress.
The IRA package, negotiated by Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV), covers three main legislative items: (1) tax reform/changes to corporate taxes; (2) prescription drug changes; and, (3) energy and climate change.
The IRA gives billions of dollars to increase household electricity consumption, and tens of billions of dollars towards “clean energy manufacturing” in the United States across numerous components of the supply chain for clean energy and transportation technologies. It does not include any allocations to support baseload power generation.
The bill as signed by President Bill contains the same language as that version passed out of the Senate (no changes were made in the House). A review of pertinent provisions was provided in the last Standard, and we provide the same herein:
Methane Fee: The bill authorizes the U.S. Environmental Protection Agency (EPA) to impose a fee on methane emissions for oil and natural gas facilities that report more than 25,000 metric tons of carbon dioxide equivalent emissions per year if they exceed the amount of oil or gas they produce by a certain threshold. This threshold for onshore oil and natural gas production would be either (1) .20% of the natural gas sent to sale from such a facility or (2) 10 metric tons of methane per million barrels of oil sent to sale from such facility, if such facility sent no natural gas to sale.
The fee would be $900 for each metric ton above the threshold reported for calendar year 2024, $1,200 for emissions reported for calendar year 2025, and $1,500 for emissions reported for calendar year 2026.
The fee would not apply if the excess emissions are caused by an unreasonable delay in environmental permitting for any infrastructure to reduce emissions, or for emissions from plugged wells. Charges would take effect beginning 2024.
Federal Lease Rates: The bill increases the royalty rate for new onshore oil and gas leases from 12.5% to 16 2/3%, and increases the “reinstatement” lease rate from 16 2/3% to 20%. It also increases the minimum bid amount, changing it from “$2 per acre for a period of 2 years” to “$10 per acre during a 10 year period beginning on the date of enactment…” Annual rental fees have been increased and a new fee for “Expression of Interest” is to be instated as well.
Alternative Minimum Tax (Book Income Tax): The bill imposes a 15% minimum tax in tax years after 2022 on the income corporations report on their financial statements, or “book income,” with some adjustments.
The minimum tax would apply to corporations with more than $1 billion in average annual income over a three-year period.
US corporations that are members of a foreign-parented multinational group for any taxable year would need to have earned at least $100 million in such income. Foreign corporations that are engaged in a trade or business with the US will be treated as a separate domestic corporation that is owned by a foreign corporation.
Corporations would pay the larger of the minimum tax or the statutory corporate tax — which is currently 21%.
Financial statement income would be:
- Reduced by depreciation deductions — deductions for the exhaustion or wear and tear of a physical property used for trade, business, or held for the production of income.
- Adjusted to disregard any amount of depreciation expense on a taxpayer’s financial statement for a property.
- Reduced by amortization deductions — deductions for certain capital costs for non-physical assets over time — for wireless spectrum used in the business of a wireless telecommunications carrier and acquired after Dec. 31, 2007, and before the measure’s enactment.
- Adjusted to disregard an amortization expense on a taxpayer’s financial statement for wireless spectrum.
The minimum tax would also apply to corporations that have been in existence for less than three years, though S corporations, regulated investment companies, and real estate investment trusts would be excluded from the provision.
Under the minimum tax, as much as 80% of losses could be carried over to offset financial income in future years. Corporations could claim certain domestic and foreign tax credits to offset the minimum tax.
If you have any questions regarding the above described provisions or any other provision of the IRA, please let us know.
—contributed by the PBPA