The Internal Revenue Service and the Treasury Department issued
The CAMT was included in the Inflation Reduction Act of 2022, with the goal of ensuring that billion-dollar corporations pay more in taxes. However, the draft rules have provoked pushback, not least because of their complexities.
"The regulations are really complex in all the various aspects," said David Strong, a partner in the tax services group at Top 25 Firm Crowe in Grand Rapids, Michigan. Among the complicating factors is depreciation.
"Probably the one that impacts a lot of companies are going to be depreciation adjustments, where it's viewed as a favorable type of approach," said Strong. "You generally would add back your book depreciation to your financial statement income and take a deduction for your tax depreciation. In years where companies are taking the benefit of bonus depreciation, it certainly goes to reduce your adjusted financial statement income in determining, No. 1, if you're subject to the corporate alternative minimum tax, or secondarily in computing the tax itself. But if you take a look at just those rules, they're fairly complex in how you go about computing that adjustment. Generally you have to track through [whether] you are taking impairment losses for financial statement purposes that effectively get added back for computing your corporate AMT, and then tracking the basis difference, both from a financial statement perspective and a tax perspective."
He expects the IRS and the Treasury to be inundated with comments from tax practitioners, corporations, and other groups ahead of a scheduled public hearing in January.
"The mindset is that it's a lot of larger companies that are going to have sophisticated tax departments [with] people that can address some of these complex issues," said Strong. "But I think the fallout is that we take a look at one of the aspects of the adjustment to your financial statement income deals with partnerships. Generally, if I'm a partner in a partnership, and I include that partnership income in my financial statement income, I need to make an adjustment for whatever my distributive share of the partnership's adjusted financial statement income needs to be adjusted in, let's say, the corporate entity's financial statement income. That calculation generally is pushed to the partnership."
"That's probably one of the areas from my client base that's been impacted the most," he continued. "If I have an investment partnership where I have a corporate entity that could be subject to the alternative minimum tax, they're requesting that the partnership provide them with their distributed share of financial statement income. What that does is it effectively takes all the rules that apply to these larger companies and applies those to the partnership, because the partnership has to go through, as if it were that corporate entity, and give its adjusted financial statement income in order to provide that information to its partner that would be subject to the tax."
Some of the partnerships are investment funds that have invested in the billion-dollar companies, he noted.
"The rub is those complex rules now need to be applied by smaller entities in order to provide the corporate entity that's a partner in this partnership the requisite information they need in order to compute their corporate AMT," said Strong.
It can get even more complicated with a tiered partnership. "The lower-tier company could be a corporation, or it could be another partnership," he said. "If it's another partnership, you have a second layer of having to do this computation. So the lower-tier partnership would have to go through and compute its AFSI, the adjusted financial statement income, and report that to the upper-tier partnership, and then the upper-tier partnership provides that information to the corporate entity. It can get fairly complex for companies that generally are much smaller than those that are paying the tax."
The outcome may depend on the November election contest between Vice President Kamala Harris and former President Donald Trump.
"If Harris wins the presidency, I think the shift there is to keep the corporate alternative minimum tax in place, but increase the rate from its current 15% to 21%," said Strong. "If that's the case, then the rules will be in place for a longer period of time."
If Trump wins, he has expressed interest in eliminating the Inflation Reduction Act and lowering the corporate tax rate further.
"The main focus of what the corporate alternative minimum tax was funding were a lot of those energy incentives that were part of the Inflation Reduction Act," Strong noted.
The CAMT rules for a 15% minimum tax
"Different rules, different tax," said Strong. "They may operate in a simpler manner, but they are certainly different taxes that would apply."
Corporate taxpayers will also need to be aware of a safe harbor that the Treasury and the IRS provided in
"One of the things in an earlier notice that the government provided for was called a safe harbor method for determining if you're an applicable corporation and subject to these rules or not," said Strong. "It didn't necessarily mean that you wouldn't have to pay the tax if you went through this safe harbor. But generally what it did is it simplified the process of saying if these rules would apply."
The safe harbor reduces the $1 billion in adjusted financial statement income down to $500 million for wholly domestic entities, and $50 million for foreign-parented multinational entities. But that doesn't mean they're off the hook completely.
"If I'm above those thresholds, even though I might not be subject to the tax itself, I still have a filing requirement," said Strong.
Companies will still have to go through the process of completing the forms to effectively show the IRS that they're not subject to the tax.
