Overview
The IRA imposes a new 15% CAMT on applicable corporations for taxable years beginning after Dec. 31, 2022. Generally, an applicable corporation is a U.S. multinational (other than an S corporation, regulated investment company, or real estate investment company) with average AFSI of more than $1 billion for the three taxable years ending prior to the current taxable year (testing period). For instance, a calendar year corporation tests financial statement income for 2020, 2021, and 2022 to determine if it is an applicable corporation subject to the alternative minimum tax in 2023.
The U.S. members of a foreign-parented multinational must meet an additional test to fall within the purview of the CAMT. AFSI for the U.S. members of the group, including their foreign subsidiaries, must average more than $100 million over the testing period.
When determining if it is an applicable corporation subject to the CAMT, the corporation first must compute AFSI for the testing period. The starting point for this computation is the income reported on the corporation’s applicable financial statements (AFS) adjusted for various items such as federal income taxes, depreciation, credits treated as direct payments, or refundable credits under IRC Section 48D(b), among others.
Interim guidance on AFSI and the safe harbor
Computing AFSI
The notice provides clarification regarding several of the items that adjust a taxpayer’s AFS income in determining AFSI. The guidance provides specific examples of how the following items affect AFSI:
- The special rules related to consolidated financial statements and consolidated tax returns
- The computation of the adjustments related to depreciation deductions, asset impairments, and other adjustments related to the gain or loss recognized on the sale of fixed assets
- The treatment of partnership income reflected in a taxpayer’s AFS
- The adjustments related to payments received under IRC Section 48D and Section 6417 reflected as income in a taxpayer’s AFS
- The treatment of cancelation of debt income excluded from income in computing a taxpayer’s regular tax liability
- How to treat amounts received for the transfer of credits under IRC Section 6418
- The impact of covered recognition and nonrecognition transactions in computing AFSI
These items are factored into determining if a corporation is subject to the CAMT.
Crowe observation
The notice did not include any guidance regarding the impact of income from a controlled foreign corporation or the determination of effectively connected income of a foreign corporation in computing AFSI, leaving many taxpayers uncertain how these factors apply in computing AFSI and the applicability of the CAMT to their organization.
Safe harbor
The notice provides a simplified method a corporation can use in determining if it is an applicable corporation subject to the new 15% CAMT for the first taxable year beginning after Dec. 31, 2022. Generally, the safe harbor provides that in computing AFSI for the testing period, a taxpayer can substitute $500 million for the $1 billion threshold for a U.S. multinational or $50 million for the $100 million threshold for a U.S. member of a foreign-parented multinational. Use of the safe harbor will simplify the process of determining if a corporation is an applicable corporation but will not simplify the CAMT computation.
Crowe observation
The notice is unclear about how taxpayers subject to CAMT under the safe harbor for 2023 are affected in future years.
Request for comments
The notice requests comments regarding any questions arising from the interim guidance in addition to general comments related to the CAMT. The notice also requests that commenters address specific issues listed in the notice and specify which issues are most in need of immediate guidance. These comments will be key in informing the IRS and Treasury regarding urgent guidance needed in the short term and will factor into the proposed regulations when they are issued.
Looking ahead
The notice is informative regarding certain elements of computing AFSI and should be helpful for taxpayers to assess whether they are subject to the CAMT. However, as the notice indicates, numerous issues remain to be addressed, and taxpayers will need additional guidance to determine how to comply with and plan for this significant new tax. Additional interim guidance will be welcome, particularly if it is provided quickly given the immediacy of financial statement reporting deadlines and quarterly estimated tax payments. Without such guidance, taxpayers should consult their tax advisers to determine the most appropriate course of action related to the CAMT.
