New Corporate Minimum Tax Guidance Has Lessons for the C-Suite

The Department of Treasury and the IRS recently released the latest in a series of guidance on the corporate alternative minimum tax. CAMT is a 15% minimum tax based on adjusted financial statement net income for certain corporations. It applies when the corporation, alone or with related entities, has average annual adjusted financial statement income in a three-taxable-year period over $1 billion.

The new guidance in Notice 2023-64 underscores that CAMT is an awesomely complex regime with extensive tracking and reporting burdens. Treasury notices often go unnoticed, especially when addressing a law that is commonly (and mistakenly) believed to only impact a small universe of taxpayers, but all corporations should pay attention.

Expanding the CAMT Universe

Notice 2023-64 contains several provisions that make it more likely that a corporation will be in scope and thus possibly have to pay CAMT.

Generally, the income of related entities counts when determining whether a corporation is in scope. For US-parented entities, such income counts towards the $1 billion threshold if the related entity is in the tested corporation’s tax single employer group.

For foreign-parented entities, the rules are different. Previously, for corporations that are members of foreign-parented groups, it appeared that a related entity’s income only counted towards the $1 billion threshold if it was part of the corporation’s book consolidated group. However, as a result of the notice, for corporations that are members of foreign-parented groups, a related entity’s income counts toward the $1 billion threshold if it’s either part of the corporation’s book consolidated group or tax single employer group.

Adjusted financial statement income, or AFSI, is derived from net income, such as book income, reported on the correct (applicable) financial statement. But it can be higher or lower than the number that appears on the face of a financial statement because of a series adjustments required by the statute, along with adjustments required by prior CAMT notices.

Several provisions in Notice 2023-64 may crush taxpayers’ hopes that Treasury would exclude certain items—including mark-to-market amounts and nonrecurring (or extraordinary) items—from the AFSI computation. Specifically, the notice indicates that gain or loss needn’t be recognized or realized for tax purposes to be included in AFSI and that nonrecurring items generally are included in the base.

Given the potential magnitude of mark-to-market amounts in net income (due to commodity price swings, for example) and nonrecurring items (such as book gain from the taxable sale of a business), it appears likely that more corporations will be subject to the CAMT. For example, if a corporation that otherwise had $750 million in average annual AFSI sold a business, and that sale resulted in $900 million of book and tax gain, the corporation would be within the scope of CAMT.

However, the notice helpfully and clearly indicates that amounts not reflected in the income statement, including items in other comprehensive income, generally are excluded from AFSI.

Adding to Existing Burdens

This latest notice adds to CAMT’s compliance burdens and requirements. Many corporations will have to create standalone or carve-out financial statements from a consolidated financial statement for a larger book consolidated group, and this allocation of book items between different tax return filers could have a significant aggregate tax effect.

The rules around intercompany elimination entries effectively requires each taxpayer within a book consolidated group to determine its financial statement net income on a pre-elimination basis. In addition, amounts that relate specifically to a taxpayer and not recorded on that taxpayer’s separate books and records will need to be assigned or “pushed down.” Depending on how a company maintains its accounting ledgers and other internal books and records, this process could involve a considerable amount of work.

The notice contains a reconciliation requirement that could mean even more work. It contains a series of generally taxpayer-favorable additions to the rules for CAMT’s depreciation adjustment. These additions generally will require taxpayers to find a host of additional numbers from both tax and book data sources and will complicate the computations with respect to the CAMT asset basis and the CAMT gain or loss on the sale of each item of property.

Some Good News

Not everything in the latest CAMT notice is bad news. The depreciation guidance is apt to result in better answers in many cases. The guidance also adopts a reasonable approach for how CAMT foreign tax credits are determined where a partnership, in which the taxpayer is a partner, pays a foreign tax.

Moreover, the guidance negates the need for taxpayers to engage in certain difficult tasks. For example, corporations don’t need to compute US tax depreciation for property held by a foreign corporation that’s not subject to US tax. And corporate partners generally won’t need additional information from partnerships to determine if CAMT applies to them.

The guidance also clarifies certain areas that previous notices didn’t address, such as instructions on which financial statement to use and the treatment of deferred income taxes in adjusting AFSI.

Perhaps the best news is that taxpayers have options with respect to applying CAMT for their 2023 tax years and should feel comfortable preparing their 2023 CAMT calculations now based on the statute and/or guidance issued to date.

Specifically, the latest guidance states that Treasury anticipates publishing proposed regulations that will apply for tax years beginning on or after Jan. 1, 2024 (not, as previously indicated, Jan. 1, 2023). This appears to allow taxpayers, for pre-2024 tax years, to rely on reasonable interpretations of the statutory language and, at their discretion, the notices issued to date.

Thus, Treasury has made the welcome decision to be less proscriptive for 2023 as taxpayers (and tax advisers) attempt to understand the CAMT and comply with this complex new regime.

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

Monisha Santamaria is a principal in the passthroughs group of the Washington National Tax practice of KPMG.

Natalie Tucker is a partner in the methods group of the Washington National Tax practice of KPMG.

Daniel Winnick is a principal in the international group of the Washington National Tax practice of KPMG.