In August of 2022, Congress enacted the Inflation Reduction Act (the “IRA”), which was the successor to the stalled Build Back Better legislation. Senator Lindsay Graham asked the nonpartisan Congressional Budget Office (CBO) about the anticipated effects of the IRA on inflation in the near term. There would be negligible effects for 2022, the CBO answered. “In the calendar year 2023, inflation would probably be between 0.1 percentage point lower and 0.1 percentage point higher under the bill than it would be under current law, CBO estimates.”
Not included. Earlier in the year, there had been some discussion about wealthier Americans restricting access to tax-preferred savings plans. In particular, there had been proposals for enhanced required minimum distributions for larger plan accumulations, including such distributions from large Roth IRAs. The final legislation did not include any such changes to the individual tax rules.
Book income minimum tax. Under current law, corporations are required to keep two sets of books, one for tax reporting and another for complying with the Securities and Exchange Commission. Corporate income for tax purposes is generally lower, as it includes adjustments and credits that Congress has added to the tax code to encourage economic growth in desired directions, such as incentives for “green energy.” However, if a corporation takes “too much” advantage of those legal incentives, corporate taxable income may be lowered dramatically. The most important tax increase in the IRA is a new 15% corporate minimum tax on book income, which applies if that figure is larger than the 21% rate imposed upon taxable income. The new tax applies to companies with an average financial statement income greater than $1 billion over three years.
This new provision is projected to raise $222 billion over the next ten years and is the most significant revenue enhancer in the legislation. According to an item in the Washington Post, only 83 companies pay less than 15% in taxes on $1 billion of income. These include well-known firms such as Berkshire Hathaway, Alphabet, Bank of America, Amazon, and Verizon. The higher tax liabilities are likely to make owning the shares of affected companies somewhat less attractive, depressing the share prices. On the other hand, the companies may mitigate the impact of the new minimum tax by restricting those activities that gave rise to the “excess” of credits and deductions. The effect of such changes on overall profitability is uncertain.
Tax on stock buybacks. Companies have a choice in how to share profits with shareholders. They may declare dividends, reinvest profits in the company, or use the profits to buy back shares of stock. A buyback lowers the number of shares available to the public and typically increases share prices. Most dividends are taxed at the same rate as long-term capital gains, but some shareholders may prefer that companies take the buyback approach because the tax obligation is deferred until the shares are sold.
In 2021, a record $881.7 billion worth of shares were repurchased by the S&P 500 companies. Five companies accounted for one-quarter of the buybacks—Apple, Alphabet, Meta, Microsoft, and Bank of America. Starting in 2023, a 1% excise tax will be applied to the net market value of corporate shares repurchased. The change is expected to cause companies to increase dividend payouts (which will be taxable), reduce buybacks, and raise $73.6 billion over the next ten years.
Some companies have already announced a possible acceleration of buyback into this year, which could push some shares prices higher as the year comes to a close.
The reduction of inflation is an issue on many people’s minds in recent months, and you can count on your team at Legacy to keep you up to date on the future and impact of the Inflation Reduction Act. Visit our blog at https://www.lptrust.com/blog/ to read additional articles on this topic and many others.
If you are a Legacy client and have questions, please do not hesitate to contact your Legacy advisor. If you are not a Legacy client and are interested in learning more about our approach to personalized wealth management, please contact us at 920.967.5020 or email@example.com.
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