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Inflation Reduction Act: Considerations for tax-exempt organizations
September 2022
In brief
The “Inflation Reduction Act” (the Act), signed into law by President Biden on August 16, includes the following key provisions of interest to exempt organizations:
- a 15% book-income alternative minimum tax (BMT) on corporations with adjusted financial statement income over $1 billion, which generally would apply only to exempt organizations with unrelated trade or business income or unrelated business income from debt-financed property above this threshold;
- $370 billion in spending and tax credits and incentives on energy and climate change provisions, including a new provision that, in general, specifically allows exempt organizations to monetize these credits by electing to receive direct payments; and
- an $80 billion increase in IRS funding for tax enforcement and IRS services, which could lead to increased audit activity, including potentially for exempt organizations the executive compensation excise tax, unrelated business taxable income siloing, and the college and university net investment income tax where final regulations more recently have been issued.
Action item: Exempt organizations should evaluate the potential impact of these provisions, including whether any of the new tax credits and incentives and the direct payment option might benefit them.
See our Insight, Senate passes “Inflation Reduction Act” reconciliation bill, for more information.
In detail
Corporate book-income alternative minimum tax
The Act imposes a corporate alternative minimum tax based on adjusted financial statement income (book minimum tax, or BMT), effective for tax years beginning after December 31, 2022. This provision imposes a 15% minimum tax on adjusted financial statement income (AFSI) for corporations with average annual AFSI over a three-tax year period in excess of $1 billion. For exempt organizations, AFSI is defined as unrelated trade or business income or income from debt-financed property treated as unrelated business taxable income.
Observation: An exempt organization would be subject to the BMT only if its AFSI (as defined above) for exempt organizations exceeds $1 billion. Given this high threshold, it appears unlikely that this provision would apply to any exempt organization. In this regard, the Joint Committee on Taxation (JCT) staff projected that this provision would apply to only approximately 150 taxpayers, none of which appear to be an exempt organization.
See our Insight, Corporate book minimum tax to be effective for 2023, for more information.
Clean energy provisions
The $370 billion in spending and tax credits and incentives on energy and climate change provisions is intended to spur investments not only by traditional energy companies but also by companies in the transportation, real estate, and manufacturing industries, and includes significant enhancements if the projects meet certain wage, domestic content, or location requirements.
Importantly, the Act specifically allows exempt organizations to monetize applicable tax credits by electing to receive direct payments. These direct payments work as an election by the organization to be treated as having made a payment of tax equal to the value of the credit for which the organization otherwise would be eligible.
There are numerous energy and climate change provisions of potential interest to exempt organizations, including the credit for clean energy vehicles and the deduction for energy-efficient commercial buildings.
Clean energy vehicle credit
The Act provides, for qualified commercial clean vehicles acquired after 2022, a new business credit in an amount equal to the lesser of 15% of basis, or the incremental cost of the vehicle (excess of purchase price of such vehicle over purchase price of a comparable vehicle, up to $7,500 or $40,000 for a vehicle with a gross vehicle weight rating of at least 14,000 pounds). This credit terminates after 2032.
Energy-efficient commercial buildings deduction
Starting in 2022, the Act updates and expands the energy-efficient commercial buildings deduction by increasing the maximum deduction, determined on a sliding scale. It also changes this maximum from a lifetime cap to a three-year cap. This provision allows exempt entities to allocate the deduction for the cost of energy-efficient commercial buildings to the designer of the building or qualified retrofit plan. The amendments made by this provision expire after December 31, 2031.
Relaxing the overlap rules between tax-exempt financing and applicable tax credits
The Act amends rules governing projects that both use tax-exempt financing and claim tax credits to provide taxpayers greater ability to utilize the credits. This change could facilitate additional deployment of renewals in projects financed by tax-exempt bonds.
Observation: Exempt organizations should consider these energy and climate tax credit and incentive provisions, including when they are acquiring, building, or improving real estate and when purchasing commercial clean vehicles, especially given the new provision allowing exempt organizations to monetize applicable credits through a direct payment option. Further, as noted, the relaxed overlap rules between tax-exempt financing and tax credits, as well as a new provision allowing exempt organizations to allocate the energy-efficient buildings deduction, may provide new opportunities for exempt organizations to achieve more favorable financial benefits relating to these initiatives.
See our Insight, Reconciliation bill includes numerous energy incentive tax proposals, for more information.
Increase in IRS funding
The Act provides an $80 billion increase in IRS funding, approximately half of which is allocated to tax enforcement and approximately half of which is allocated to IRS services and systems modernization. The Act states that these appropriated funds are to remain available until September 30, 2031.
Observation: Although assessing the impact of the increased IRS funding will take time, the provision may alleviate resource constraints, customer service problems, inadequate computer systems, and taxpayer frustration, including those functions in the IRS Exempt Organization division. It is likely that the IRS will allocate additional resources for enforcement initiatives impacting exempt organizations, which may include the executive compensation excise tax, unrelated business taxable income siloing, and the college and university net investment income tax where final regulations more recently have been issued.
See our Insight, Inflation Reduction Act: What the IRS budget increase means for taxpayers, for more information.
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