Valuation Implications of the Inflation Reduction Act

The Inflation Reduction Act (IRA) was signed into law by President Biden on August 16, 2022 after passing both the Senate (on August 6, 2022) and the House (on August 12, 2022) on straight party-line votes. The new law makes a series of domestic policy changes, most of them dealing with corporate taxes, federal health programs, energy, and climate change (summary below). According to the Congressional Budget Office and the Joint Committee on Taxation – the official non-partisan congressional scorekeepers – the IRA will reduce the federal deficit by just over $300 billion (bn) over the next decade – $737 bn in savings and new revenue and $437 bn in new spending and tax breaks.

Passage of the IRA come after more than a year of negotiations and intra-party disagreements among congressional Democrats. It started out as the Build Back Better Act – a $3.5 trillion domestic tax and spending package – and was significantly reduced and reworked over time mostly due to opposition from a small handful of moderate Senate Democrats. The law moved through Congress under the budget reconciliation process, which was exempted from the Senate filibuster rules and allowed it to pass on a simple majority vote. However, the reconciliation rules also limited the substance of the IRA to revenue and spending provisions within a 10-year window, among other restrictions.

Top-Line Summary

Total Revenue/Savings: $737 bn

Total Spending/Tax Credits: $437 bn

Total Deficit Reduction: ~$300 bn

General Valuation Considerations

There are a few initial observations that may impact valuations prepared for financial reporting and tax planning/reporting purposes. Since the Corporate Minimum Tax, by definition, only impacts certain companies, the factors noted below are important to consider when either a) the subject company/client is an "Applicable Corporation" as defined in the IRA or b) the market for the subject asset/company may be impacted by the view or perspective of an Applicable Corporation (e.g., in the case of determining a hypothetical "market participant," or in determining whether a taxable or non-taxable transaction is a likely exit for a reporting unit). Below are a few important considerations we expect may impact valuations in the future.

For goodwill impairment related valuations, the primary impact we expect to see is when performing analyses for reporting units (RU) or cash generating units (CGU) of an Applicable Corporation. The size of individual RUs/CGUs, market participant assumptions around the potential exit/sale of the RU/CGU (and highest and best use assumptions), and market capitalization reconciliation may be particular assumptions that may be impacted by the IRA. An additional consideration may be appropriate when determining the structure of a likely RU/CGU sale pursuant to ASC 350-20-35, with “sale to Applicable Corporation” added to the current taxable and non-taxable options.

For purchase price allocations, it is possible that a buyer that is an Applicable Corporation begins to consider the incremental tax impact of a non-taxable transaction through the incremental amortization expense that would impact alternative tax calculations, and specifically, the calculation of Adjusted Financial Statement Income (AFSI), per the IRA. Also, for U.S. entities within foreign-owned corporations that qualify as an Applicable Corporation, the need for U.S. and non-U.S. financial statements may require additional granularity to identify U.S.-based intangible assets as the corresponding amortization may impact the AFSI calculation.

Lastly, as the IRA provides for additional funding of the IRS, we expect a significant increase in tax controversy matters as enforcement efforts ramp up in the future. This is likely to impact legal entity and/or intangible property valuations for intercompany reorganization transactions, cheap stock valuations, worthless stock deduction valuations, estate and gift tax valuations, and other related valuations used for tax purposes.

Given the provisions of the IRA, there are certain industries that we expect may be impacted more than others, which include:

• Valuation Impacts on Clean Energy
• Valuation Impacts on the Pharmaceutical and Biotechnology Industries
• Implications for Site Selection and Incentives

Valuation Impacts on Clean Energy

Companies and sponsors are scrambling to fully assess the impact of the IRA on the valuation of renewable energy projects. Below is a quick guide of tax credits prior to the IRA and tax credits under the IRA for certain renewable energy technologies:

Note: Investment Tax Credit (ITC); Production Tax Credit (PTC)

What does this mean from a valuation perspective?

• The potential impacts of the IRA on the economics of a renewable energy project are significant given the planning certainty and tax credit “runway” that it provides to all stakeholders. The IRA is expected to lead to significant growth and deployment of renewable energy resources going forward.
• The estimation of the fair market value of a renewable energy project is highly dependent on the tax credits that the facility receives, and we can expect incremental benefits arising as a result of the new provisions under the IRA.
• We expect the assessment of the impacts of the IRA on valuations to continue to evolve as we consider any guidance issued by the IRS and/or the tax equity market, and as sponsors and other stakeholders adjust to the full implications of the IRA from an investment perspective.

Valuation Impacts on the Pharmaceutical and Biotechnology Industries

While the ultimate impact on the pharmaceutical and biotechnology industry remains to be seen, the IRA has clear implications for certain drugs as it relates to Medicare beneficiaries. Under the new program, the Secretary of Health and Human Services will identify 100 drugs that have 1) been on the market for seven to 11 years for biologics and 2) have the highest spending under Medicare. It provides exclusions for certain orphan drugs, plasma-derived products and low-cost Medicare drugs. From that initial list, the Secretary will select 10 drugs for negotiation under Medicare Part D in 2026, 15 drugs in 2027 and 2028, and 20 drugs in 2029. The same number of prescription drugs provided under Part B would be subject to negotiation starting in 2028. In addition, the IRA provides for inflation rebates and a cap on out-of-pocket costs. This will likely result in price reductions on some drugs and potentially limited growth on others. Each of these items are expected to have an impact on business valuations and individual product level valuations. There is also the potential for increased M&A activity in the industry to offset potential growth impacts due to price reductions/growth limitations resulting from the IRA.

In addition, we anticipate that the corporate minimum tax aspect of the IRA, as highlighted above, will be particularly impactful in the pharmaceutical and biotechnology industries given the size of the companies with presence in the U.S.  The potentially higher tax burden, along with the pricing dynamics mentioned above, may result in additional pressure on valuations from an impairment testing standpoint depending on the nature of assets and/or RUs/CGUs subject to impairment testing.

Implications for Site Selection and Incentives

In addition to the valuation considerations outlined above, the IRA is expected to have significant implications for companies exploring additional incentives and potentially pursuing site location alternatives.

The IRA, in conjunction with the Bi-Partisan Infrastructure Law and the President’s Emergency Order Invoking Defense Production Act for Solar Panel Manufacturing, offers holistic support for manufacturers of renewable energy products. The IRA in particular answers several challenges that the sinusoidal sector has faced for decades, including ensuring long-term demand through the extension of credits for renewable power generation, electric vehicle production and solar panel manufacturing as well as a tool box of incentives, e.g. credits, grants, direct loans, loan guarantees and cooperative agreements that encourage manufacturers to invest in domestic production, shore-up supply chains with domestic content requirements and reduce costs associated with converting legacy, energy-intensive facilities. With many of the new incentives starting in 2023, our professionals have the experience to help your team ramp up quickly by analyzing costs, integrating incentives, and selecting sites.  In fact, from previous searches this year through our new digital marketplace, SITE Selector TM, we have a database of over 100+ existing facilities that could expedite your timelines. 

To further discuss your company’s eligibility for specific programs and the application process and strategies, please contact the Site Selection and Incentives Advisory team.