Inflation Reduction Act – New Corporate Alternative Minimum Tax
Effective for tax years beginning after December 31, 2022, the Inflation Reduction Act of 2022 (IRA) imposes a 15 percent Corporate Alternative Minimum Tax (CAMT) on applicable corporations. The new tax will have significant tax implications on large applicable corporations which requires complex analysis to determine whether they are affected by the CAMT.
Who is subject to the Corporate Alternative Minimum Tax (CAMT)?
Applicable corporations’1 with an average annual adjusted financial statement income (AFSI) exceeding $1 billion are subject to the 15 percent CAMT. The taxpayer is required to calculate the average annual AFSI over a three-year period and pay the greater of the CAMT or its regular income tax plus tax imposed under IRC Section 59A (Base Erosion and Anti-abuse Tax). The three-year period2 is any three consecutive tax years preceding the tax year in which the tax applies.
Analysis of the Adjusted Financial Statement Income
According to IRC Section 56A, “adjusted financial statement income” is defined as the net income or loss of the taxpayer set forth on the taxpayer’s applicable financial statement with adjustments to certain items. Notice 2023-07 provides interim guidance on Corporate Alternative Minimum Tax which includes general adjustments in computing AFSI. The following are some of the general adjustments to account for and the applicability of each adjustment varies based on the taxpayer’s structure.
- Aggregation Rule
- Special rules for related entities
- Consolidated financial statements
- Consolidated returns
- Treatment of dividends and other amounts
- Treatment of partnerships
- Federal income tax depreciation
- Net Operating Loss
- General Business Credit
- Covered Benefit Plan
- Foreign Tax Credits
Due to the complexity of the AFSI calculation, extensive analysis and regulation interpretations, taxpayers are advised to assess their structures and perform the income test as soon as possible to properly calculate their tax responsibilities for effective tax year 2023.
1 S-Corporation, regulated investment company (RIC) or real estate investment trust (REIT) are exempt from CAMT.
2 As per IRC Section 59(k)(1)(E)(i) and (ii), AFSI is determined based on the number of years the corporation has been in existence and AFSI is annualized for taxable years that are less than 12 months.