Corporate AMT guidance clarifies thresholds and computation

The IRS has released significant guidance (Notice 2023-64) on the new corporation alternative minimum tax (CAMT) with important rules for determining who is covered and how it is calculated. The notice builds off guidance previously offered in Notice 2023-7 and Notice 2023-20, and in some cases supersedes them.

The CAMT was created by the Inflation Reduction Act under a new version of Section 55, and generally applies to corporations with adjusted financial statement income (AFSI) exceeding an average of $1 billion over three years. The new guidance provides clarity for determining when it is applicable, how it is calculated, adjustments to AFSI for depreciation and the application of foreign tax credits. The rules can be highly complex to apply, and taxpayers may need to spend significant time and resources to determine whether and to what extent they apply to their circumstances.

Similar to the prior notices, the IRS said it intends to issue proposed regulations with rules consistent with Notice 2023-64, but taxpayers can rely on the rules for any taxable year that begins before Jan. 1, 2024.

Background

The IRA enacted a revised Section 55 to impose the CAMT effective for tax years beginning after Dec. 31, 2022. The CAMT applies only to certain “Applicable Corporations” as defined under Section 59(k). An “applicable corporation” means any corporation (other than an S corporation, a regulated investment company (RIC), or a real estate investment trust (REIT)) which has average annual AFSI exceeding $1 billion for a three-taxable-year period ending with that taxable year. The rules are modified for domestic members of a foreign-parented multinational group (FPMG). The FPMG makes different adjustments to compute AFSI when applying the $1 billion threshold, and the domestic corporate members must have at least $100 million of AFSI for the applicable three-taxable-year period.

For purposes of determining whether a corporation is covered, the AFSI of the corporation is aggregated with the AFSI of all persons treated as a single employer with under Section 52(a) (corporations that are members of the same controlled group) or Section 52(b) (trades or businesses that are under common control).

The tax itself applies to the extent that a covered corporation’s tentative minimum tax for a taxable year exceeds the sum of regular tax and any base erosion minimum tax (BEAT) under Section 59A. The tentative minimum tax for a taxable year is 15% of AFSI for the taxable year and also includes, if applicable, a foreign tax credit (FTC) determined under special rules for CAMT purposes.

The AFSI of a taxpayer is defined in Section 56A starting with the net income or loss of a taxpayer set forth on the taxpayer’s applicable financial statement (AFS) subject to a number of adjustments provided in Section 56A.  The adjustments under Section 56A include an adjustment to disregard federal income taxes and an adjustment for depreciation of certain types of property. AFSI is reduced by a deduction for financial statement net operating loss (FSNOL) pursuant to Section 56A(d). 

Applicable corporations

The notice clarifies many rules for determining whether a corporation is an “applicable corporation.”

First, the notice clarifies that constructive ownership rules under Sections 1563(d) and (e) are taken into account for purposes of determining members of a controlled group under Sections 52(a) or (b). The notices also emphasizes that Section 52(a) applies to the members of a controlled group and not to just component members of a controlled group. Thus, a foreign corporation may be a member of a controlled group treated as a single employer. Similarly, the notice affirms that a foreign entity may be aggregated under Section 52(b).

While S corporations, RICs and REITs are excluded from the definition of “applicable corporation,” they are not excluded from being members of a controlled group and are taken into account in determining whether members of a controlled group are treated as a single employer under Section 52.

A taxpayer that is a partner in a partnership includes in its AFSI the financial statement income (FSI) with respect to the partnership investment using financial accounting methods such as the fair value method or equity method, rather than its distributive share of the AFSI of the partnership. However, if a taxpayer is a partner in a partnership and all of the AFSI of the partnership is treated as AFSI of the taxpayer under the aggregation rule, the taxpayer does not include the FSI amount with respect to such partnership in order to prevent duplicable of income or loss from the partnership.

The notice also clarifies the test for applying the applicable corporation determination to members of an FPMG. Specifically, the AFSI of a member of an FPMG for purposes of the applicable corporation test includes (in addition to its own AFSI) the AFSI of all other members of the FPMG and the AFSI of all persons treated as a single employer with the taxpayer under Section 52. As a result, the AFSI of such a tested corporation includes persons that are not members of the tested corporation’s FPMG but are treated as a single employer with the tested corporation under Sections 52(a) or (b). Because the AFSI of a taxpayer that is a member of a FPMG is calculated without regard to adjustments in Sections 56A(c)(D)(i), (c)(3), (c)(4), and (c)(11), the notice provides that the AFSI of all persons (including persons who are not members of the FPMG but treated as a single employer with the tested corporation) is determined without regard to these adjustments for the purpose of the FPMG $1 billion test.

Determining AFSI

The notice clarifies how taxpayers determine their AFSI and financial statement income (FSI). The IRS makes clear that AFSI generally starts with a taxpayer’s financial statement income from an AFS and is then subject to adjustments under Section 56A, including guidance from the IRS thereunder (e.g., IRS notices, regulations). The notice states that a taxpayer may not otherwise make adjustments to FSI in determining AFSI. Also the notice provides that a taxpayer’s AFSI is the taxpayer’s taxable income if the taxpayer’s AFS is a federal income tax return, or an information return filed with the IRS.

The notice further clarifies that FSI includes nonrecurring items and net income or loss from discontinued operations but does not include amounts reflected in equity accounts like retained earnings and other comprehensive income. FSI also includes income, expense, gain, or loss regardless whether realized, recognized, or otherwise taken into account for the taxpayer’s regular tax liability. 

A taxpayer’s FSI must be supported by the taxpayer’s separate books and records and is generally the FSI that the taxpayer would have reported on a separate AFS. Generally, the loss of one taxpayer may not be netted against the income of another taxpayer in the same AFS group notwithstanding that such amounts are netted in the consolidated AFS.

The notice also provides rules that disregard elimination entries between a taxpayer and other taxpayers in the consolidated AFS and the allocation of other consolidation entries that are not reflected in the separate books and records of the members of the AFS group (e.g., shared expenses). 

The notice contemplates that relevant accounting standards like the equity method may apply when a taxpayer has an investment in a partnership when the taxpayer does not account for such investment in its separate books and records.

Determining a taxpayer’s AFS

The notice defines an AFS for purposes of the CAMT, which will be determined by a hierarchy. A taxpayer’s AFS will be its financial statement with the highest priority on the IRS’s list. 

GAAP statements that are certified have the highest priority and include the following:

• Form 10-K or other annual statement to shareholders filed with the SEC
• Audited financial statements for (in order of priority):
  • Credit purposes
  • Reporting to shareholders, partners, other proprietors or beneficiaries
  • Any other substantial nontax purpose
• A financial statement other than a tax return filed with a federal government agency besides the IRS or SEC

IFRS statements that are certified have the second highest priority, which a similar sub-priority list as the GAAP statements.

The next priority is given to a financial statement, other than a tax return, that is filed with a government or government agency or self-regulatory organization (e.g., FINRA). The fourth priority is given to unaudited financial statements prepared for an external purpose using GAAP, IFRS, or any other accepted accounting standards issued by an accounting standards board. The last priority is given to the taxpayer’s federal income tax return or information return filed with the IRS.

The notice provides additional rules covering when a taxpayer with different accounting and taxable years is required to file both annual financial statements and periodic financial statements, when a taxpayer reports consolidated AFS with one or more other taxpayers, and when a taxpayer’s financial results are also separately reported on an AFS that is of equal or higher priority to a consolidated AFS.

Additional considerations are provided in the notice in determining the taxpayer’s AFS for a member of a tax consolidated group and a corporation that is a member of a FPMG.

The notice also covers considerations when a taxpayer restates its financial statement income for a taxable year and whether an adjustment to the financial results of a prior accounting period constitutes a restatement for the purposes of the notice.

Consolidated groups

The notice provides that if a consolidated AFS contains only the consolidated group members and disregarded entities of the group (i.e. the consolidated AFS members are identical to the consolidated group members for tax purposes), then the FSI of the group for CAMT purposes is merely the consolidated FSI set forth in the consolidated AFS.

However, if the consolidated AFS also includes one or more taxpayers that are not part of the consolidated group for tax purposes, then the FSI of the consolidated group for CAMT purposes is determined by treating the consolidated group as a single entity and then applying the general rules for determining FSI from consolidated AFS in the notice.  

Foreign corporations

The notice clarifies the determination of AFSI with respect to certain foreign corporations. Under the notice, a U.S. shareholder of a controlled foreign corporation (CFC) must apply the adjustments contained in both Section 56A(c)(2)(C) and Section 56A(c)(3) when determining the AFSI of a CFC. 

Section 56A(c)(2)(C) provides required adjustments for determining the AFSI of a taxpayer that has an interest in another corporation that is not included on the consolidated return with the taxpayer. If a corporation is not part of the taxpayer's consolidated return, the taxpayer's AFSI related to that corporation is determined by taking into account only the dividends and other amounts (as determined under U.S. federal income tax principles) that are includible in gross income (or deductible as loss) under Chapter 1 of the Code with respect to such corporation not included on a consolidated return with the taxpayer.

Section 56A(c)(3) provides the taxpayer's AFSI related to a CFC is also adjusted to take into account its pro rata share of certain items taken into account on the AFS of the CFC. As a result, a U.S. shareholder in a CFC must include dividend inclusions (and potentially other amounts) under Section 56A(c)(2)(C) and must also include its pro rata share of the AFSI items of the CFC. The pro rata share is determined under rules similar to the pro rata share rules within the Subpart F rules under Section 951(a)(2).  

The `notice also clarifies the determination of AFSI with respect to certain foreign corporations in several other ways, including the following clarifications:

• Adjustments under Section 56A(c)(3), requiring pro-rata inclusions of the AFSI of a CFC, are determined on an aggregate basis, such that U.S. shareholders of multiple CFCs make a single positive adjustment to their AFSI with respect to all CFCs.   
• A CFC's AFSI includes both its distributive share of the AFSI of any CFC-owned partnerships and the AFSI of any of its wholly owned disregarded entity.
• Foreign corporations qualifying for and claiming treaty benefits under the business profits clause of a treaty shall determine their AFSI consistent with the principles of such treaty.  

Certain taxes

The notice provides clarifications on the timing of AFSI adjustments for certain federal and foreign income taxes under Section 56A(c)(5). Adjustments for taxes taken on the taxpayer’s AFS—including taxes accounted for as deferred tax expense, as current tax expense, or through increases or decreases to other AFS accounts (e.g., adjustments under the equity method)—are taken into account on the taxpayer’s AFS in the taxable year or years in which such taxes impact the taxpayer’s FSI or are included as a component of an adjustment to the taxpayer’s AFSI.

The notice further provides that a federal or foreign income tax is considered taken into account on a taxpayer's AFS if a journal entry has been recorded in a journal used to determine the amounts on the AFS of the taxpayer for any year or a journal entry has been recorded on the AFS of another taxpayer which include the taxpayer.  This applies even when the income tax does not impact the taxpayer’s FSI at the time of the journal entry. An income tax accounted for on a partnership’s AFS is also considered taken into account on any AFS of its partners.

Depreciation

Section 56A(c)(13) provides that taxpayers can generally use Section 168 tax depreciation to reduce AFSI while disregarding any related depreciation expense from the AFS. Section 4 of previous Notice 2023-7 provided initial rules for determining AFSI depreciation.  

Section 9 of the notice modifies and replaces the previous guidance related to depreciation in Notice 2023-7, and provides that taxpayers must use the modified and clarified definitions after Sept. 12, 2023.

Notable changes from the prior guidance include the following:

• Taxpayers that change their method of accounting for depreciation for any item of Section 168 property must also adjust AFSI for the Section 481(a) adjustment. In doing so, the Section 481(a) adjustment is included as a reduction or increase to AFSI over the appropriate spread period (e.g., one year or four years).
• The definition of “deductible tax depreciation” is modified to include depreciation that is capitalized under another provision in the Code and subsequently recovered. For example, if a taxpayer capitalizes depreciation to its R&E expenditures under Section 174(a) and subsequently recovers the R&E through amortization deductions, the portion of that recovery related to the capitalized depreciation is an adjustment to AFSI.
• The treatment of the adjustments for dispositions is clarified to clearly state that if the book disposal and tax disposal are in different years, the AFSI adjustment related to the book disposition is the year of the book disposition, and the AFSI adjustments for the tax disposition are the year of the tax disposition.
• The notice provides rules and examples for dispositions of Section 168 property that result in nonrecognition or deferral of gain for regular tax purposes but not for AFSI—specifically installment sales under Section 453 and like-kind exchanges under Section 1031. The notice indicates that Section 56A(c)(13) does not allow a deferral for these transactions unless specified in the statute or other guidance. Therefore, if a taxpayer disposes of property and recognizes gain or loss for FSI purposes, an adjustment is required for AFSI—regardless of the treatment for regular tax.

Certain duplications and omissions

The notice addresses when AFSI must be adjusted for a change in financial accounting principle. Specifically, AFSI must be adjusted to take into account any cumulative adjustment to retained earnings of the taxpayer on its AFS from a change in a financial accounting principle. If the adjustment is necessary to prevent duplication of an item, there is a general rule that requires such an adjustment to be taken into account in AFSI ratably over a four-taxable year period. However, such an adjustment may be taken into account over a different period if the taxpayer is able to demonstrate that the duplication is reasonably anticipated to occur over a different period.

If an adjustment is necessary to prevent an omission, and increases AFSI, the adjustment must be taken into account in AFSI ratably over a four-taxable year period. However, if an adjustment is necessary to prevent an omission, and decreases AFSI, the adjustment must be taken into account in full in the taxable year for which the change in financial accounting principle is implemented in the taxpayer’s AFS.

Any portion of an adjustment not taken into account in AFSI may be accelerated if a taxpayer ceases to engage in the trade or business subject to the accounting principle change adjustment.

If the priority of a taxpayer’s AFS for the current taxable year is different than the priority for the preceding year, the taxpayer will be treated as having implemented a change in financial accounting principle and may need to adjust AFSI.

The notice also addresses when AFSI must be adjusted for a restatement of a prior year AFS. Generally, if a taxpayer restates an AFS and the taxpayer’s FSI for a taxable year is restated after the taxpayer filed its original federal income tax return for such taxable year, the taxpayer must account for the restatement by adjusting its AFSI for the first taxable year for which the taxpayer has not filed an original return as of the restatement date. However, a taxpayer may need to include the restated AFSI on an amended return or an administrative adjustment request under Section 6227 under certain circumstances.

The notice provides that a taxpayer may be deemed to have restated its AFS for a preceding taxable year if the beginning balance of retained earnings is adjusted to be different than the ending balance of the preceding taxable year under certain circumstances. AFSI must also be adjusted to take into account certain amounts disclosed in an independent financial statement auditor’s opinion. Timing differences between FSI and regular tax generally do not give rise to a duplication or omission even if the timing difference originated before the effective date of the CAMT.

Net operating losses

The notice provides some clarity on the use of net operating losses for purposes of CAMT. Specifically, when a taxpayer has a financial statement net operating loss (FSNOL), the absorption of that FSNOL is computed without regard to whether the taxpayer was an applicable corporation in a prior year. Thus, FSNOL may be treated as if it was absorbed in the period preceding when a corporation becomes an applicable corporation.

Foreign tax credits

The statute under Section 59(l) provides an applicable corporation with a CAMT FTC, and the notice clarifies the calculation of this CAMT FTC.

The CAMT FTC is equal to the amount of foreign income taxes imposed directly on the applicable corporation plus the aggregate pro rata share of the amount of foreign income taxes of a U.S. shareholder's CFCs. In both cases, the taxes must be “taken into account” on the AFS of the payor and be considered paid or accrued under U.S. federal income tax principles. 

The CAMT FTCs with respect to CFCs are generally limited to the amount of the taxpayer’s AFSI adjustment described in the pro rata shares rules discussed above multiplied by the 15% minimum tax rate. With respect to the determination of the CAMT FTC, the notice includes the following clarifications:

• Both CFC FTCs and the CFC FTC limitation for CAMT are determined on an aggregate basis for any taxable year (i.e., taxpayers should aggregate all CFC amounts to determine its CAMT FTC and limitation). 
• A foreign income tax is treated as “taken into account” on an AFS as described above.
• A CAMT FTC is claimed in the taxable year in which it is paid or accrued for federal income tax purposes by an applicable corporation or a CFC, provided that the foreign income tax has been taken into account on its AFS.
• Foreign income taxes paid or accrued by an applicable corporation or a CFC also include its share of any foreign income taxes paid or accrued by a partnership in which it is a partner.
• FTCs paid or accrued with respect to a redetermination under Section 905(c) may only be credited in a relation-back year and only if the taxpayer with the redetermination is an applicable corporation in the relation-back year.

Applicability dates

The notice provides that the IRS intends to publish proposed regulations with rules consistent with Notices 2023-7, 2023-20, and 2023-64 that would apply for taxable years beginning on or after Jan. 1, 2024.

Taxpayers may rely on the interim guidance in the notice for taxable years ending on or before the date that the proposed regulations are published in the Federal Register and for any taxable year that begins before Jan. 1, 2024.

The notice requests for comments on several topics including some specific rules not included in Notice 2023-64.