President Biden signed into law the Inflation Reduction Act (H.R. 5376, 117th Congress) (the “IRA”). The enactment of the IRA caps a tumultuous period of many months of negotiations involving the original Build Back Better Act (the “BBBA”) on which the IRA is based. The BBBA did not progress beyond approval in the House of Representatives in November 2021. The IRA is considered a “light” version of the BBBA with many original provisions scaled back significantly or removed altogether in an effort to ensure passage. Nevertheless, the IRA represents a significant federal investment to address climate change and curb inflation.
Key provisions of the IRA relate to energy (including tax credits), healthcare, tax reform and deficit reduction. Unfortunately, the IRA falls short of including any tax-exempt financing tools. Communities relying on public financing have been requesting, among other things: a provision to protect direct pay subsidy bonds from continued federal sequestration; an expansion of volume cap for exempt facility bonds especially to satisfy the demand for affordable low-income housing; a reduction in the 50% bond financing requirement to unlock 4% low-income housing tax credits; and an update and increase to the $10 million bank qualified provision for small issuers. The IRA includes none of the requested provisions.
Relevant to the public finance community, however, is the reintroduction by the IRA of a corporate alternative minimum tax (the “AMT”). As a reminder, the AMT for corporations had been eliminated by the 2017 legislation commonly referred to as the Tax Cuts and Jobs Act. The new corporate AMT imposes a 15% alternative minimum tax on annual adjusted financial statement income of “applicable corporations.” Corporations that do not fall within the category of “applicable corporations” will continue to be exempt from the AMT altogether. “Applicable corporations” generally include domestic corporations (including banks but excluding Subchapter S corporations, regulated investment companies, real estate investment trusts, and businesses owned by private equity) with profits of more than $1 billion, and certain foreign-parented multinational corporations with profits of more than $100 million, over a specified three-year period, effective beginning in the 2023 taxable year.
From the perspective of tax-exempt legal documentation, the reintroduction (albeit in limited form) of the corporate AMT may require adjustments to offering statements, tax opinions, and tax covenants going forward. We have already been working closely with our clients to discuss the new AMT provision and draft necessary documentation changes, including revised tax disclosure for official statements.
Within Kutak Rock LLP, there are several working groups that are also assisting clients with the application of energy, tax credit, and healthcare provisions of the IRA. The firm’s National Public Finance Tax Group would be happy to assist with efforts to coordinate with these working groups.
Please also note that in certain cases the use of tax-exempt financing for IRA-assisted projects can impact the availability of IRA tax credits or subsidies for such projects.