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On October 23, 2024, the IRS announced (IR-2024-277) that tax-exempt organizations would be exempted from the requirement to file Form 4626, Alternative Minimum Tax — Corporations, for the 2023 tax year while it reviews comments on the application of the applicable corporation safe harbor (simplified method) to exempt organizations.

The applicable corporation safe harbor (simplified method) was first introduced in Notice 2023-7 (see Tax Alert 2023-0091) and later proposed to be made permanent in proposed regulations released on September 12, 2024 (see Tax Alert 2024-1798). Neither the Notice, nor the proposed regulations, took into account the specific adjusted financial statement income (AFSI) adjustments provided by the statute for tax-exempt organizations for purposes of determining tax-exempt organizations' qualification for the safe harbor.

Background

The proposed regulations came more than two years after the CAMT was enacted as part of the Inflation Reduction Act (see Tax Alert 2022-1237), and followed multiple Treasury Department and IRS notices that provided interim CAMT guidance (see Tax Alerts 2023-2105, 2023-0091, 2023-0384 and 2023-1570, and Tax Alert 2022-1281 for CAMT implications for tax-exempt entities). A detailed analysis of the proposed regulations can be found in Tax Alert 2024-1798.

The CAMT imposes a 15% minimum tax on the AFSI of "applicable corporations" for tax years beginning after December 31, 2022. AFSI is defined as a taxpayer's net income or loss set forth in the taxpayer's applicable financial statements (AFS) for the year, as adjusted under IRC Section 56A.

A corporation meets applicable corporation status if its average annual AFSI exceeds $1 billion for any three consecutive tax years beginning after December 31, 2021. For this purpose, a corporation's AFSI includes the AFSI of other entities in the corporation's IRC Section 52 controlled group and is determined without regard to certain AFSI adjustments.

AFSI adjustments for tax-exempt entities — Proposed Regulation Section 1.56A-14

IRC Section 511 imposes tax on the UBTI of tax-exempt organizations. IRC Section 512(a)(1) defines UBTI for most IRC Section 501(c) entities as the gross income derived from any unrelated trade or business, less allowed deductions, subject to the modifications provided in IRC Section 512(b). "Unrelated trade or business" is defined in IRC Section 513.

The proposed regulations would require a tax-exempt organization to make adjustments to its calculated AFSI so that it only takes into account income (i) from "an unrelated trade or business (as defined in [IRC] Section 513) of such organization, or (ii) derived from debt-financed property (as defined in [IRC] Section 514) to the extent that income from such property is treated as unrelated business taxable income." The proposed regulations would clarify those modifications under IRC Section 512(b) (including UBTI exclusions of income from passive sources, royalties, certain rents and capital gains) would apply when calculating AFSI for tax-exempt entities. Under Prop. Reg. Section 1.56A-14(b), if a tax-exempt organization is subject to tax under IRC Section 511, the organization's AFSI would be comprised only of UBTI, including income from debt-financed property to the extent such income is treated as UBTI by the tax-exempt entity. Tax-exempt entities would exclude income that is not specifically UBTI from AFSI.

Safe harbor (or simplified method) — Proposed Regulation Section 1.59-2(g)

Section 5 of Notice 2023-7 created a simplified method, and related safe harbor, for determining if a corporation is an applicable corporation subject to CAMT for the first tax year beginning after December 31, 2022. The simplified method would generally apply by cutting the statutory thresholds in half (i.e., $1 billion to $500 million of average annual AFSI) and eliminating most of the AFSI adjustments. If the safe harbor of $500 million or less is met, the corporation will not be a considered an "applicable corporation" for CAMT purposes, and therefore will not be subject to CAMT for the 2023 tax year.

Like the $1 billion statutory threshold, the safe harbor would apply on a controlled group basis. That is, a controlled group of related organizations meets the safe harbor, and is not subject to CAMT, if it has a three-year average AFSI of $500 million or less. The safe harbor would not apply if a controlled group's three-year average AFSI exceeds $500 million. In that case, each organization within the controlled group would determine if its individual adjusted AFSI exceeds $1 billion for the prior three-year period. Under the simplified method, AFSI is still determined by making certain adjustments, as described in the proposed regulations. Notice 2023-7, however, does not address any specific adjustments for tax-exempt organizations, including whether exempt organizations should treat only UBTI as AFSI in determining their qualification for the safe harbor.

The proposed regulations, if formally adopted, would permanently extend the safe harbor, under Prop. Reg. Section 1.59-2(g), and be available to all applicable corporations, including tax-exempt organizations, so long as the three-year controlled group AFSI average does not exceed $500 million. As with Notice 2023-7, however, the proposed regulations do not indicate whether exempt organizations should treat only UBTI as AFSI in determining their qualification for the safe harbor.

Form 4626 — 2023 filing exemption for tax-exempt organizations

Form 4626 has been redesigned for tax years beginning after December 31, 2022, and is used to determine if the filing organization is considered an applicable corporation under IRC Section 59(k) and thus required to calculate CAMT under IRC Section 55.

If the safe harbor is not met, a corporation, including a tax-exempt organization, generally would be required to complete Part I of Form 4626 to determine if it is an applicable corporation (i.e., with a three-year controlled-group average AFSI in excess of $1 billion) subject to CAMT. An exempt organization would file its Form 4626 with its Form 990-T for the applicable tax year.

However, on October 23, 2024, the IRS and Treasury granted tax-exempt organizations an exemption to filing Form 4626 for tax year 2023. The filing exemption allows a tax-exempt organization to omit Form 4626 from its 2023 Form 990-T if the organization has calculated and determined that it is not liable for any CAMT for 2023. A tax-exempt organization with a three-year average AFSI in excess of $1 billion (calculated by treating only UBTI as AFSI) is not covered under the filing exemption and must complete a 2023 Form 4626 and report any CAMT liability on its Form 990-T, Part II, Line 5.

The exemption only applies to tax year 2023. It is unclear if the exemption will be extended to subsequent tax years.

Implications

The proposed regulations and the IRS did not indicate whether exemption from the requirement to file Form 4626 will be made permanent. In the meantime, tax-exempt organizations with no CAMT liability should remain diligent in evaluating their three-year AFSI average, including the three-year AFSI average of their controlled groups, if applicable, to determine applicability of the CAMT and Form 4626 filing requirements and maintaining written support for those determinations.

Tax-exempt organizations should consider submitting comments on the proposed regulations while the comment period remains open (through December 12, 2024). Considerations for comments include:

• The simplified method / safe harbor described in Notice 2023-7 and the proposed regulations does not specify what adjustments tax-exempt organizations should make to AFSI, such as whether AFSI is comprised solely of UBTI for purposes of determining safe harbor qualification.
• It is unclear whether certain AFSI adjustments apply to both the safe harbor calculation and the CAMT tax liability calculation. It is clear, however, that some adjustments apply to one but not the other; for example, AFSI adjusts for foreign income, but no similar adjustment is available in calculating the safe harbor threshold. In contrast, it is unclear whether the adjustment limiting tax-exempt organization AFSI to UBTI also applies for purposes of the safe harbor qualification calculation.
• The temporary nature of the Form 4626 filing exemption for tax-exempt organizations that applies only to the 2023 tax year.
• If and to what extent the simplified method / safe harbor in the proposed regulations may be extended / formally adopted.