The U.S. Department of Treasury and the IRS issued Notice 2023-42, granting estimated tax penalty relief to corporations in connection with the new CAMT, which is effective for taxable years beginning after Dec. 31, 2022. The relief is available for tax years beginning after Dec. 31, 2022, and before Jan. 1, 2024 (covered CAMT year). Only limited, interim guidance has been published on the new and complex CAMT. Given the significant questions that remain about the CAMT, Notice 2023-42 provides welcome relief for entities struggling with the challenge of determining whether they are subject to the new tax and, if so, the amount of their CAMT liability.
Background
The Inflation Reduction Act of 2022 (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 adjusted financial statement income (AFSI) of more than $1 billion for the three taxable years ending prior to the current taxable year.
In December 2022, Treasury and the IRS released interim guidance in Notice 2023-07 to clarify the treatment of certain items in computing AFSI, to provide a safe harbor for taxpayers determining whether they are subject to the CAMT, and to inform taxpayers that proposed regulations would be issued in the future. In February 2023, Treasury and the IRS released Notice 2023-20, which provided additional interim guidance on the CAMT for the insurance industry.
Crowe observation
To date, proposed regulations have not been issued, and numerous questions about application of the new law remain, including computation of AFSI and how the rules apply to multinational corporations.
IRC Section 6655 generally provides that a corporation’s estimated income tax is required to be paid in four installments and that the amount of any required installment is 25% of the required annual payment. Section 6655(a) imposes a penalty for failure to make a sufficient and timely payment of estimated income tax.
Relief from the estimated tax penalty
Under the notice, a corporation’s required installments of estimated tax for the covered CAMT year are not required to include amounts attributable to its CAMT liability. The notice further provides that waiver of the estimated tax penalty is not a waiver of other penalties that may apply if the CAMT is not paid when due, such as the failure-to-pay penalty under Section 6651.
In addition, Notice 2023-42 provides that to avoid an estimated tax penalty notice for the covered CAMT year, affected taxpayers should:
- File Form 2220, “Underpayment of Estimated Tax by Corporations,” with their federal income tax return even if no estimated tax penalty is owed
- Include an amount of estimated tax on line 34 of their Form 1120, “U.S. Corporation Income Tax Return” (or other appropriate line of the corporation’s income tax return in the Form 1120 series), even if the amount is zero
Looking ahead
While Notice 2023-42 provides temporary estimated tax penalty relief to corporations that might be affected by the new CAMT, it does not provide relief from penalties for failure to pay the full CAMT liability when due. Additional and more robust guidance from the IRS is needed to answer the many questions about how to determine if a corporation is subject to the new CAMT regime and, if so, what its CAMT liability will be. Taxpayers should continue to monitor the guidance in this area and consult their tax advisers to determine the most appropriate course of action relating to the CAMT.
