By Robert E. Duquette, CPA
This column is an abridged form of a CPA Now blog that ran in September under the same headline. The importance of the Inflation Reduction Act, the corporate alternative minimum tax, and its potentially greater applicability than originally thought inspired us to include it in brief here. You can read the full blog at www.picpa.org/camt2022.
The new corporate alternative minimum tax (CAMT) is a significant feature of the Inflation Reduction Act of 2022, which became law this past August. Estimates are that the CAMT will bring in just over $200 billion over the next 10 years. The
effective date will be for tax years beginning after Dec. 31, 2022, for applicable corporations. An “applicable corporation” would be any corporation (other than S corporations, regulated investment companies, or real estate investment
trusts) whose average annual adjusted financial statement income (AFSI) exceeds $1 billion for any three consecutive tax years preceding the tax year. However, due to which companies are to be included in calculating AFSI (see below), there are situations
in which the CAMT could apply that would not be obvious at first.
A corporation is liable for the CAMT to the extent that its “tentative minimum tax” exceeds its regular U.S. federal income tax liability after applicable foreign tax credits, plus its tax liability for the base erosion anti-abuse tax (BEAT).
The tentative minimum tax is a 15% minimum tax on AFSI, adjusted for net operating losses (explained below), to the extent the tax exceeds that year’s CAMT foreign tax credit. Domestic credits under the general business tax appear to be allowed
to offset up to 75% of the combined regular and minimum tax. (Note that this new tax is not identical to the OECD’s proposed minimum tax of 15%.)
How Many Corporations Will Be Impacted?
The Joint Committee on Taxation estimates that only about 150 U.S. corporations would be subject to the CAMT. Other analysts estimate it would be less than 100, and that the impact would be modest
since many already pay more than 15% or will adjust their AFSI to escape the tax. However, a more careful reading of the act reveals interesting language regarding whose income is to be included in AFSI.
First, all those persons constituting a single employer within a corporation under IRC Sections 52(a) or (b) are to be considered in the AFSI of the corporation. Thus, it appears that the determination of AFSI will include businesses that
are members of the same controlled group of corporations.
Next, for corporations that are foreign-owned or otherwise a member of an international financial reporting group, the threshold amount for the three-year average annual
AFSI that triggers the CAMT is met if there is over $1 billion in average AFSI collectively from all members of that foreign-parented group and $100 million or more of income from the U.S. corporation. This includes a U.S. shareholder’s pro
rata share of controlled foreign corporation AFSI, and effectively connected income as well as certain partnership income.
I wonder, therefore, if the component member and foreign parent provisions were considered in the estimate
of the number of corporations that would be swept into at least having to analyze the applicability tests – especially the foreign parent provisions that may apply to U.S. corporations at $100 million of AFSI.
Adjustments to AFSI
New IRC Section 56A defines “adjusted financial statement income” of a corporation as the taxpayer’s net income or loss reported in the taxpayer’s “applicable financial statement” as defined in IRC Section 451(b)(3),
with adjustments for certain items. If a taxpayer’s financial results are reported on the financial statement for a group, such as part of a foreign parent group, the act treats that consolidated financial statement as the taxpayer’s applicable
Several adjustments to AFSI are required under Section 56A. Here are a few:
- Tax depreciation – AFSI does not include book depreciation and amortization with respect to such property, but it apparently does include a reduction equal to the tax depreciation and amortization amounts, including bonus depreciation.
- Net operating losses (NOLs) – This deduction equals the lesser of the aggregate amount of financial statement NOL carryovers to the tax year, or 80% of the AFSI computed before the NOL deduction.
- Taxes – Disregard federal income taxes. No adjustment is required for income, war profits, or excess profits taxes imposed by a foreign country or possession of the United States if the taxpayer chooses not to claim foreign tax credits for the
A CAMT credit will be available to be carried forward indefinitely for CAMT paid. It can be used to reduce regular tax liability in future years if the regular tax liability exceeds the CAMT liability.
This suggests that companies
and advisers should carefully consider projecting their CAMT position with regard to GAAP pretax income, AFSI, CAMT credits, and regular taxable income. To the extent there are appropriate opportunities within GAAP, tax law, and business considerations,
companies might revisit when certain expenses or income for book versus tax will be recognized to optimize when CAMT is triggered versus the ability to use the CAMT credit in the future.
GAAP Valuation of CAMT Credit
Companies apparently will need to consider ASC 740 as to how CAMT and related credits may impact their deferred tax balances, deferred tax valuation allowances, and income tax expense reporting and disclosures. This includes the prospect of possibly being
subject to CAMT indefinitely, thus increasing the chances of a valuation allowance on the usefulness of its CAMT credit carryforward.
Future regulations will have to address the above matters, and more. Guidance will be needed on the interaction with existing BEAT, global intangible low-taxed income, and foreign tax credit provisions; how “other comprehensive income” in
the financial statements could impact AFSI; situations in which a U.S. corporation or its predecessors have not yet existed for at least three years; what to do when a tax year is less than 12 months; changes in ownership; what happens when affected
companies fall below the AFSI threshold; and whether any GAAP mark-to-market or valuation adjustments are included.
I personally wonder if more midsize companies and their CPAs will now have to analyze in greater detail what has passed
to determine its applicability when considering the controlled group and foreign ownership provisions.
Robert E. Duquette, CPA, is a teaching full professor in the College of Business at Lehigh University and a retired EY tax partner and Philadelphia Transactions Tax Leader. He has served on PICPA’s Federal Tax Thought Leadership Committee for 30 years and is a member of the Pennsylvania
CPA Journal Editorial Board. He can be reached at firstname.lastname@example.org. The views expressed here are of the author, not Lehigh University.