Just in time for tax season, on December 27, 2022, the IRS released Notice 2023-7, which provides interim guidance for some year-end and time-sensitive questions regarding the Corporate Alternative Minimum Tax (CAMT). The Notice also expresses the Treasury’s intention to issue additional guidance on the subject before publishing proposed regulations.
What is Corporate Alternative Minimum Tax (CAMT)?
The CAMT applies a flat 15% tax on corporations with average annual adjusted financial statement income (AFSI, also known as book income) exceeding $1 billion for three consecutive tax years. Included in the Inflation Reduction Act of 2022, CAMT is a response to large corporations that report significant earnings to their shareholder while paying very little federal income tax.
A company’s AFSI is typically the audited financial statement it uses for reporting to the SEC. However, its reported income may be significantly reduced for tax purposes thanks to loss carryovers, credits, depreciation, and other adjustments. Beginning in 2023, corporations that meet the CAMT threshold will pay the larger amount of taxes calculated under the regular corporate tax rules or taxes calculated by CAMT.
Because of the high threshold and various exemptions, it is likely that CAMT will affect only a few dozen corporations a year. S corporations, real estate investment trusts, private equity funds, and regulated investment companies are not subject to CAMT.
Key Takeaways from December’s CAMT Guidance
Following are some of the top:
Simplified Safe Harbor
Given the complexity of many corporate structures, many companies were left uncertain if they would be subject to CAMT. The Notice offers these companies a “simplified” method to determine whether they fall below the $1 billion threshold.
In essence, a corporation will be considered not to be subject to CAMT if its average unadjusted financial statement does not exceed $500 million over a three-year period. Corporations that are members of foreign-parented multinational groups will not be subject to CAMT if the average annual unadjusted financial statement income of the domestic members and the unadjusted financial statement income of foreign members is less than $50 million.
Nonrecognition transactions are corporate gains or losses that are not typically included in corporate tax filings. These include reorganizations, contributions of property to partnerships and controlled corporations, and liquidation of subsidiaries into a corporate parent.
The new guidance provides that these gains and losses will be excluded from a corporation’s AFSI and not subject to CAMT. It is not yet clear how partially taxable nonrecognition transactions will be treated, however.
Debt and Bankruptcy
The Notice provides some relief for financially distressed corporations or those emerging from bankruptcy. Gain or loss from the emergence of bankruptcy will be excluded from a company’s AFSI, subject to certain adjustments. Debt discharged at a discount will be excluded from a corporation’s AFSI in an amount equal to the amount excluded from taxable income.
Partnership Income and Consolidated Groups
The Notice clarifies that a consolidated group will be considered a single entity for purposes of calculating AFSI, both for determining whether it is subject to CAMT and for calculating its liability.
The Notice also clarifies that a corporation in a partnership does not take into account its distributive share of the partnership’s financial statement income or loss in determining whether it will be subject to CAMT.
More Guidance Needed
While Notice 2023-7 provides some welcome clarification around CAMT, it’s clear that more is needed. Corporations still face questions around how foreign-parented corporations will be treated, the treatment of certain items reported in other comprehensive income, the interaction of CAMT with the pending global minimum tax, and more.
More guidance from the IRS is expected in the first quarter of 2023. In the meantime, we advise corporations that may be subject to CAMT to consult with one of Tonneson’s qualified tax advisors to ensure that they are following the law and current guidance to the best of their ability.
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