Overview
The IRA enacted 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 CAMT in 2023. A U.S. member of a foreign-parented multinational is subject to CAMT if the U.S. member’s AFSI, including income from its foreign subsidiaries, averages more than $100 million over the testing period.
When determining if a corporation is an applicable corporation subject to the CAMT, it 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 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.
Summary of key provisions in proposed CAMT regulations
The proposed regulations explain how to compute AFSI, the adjustments required, and which corporations are subject to CAMT. They include detailed provisions regarding how corporations should handle foreign operations, partnership income, and corporate reorganizations, among other key areas. Among other things, the proposed regulations:
- Define financial statement income, the starting point in computing AFSI, and special rules for consolidated financial statements
- Detail the treatment of controlled foreign corporations to eliminate the potential duplication of income in computing AFSI
- Outline how to handle differences in financial and tax reporting years through an interim closing-of-the-books methodology
- Address 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
- Describe the treatment of hedging transactions and the mark-to-market rules in computing AFSI
- Provide rules for the adjustments related to payments received under IRC Section 48D and Section 6417 and amounts received for the transfer of credits under IRC Section 6418
- Provide rules regarding the treatment of cancelation of debt income excluded from income in computing a taxpayer’s regular tax liability
- Describe the treatment of covered recognition and nonrecognition transactions in computing AFSI and the impact on CAMT basis
- Include a safe harbor for determining if a corporation is an applicable corporation for CAMT purposes
- Specify how to determine the distributive share of partnership income reflected in an applicable corporation’s AFSI and the related reporting requirements
Crowe observation
The proposed regulations impose significant recordkeeping and reporting requirements on partnerships that have partners subject to CAMT to determine the partner’s distributive share of the partnership’s AFSI. These rules add an additional layer of complexity for partnerships with investors that are subject to the CAMT and could be particularly burdensome for smaller entities.
Additionally, the proposed regulations address the impact that a change in accounting method has on the computation of AFSI and provide special rules related to changes in accounting principles for financial reporting purposes.
The proposed regulations provide special rules for transitioning to the CAMT framework designed to prevent retroactive adjustments to prior years while allowing a corporation to make adjustments for the first taxable year after the regulations come into effect.
Crowe observation
The proposed regulations provide that once a corporation is an applicable corporation it retains that classification until there is an ownership change or the corporation does not meet the average AFSI test for five consecutive years. This could require a corporation to complete the CAMT form and attach it to the corporation’s income tax return even though there might not be any CAMT due for that taxable year.
Certain provisions of these regulations are proposed to apply to taxable years ending after Sept. 13, 2024, while other provisions will apply to tax years after the final regulations are published in the Federal Register. Taxpayers may rely on the proposed regulations for any tax year ending on or before Sept. 13, 2024, if applied consistently in their entirety until the final regulations are applicable.
Estimated tax relief
Notice 2024-66 provides relief in calculating estimated taxes related to the CAMT for tax years beginning after Dec. 31, 2023, and before Jan. 1, 2025. This guidance is similar to relief provided in Notice 2023-42 for tax years beginning after Dec. 31, 2022, and before Jan. 1, 2024.
Looking ahead
The proposed regulations are very comprehensive and complex, so careful consideration should be given to how the rules will apply and if a taxpayer wants to apply them early. Taxpayers should consult their tax advisers to determine the most appropriate course of action related to the CAMT.
