August 16, 2022
Inflation Reduction Act includes 15% corporate minimum tax on book income
On August 16, 2022, President Biden signed into law the Inflation Reduction Act (the Act). For companies that report over $1 billion in profits to shareholders, the Act includes a 15% corporate alternative minimum tax (CAMT) based on book income.
The CAMT was originally introduced in the House Ways and Means Committee's Build Back Better Act (BBBA) proposal in November 2021 (House BBBA). It was then modified by the Senate Finance Committee in its December 2021 BBBA proposal (Senate BBBA). As was its purpose in both House and Senate BBBA proposals, the CAMT is primarily a revenue raiser in the Act. The CAMT will apply to tax years beginning after December 31, 2022.
15% minimum tax and applicable corporations
An appliable corporation is liable for the CAMT to the extent that its "tentative minimum tax" exceeds its regular US federal income tax liability plus its liability for the base erosion anti-abuse tax (BEAT). An applicable corporation's tentative minimum tax is a 15% minimum tax on its AFSI to the extent it exceeds the CAMT foreign tax credit for the tax year. The CAMT applies to any corporation (other than an S corporation, regulated investment company, or real estate investment trust) whose average annual AFSI exceeds $1 billion for any three consecutive tax years preceding the tax year. When determining AFSI for the $1 billion qualification test, the Act generally treats AFSI of all persons considered a single employer with a corporation under IRC Sections 52(a) or (b) as AFSI of the corporation.
For a corporation that is a member of a foreign-parented multi-national group, the three-year average annual AFSI must be (1) over $ 1 billion from all members of the foreign-parented multi-national group, and (2) $100 million or more of income from only the US corporation(s), a US shareholder's pro rata share of CFC AFSI, effectively connected income and certain partnership income. A foreign-parented multi-national group means two or more entities if (i) at least one entity is a domestic corporation and another is a foreign corporation, (ii) the entities are included in the same applicable financial statement, and (iii) the common parent of those entities is a foreign corporation (or the entities are treated as having a common parent that is a foreign corporation).
The three-tax-year period means any three consecutive tax years preceding the tax year in which the tax applies (beginning with three-tax-year periods in which the third year of the period ends after December 31, 2021). For example, the three-tax-year period for a calendar-year corporation possibly subject to the CAMT for 2023 includes calendar years ending December 31, 2020, December 31, 2021 and December 31, 2022. For corporations (or a predecessor) existing less than three tax years, the Act substitutes the number of years the corporation has existed for three. Any tax year less than 12 months must be annualized.
The CAMT does not apply to corporations that have either changed ownership or fallen below the AFSI threshold for a specified number of consecutive years (to be determined by the U.S. Department of Treasury (the Treasury)), conditioned upon the Treasury also determining that it would be inappropriate to continue subjecting the corporation to the tax. The exception no longer applies if the corporation meets the three-year average AFSI test for any tax year beginning after the year for which the determination applies.
Adjusted financial statement income
The Act adds new IRC Section 56A, which defines "adjusted financial statement income" of a corporation (taxpayer) 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 applicable financial statement for a group of entities, the Act treats that consolidated financial statement as the taxpayer's applicable financial statement. Special rules apply for cooperatives, Alaska native corporations and mortgage servicing companies.
Although the Act requires Treasury to issue regulations and/or other guidance as necessary on adjustments to AFSI, new IRC Section 56A requires the following general adjustments:
Note: The adjustments for defined benefit pensions and partnership distributive shares apply only to a corporation that is subject to the CAMT and determining its AFSI to compute the CAMT amount. In contrast, when applying the AFSI three-tax-year qualification test, AFSI is determined without regard to these adjustments (i.e., AFSI is based on defined benefit pension amounts included in book income and partnership income that must be aggregated under IRC Section 52).
Deduction for financial statement net operating loss
The Act allows taxpayers to deduct financial statement net operating losses (NOLs) from AFSI. The deduction equals the lesser of:
"Financial statement net operating loss" means the net loss on the corporation's applicable financial statement for tax years ending after December 31, 2019. The Act contemplates a taxpayer may carry forward a financial statement NOL indefinitely.
CAMT foreign tax credit
The CAMT foreign tax credit may reduce the CAMT (if the taxpayer chooses to credit foreign taxes for regular US federal income tax purposes). The CAMT foreign tax credit equals the sum of:
In other words, creditable foreign income taxes paid or accrued by CFCs are limited to 15% of the taxpayer's pro rata share of its CFCs' income; creditable foreign income taxes paid or accrued by domestic corporations are not.
Taxpayers whose pro rata share of creditable foreign income taxes paid or accrued by CFCs exceeds 15% of their pro rata share of the CFCs' income may carry the excess forward for five years.
General business credits
The Act limits general business credits to 75% of the taxpayer's net income tax that exceeds $25,000 (with no limit against the first $25,000). Net income tax is the sum of the taxpayer's regular US federal income tax liability (including BEAT under IRC Section 59A) and the tax imposed by IRC Section 55 (including the CAMT).
Credit for prior-year minimum tax liability
The Act adjusts the rules in IRC Section 53 to provide a minimum tax credit for applicable corporations. Under modified IRC Section 53, the net minimum tax (i.e., the tax imposed by IRC Section 55) for all prior tax years beginning after 2022 can generally be carried forward and utilized as a credit against the taxpayer's regular tax liability, including any BEAT liability.
Treasury to issue regulations
The Act directs Treasury to issue regulations and other guidance for the purpose of carrying out various provisions, including:
On August 6, 2022, several US senators engaged in colloquies with Senator Wyden (D-OR), the Chairman of the Senate Finance Committee, on the Senate floor to formally discuss several aspects of the CAMT. In a colloquy with Senator Menendez (D-NJ), Senator Wyden confirmed that regulations addressing potential issues with foreign income taxes in nonconforming foreign tax years would be in line with the legislative text and the Senate's intent for companies to be able to appropriately utilize foreign tax credits in the CAMT. In a colloquy with Senator Cardin (D-MD), Senator Wyden clarified that, the Treasury may issue regulations under the CAMT to address potential issues with the ordering of the calculation of the credit under IRC Section 53 and BEAT under IRC Section 59A. In another colloquy with Senator Cardin, Senator Wyden clarified that "other comprehensive income" is not included in financial statement income for CAMT purposes.
The ACT will require applicable corporations to compute two separate calculations for federal income tax purposes and pay the greater of the CAMT or their regular tax liability (regular tax liability plus BEAT liability). Companies should assess their structures to identify applicable corporations, taking into account the special rules for common employer groups and foreign-parented multi-national groups. Comprehensive modeling can help applicable corporations consider and plan for any potential increase in their federal income tax liability. Modeling is especially critical post-TCJA given the many complicated and interrelated foreign and domestic tax provisions that can affect a corporation's tax liability, including the CAMT, BEAT,163(j), FDII, GILTI and BEPS Pillar 2.
Treasury will be instructed to issue guidance to resolve issues not addressed in the Act's text (e.g., preventing the duplication or omission of income or loss when applying the AFSI qualification test or determining AFSI for computing the CAMT, etc.). Pending guidance, companies will have to take positions and file returns based solely on the statute as enacted.
1 Generally, a colloquy is a formal scripted conversation between members of Congress that can become part of the congressional record. Colloquies can be used for various purposes, including to draw attention to or clarify the intent of a particular issue or provision in a bill. The impact of a colloquy on federal agencies, including the Treasury, and their power to make policy decisions is not always clear.