Inflation Reduction Act imposes corporate minimum tax

Corporate minimum tax

The IRA imposes a new 15% corporate minimum tax on “applicable corporations” for taxable years beginning after Dec. 31, 2022. Generally, an applicable corporation is any U.S. multinational (other than an S corporation, a regulated investment company, or a 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 (testing period). For instance, a calendar year corporation would test financial statement income for 2020, 2021, and 2022 to determine if it is an applicable corporation subject to the alternative minimum tax in 2023.

Groups with a foreign parent
A foreign-parented multinational must meet an additional test to fall within the purview of the corporate minimum tax. AFSI for the U.S. members of the group, including their foreign subsidiaries, must average more than $100 million over the testing period.

Computation of the tax
The tax is imposed to the extent the alternative minimum tax exceeds the company’s regular tax including the base erosion and anti-abuse tax. When computing the corporate alternative minimum tax, the starting point is financial statement income adjusted as follows.

• Tax depreciation deductions are taken into account rather than the amounts deducted in the financial statements.
• The corporation’s pro rata share of a controlled foreign corporation (CFC) financial statement income is taken into account.
• Financial statement income of a foreign corporation (other than a CFC) is taken into account only to the extent that it is effectively connected to a U.S. trade or business.
• Federal income taxes and income taxes paid to a foreign country or a U.S. possession are disregarded.
• Subchapter T financial statement income is adjusted for cooperative patronage dividends and per-unit allocations.
• Amounts treated as tax credits under an election under Section 6417 or Section 48D(d) are disregarded to the extent that these amounts were not taken into account under Section 56A(c)(5).
• Amounts related to mortgage servicing rights are treated as adjustments to prevent the inclusion of income before it is taken into account for federal income tax purposes.
• Tax deductions for covered benefit plans are taken into account rather than the deductions taken for financial statement purposes.
• A tax-exempt entity takes into account financial statement income of an unrelated trade or business or derived from debt-financed property to the extent that income from such property is treated as unrelated business taxable income.
• Tax amortization deductions related to qualified wireless spectrum acquired and placed into service after Dec. 31, 2007, are taken into account rather than the amounts taken in the financial statements.

The corporate alternative minimum tax liability is reduced by net operating losses (NOLs), limited to the lesser of the financial statement NOL or 80% of AFSI, and credits. A corporation that pays alternative minimum tax is eligible for a credit against income tax in future years.

A corporation that claims a foreign tax credit with respect to its regular income tax also is entitled to a special foreign tax credit when computing its corporate alternative minimum tax. The alternative minimum tax foreign tax credit applies traditional foreign tax credit principles, including limitation provisions, to AFSI. The alternative minimum tax foreign tax credit is available, however, only if the corporation claims a foreign tax credit in the calculation of its regular income tax. This limit on the alternative minimum tax foreign tax credits is inconsistent with the computation of the global minimum tax under Pillar Two of the Organization for Economic Cooperation and Development model rules, which takes into account the fact that a corporation is bearing those foreign taxes with respect to its foreign income.

Generally, taxpayers are required to apply the single employer rules to determine which entities must be aggregated in determining if AFSI exceeds the $1 billion threshold. Section 52 outlines the rules to determine if a group of trades or businesses is under common control and needs to be aggregated. These rules generally require corporations and other entities under common control to be treated as a single company in determining AFSI. An exception applies to prevent the various entities owned by an investment partnership from being aggregated with one another.

Excise tax on repurchased corporate stock

The IRA imposes a new excise tax of 1% of the fair market value of any stock repurchased by a covered corporation. A covered corporation is any domestic corporation whose stock is traded on an established securities market. There are exclusions for certain repurchases, such as repurchases that are treated as a dividend, that are contributed to an employer-sponsored retirement plan, and that are less than $1 million. The amount subject to the tax is reduced for stock sold to the public or issued to employees. Stock repurchases by regulated investment companies and real estate investment trusts are excluded. The excise tax applies to repurchases of stock made after Dec. 31, 2022.

Looking ahead

The rules governing the new corporate minimum tax and the stock repurchase excise tax are extremely complex and will be effective in 2023. While the U.S. Department of the Treasury and the IRS likely are working on guidance, it is unclear when that guidance will be released. Companies should consult with their tax advisers now to navigate these new rules and plan for the changes they bring.