Corporate Generosity Could Feel Sting of New Minimum Tax Rules

Restrictions in the corporate alternative minimum tax, now in effect, and the pending international Pillar Two top-up tax, proposed by the OECD, may limit the amount large US corporations can deduct for donations of appreciated property to charity.

Multinational Examples

Starbucks Corp. is among nearly 80 publicly traded US-based multinational corporations that may be subject to the CAMT, according to UNC Tax Center data cited in January by the US Congressional Research Service. The top-up tax in Pillar Two of the OECD’s global minimum tax plan would impose a corporate minimum tax on a far greater number of US corporations.

Starbucks donates its unsold food when customers resist buying the appetizing snacks they see in the display cases. The company can claim a tax deduction—for its regular US corporate tax purposes under Section 170(e)— for the cost of that donated food, plus a portion of its normal retail price mark-up.

Starbucks isn’t the only CAMT-subject corporation that donates to food banks and qualifies for the Section 170(e) charitable deduction in excess of food cost for its regular US corporate tax purposes. Hormel Foods Corp., like Starbucks, is among the US-based multinationals identified by the UNC study as a potential CAMT taxpayer. Hormel Foods regularly donates products to food banks, and in August announced a donation of 264,000 cans of Spam in Maui to assist in recovery from Hawaii’s wildfires.

For regular US corporate income tax purposes, Section 170(e) provides that for contributions of inventory to food banks, the donor can deduct the tax basis of the contributed inventory plus half the unrealized appreciation, though limited to twice the tax basis of the inventory.

The importance of this charitable tax deduction was stressed by the US Tax Court in Lucky Stores v. Comm’r, whose opinion favorably quoted a Congressional Committee Report that expressed a concern that food bank donations could dry up if the deduction were limited to the cost of the donated food.

Food bank donations are just one example where Section 170(e) allows large corporate donors of appreciated property to deduct more than their tax basis in that donated property for their regular US corporate tax purposes.

For regular US corporate tax purposes, donors of office buildings generally can deduct the entire fair market value of that building—its tax basis plus 100% of the unrealized gain in that building, rather than merely the building’s depreciated tax basis. As an illustration of that type of donation, Humana Inc. donated an office building to the University of Louisville for the university’s use. Humana, like Starbucks and Hormel Foods, is among the US-based multinationals identified by the UNC study as a potential CAMT taxpayer.

CAMT and Pillar Two

For US-parented multinational groups, the CAMT and the OECD’s Pillar Two top-up tax typically are based on generally accepted accounting principles, with certain adjustments. Under GAAP, a US corporation that makes a charitable contribution generally records an expense for the fair market value of the donated property.

However, if the value of the donated property transferred exceeds the GAAP balance sheet asset carrying amount, then the excess is recorded as a gain. Thus, upon a charitable contribution of appreciated property, GAAP net income is reduced only by the GAAP carrying amount of the property transferred, not its larger fair market value.

Section 56A(c) of the tax code, which deals with CAMT-taxable income computations, and Article 3.2 of the Pillar Two framework, which addresses the computation of Pillar Two-taxable income, generally are based on GAAP net income.

If regulatory guidance confirms that CAMT and Pillar Two rules will follow the GAAP rules without any special allowance for charitable donations of appreciated property, the result will be far less favorable to US corporate donors than the corresponding rules concerning regular US corporate tax deductibility.

The Department of the Treasury and the OECD haven’t yet indicated they will incorporate a corporate-donor-favorable exception comparable to an exception contained in former Section 56A(g)(4)(I), which was part of the now-repealed corporate alternative minimum tax regime in effect between 1993 and 2017.

Former Section 56A(g)(4)(I) generally allowed a charitable deduction for the excess of fair market value over basis, in addition to the deduction for basis, for corporate alternative minimum tax purposes, to the same extent that such excess could be deducted for regular US corporate tax purposes.

Impact

By apparently not reflecting the congressional decision to permit large corporate donors to deduct some or all appreciation of contributed property—made in the context of the regular US corporate tax—the CAMT and Pillar Two could adversely eliminate that portion of an important tax incentive for charitable giving by large US corporations.

By placing some large US corporate donors in a marginal CAMT or Pillar Two tax rate of 15% rather than the 21% regular corporate tax rate, the CAMT and Pillar Two can reduce the corporations’ tax benefit from deducting even the cost element of the donated property.

If their corporate tax benefits are reduced, large US corporate donors may cut back on donations. To that extent, food banks, universities, and other charitable donees could feel the sting of the CAMT and Pillar Two.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan S. Lederman is a shareholder at Gunster, with a focus on income tax planning and controversies, including those related to international transactions.