US Tax Alert: Inflation Reduction Act, CHIPS Act & Private Capital | Hogan Lovells

Clean Energy Incentives

One of the ERI’s pillars is its delivery of $369 billion in “energy security and climate change” investments over the next 10 years. Among these, the IRA extends the timing of pre-existing Investment Tax Credits (ITCs) and Production Tax Credits (PTCs), usually at the full value of those credits in the past (for clean electricity generation, 30% ITC and 2.6 cent kWh PTC), as long as applicable salary and apprenticeship requirements are met (although ratepayers cannot receive both credits for tax for the same project). Credit levels may be higher if domestic content thresholds are met and/or for projects in former coal mining communities or coal-fired power plants. Additionally, new credits have been introduced for, among other things, investments in energy storage technology with zero (or less) greenhouse gas emissions, clean hydrogen production and manufacturing in the United States. United of certain clean technology components such as energy storage or EV battery cells and modules. , solar cells and wafers, and critical minerals (mined or processed in the USA). 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, their refundability.

Comment – The option to sell certain tax credits will provide valuable flexibility in structuring transactions aimed at investing in renewable energy. These new and extended credits increase the importance of location and generation capacity for renewable energy projects. More generally, these credits (and their transferability) offer tax incentives that can align with ESG objectives. Moreover, the wide availability of these credits can also stimulate investment in other ESG-aligned asset classes, thereby stimulating interest and investment in ESG-focused funds.

You can find additional comments on these clean energy incentives, including:

15% Alternative Minimum Corporate Tax

The IRA imposes an alternative minimum corporate tax (“new AMT”) equal to 15% of a corporation’s applicable excess of (a) income on its adjusted financial statements (“AFSI”) for the tax year, on (b) its AMT business foreign tax credit for the tax year. An “applicable corporation” is defined as any corporation (other than an S corporation, regulated investment company or real estate investment trust) whose average annual AFSI for the 3-year tax period ending with this tax year exceeds $1 billion. Additionally, if a company is a member of a multinational group with a foreign parent, that company may be subject to the new AMT if the 3-year average annual AFSI is (i) greater than $1 billion of all members of the multinational foreign parent group and (ii) $100 million or more of income solely from the US companies of the multinational group, a US shareholder’s pro rata share in CFC AFSI, effectively related income and certain partnership income. These calculations make it possible in particular to take into account accelerated depreciation. 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 equity funds in the United States, in part due to its adoption without an amendment that would combine income from private equity funds and their portfolio companies for the purposes of calculating the AFSI. As passed, based on calculations by 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 companies with an annual AFSI of more than $1 billion. However, particular attention should be paid to the application of the aggregation rules for the purposes of applying the new LFM to multinational groups whose parent company is foreign.

It is important to note that the new AMT is not an implementation of the second pillar of the Organization for Economic Co-operation and Development (OECD), which also imposes a minimum tax of 15% on multinational groups reaching a certain income threshold. To comply with the second pillar, at a minimum, the US tax rate on “GILTI” should be increased from 10.5% to 15%.

Interest carried

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 more to receive capital gains treatment on their carried interest. The IRA ultimately contained no such provision due to opposition from Senator Kyrsten Sinema (D-AZ), whose vote was critical to the bill passing the Senate.

Commentary – While efforts to extend the holding requirement for deferred interest capital gains treatment are not dead, these efforts are unlikely to succeed in the near term.

Share buybacks

To make up for lost revenue in the last-minute vote-down of the aforementioned carried interest provisions, Congress added an excise tax on stock redemptions. The IRA imposes a 1% excise tax on the value of certain net redemptions of shares by listed companies or their affiliates after December 31, 2022 (with some exceptions, such as where the shares redeemed are paid into employee stock plans or when the total value of shares redeemed during the year does not exceed $1 million). A “buyout” is defined as a redemption of a company’s stock (as defined in Section 317(b) of the Internal Revenue Code of 1986), or any other economically similar transaction (to be defined in future regulations of the Treasury). Given the breadth of this definition, the 1% excise tax may apply to a number of different transactions where there are payments to shareholders in cash or in property other than the company’s own shares .

Comment – Since this new 1% excise tax only applies to share buybacks of publicly traded companies and their affiliates, it is not expected to have a material effect on capital funds -Investment and venture capitalists who mainly hold private investments.

Increase in IRS funding

Among other funding commitments, the IRA provides an additional $80 billion in funding for the IRS. Approximately $45 million of this amount is allocated to law 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, from improved law enforcement efforts.

CHIPS and Science Act Tax Incentives

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